By Benjamin Mueller
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Tens of thousands of New Yorkers who had their wages garnished or bank accounts frozen in a surreptitious debt collection scheme will receive $59 million in a class-action settlement that also bars a major network of collectors from continuing the practice.
The settlement, which was filed late Thursday in Federal District Court in Manhattan, deals a significant blow to an industry that in recent years fed off a recessionary rise in consumer debt actions as companies bought up charged-off debt at low rates and then sought to recover the full debt for themselves.
It also gives hope to a larger group of mainly low-income, minority New Yorkers who are under a cloud of about $800 million in default judgments that the collectors won using fraudulent documents in court, according to legal filings. The plaintiffs are quite likely to have those judgments vacated, according to the settlement terms, and a major network of firms will be forced to stop buying and collecting debt.
A class-action lawsuit filed in 2009 accused the debt collectors of using a practice known as “sewer service.” That meant debt collectors failed to serve a notice of complaint, but still filed a false affidavit claiming that the notice had been properly served and that they had evidence of the money owed. Debtors, unaware of the complaint, did not show up in court, setting off a legal proceeding under which the collector almost always won a default judgment against them.
Consumer advocates say victims often first learn they are being targeted when property is seized or bank accounts are restrained. A default judgment on its own can follow someone for decades, making it difficult for that person to do basic things like rent an apartment, open a bank account or get a job.
“There’s wealth being systematically extracted which will be restored through this settlement,” said Sarah Ludwig, the founder and a co-director of the advocacy group the New Economy Project, which filed the lawsuit along with MFY Legal Services and the law firm of Emery Celli Brinckerhoff & Abady.
She said that a vast majority of the judgments were entered against people living in minority neighborhoods. “They end up on people’s credit reports,” she said. “This has a spiraling effect.”
The settlement, which advocates say is unprecedented in its scale, curtails the activity of companies along the whole debt collection chain, from the debt-buying companies to the law firm hired to collect the debt and the process-serving firm that is supposed to notify debtors.
The law firm that had collected the debt, Mel S. Harris & Associates, went out of business in September.
The process-serving company named in the lawsuit, Samserv Inc., of Brooklyn, agreed to stop serving process in consumer debt collection cases and to start paying process servers as much money for unsuccessful attempts as for successful ones, according to the settlement. Advocates say unbalanced rates put pressure on servers to lie about whether they had actually served notice, and state inquiries have suggested that servers sometimes claim to be in several places at once.
Advocates said the monetary scale of the settlement would most likely reverberate across the industry. Debt collectors have already become more constrained by state reforms enacted since the lawsuit was filed that require them to provide more evidence in cases, said Carolyn Coffey, the supervising attorney at MFY.
“This sends a huge message to other debt buyers and other debt collection firms,” said Matthew D. Brinckerhoff, of the law firm.
He said their projections showed that people who participated in the settlement would get all of their money back, and maybe more. About 75,000 people are expected to receive monetary compensation under the settlement, which also sets in motion the vacating of about 115,000 additional default judgments.
The settlement names several debt-buyer firms with variations on the name L-Credit, which are subsidiaries of Leucadia National, a publicly traded holding company engaged in a variety of businesses. A spokeswoman for Leucadia said the company had no comment on the settlement.
Representatives for Samserv could not immediately be reached for comment. A person who answered the phone at the law firm Stephen Einstein & Associates, which is processing the accounts because Mel Harris stopped operating, said he had no comment.