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Bloomberg Businessweek: How Debt Collectors Ruin Credit Reports With ‘Sewer Service’

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Bloomberg Businessweek

Creditors filed “upwards of 200,000” debt collection lawsuits in New York State in 2011, according to a report this week from the New Economy Project, a community advocacy group that has sued debt collectors in the past. In many of those cases, debt collectors won default judgments when borrowers didn’t show up in court. One reason for those absences, the New York-based group says, is that creditors engage in so-called “sewer service”—delivering subpoenas down sewer drains instead of to the intended recipients.

The report says that debt collectors often target individuals in minority and low-income communities. A default judgment on a business owner’s personal credit report can come back to bite her business when it applies for credit.

The NEP offers Queens (N.Y.)-based Web designer Brian Pindell as an example of why default judgments are a bad thing. After some of Pindell’s work equipment was damaged during Hurricane Sandy, he applied for a disaster loan from the Small Business Administration. “The SBA denied my application because of two judgments that were apparently on my credit report,” he told the authors of the NEP report. “I didn’t even know that I had ever been sued, because I never got notice.” (Pindell also told his story to Fox Business in April; for more, go here.)

Michelle Dunn, who ran a collection agency for eight years and now writes books on the debt collection business, says that options are limited once a court has entered a default judgment against a small business owner. “You can no longer dispute the debt,” she says. “If it’s a small claims amount, you pay—that’s what most people do. If it’s a larger amount, you can get an attorney, but a judgment really is a final judgment. The courts are so backed up already, and there’s really very little sympathy.”

Dunn—who says she once received a “sewer service,” discovering court documents left outside her basement door—says that there are a couple of things business owners can do to avoid Pindell’s plight.

It’s better to discover the default judgment yourself than letting it come up in the loan application process, says Dunn, one good reason “to take advantage of free credit checks.” Once a default judgment is discovered, business owners should write to the credit bureaus to explain the reasons for the judgment, Dunn says. The credit bureaus will attach the letter to the credit report. If it’s relatively clean, credit officers are likely to ignore the disputed judgment.