Debt collectors in New York hit upon a big idea last decade: They would buy defaulted credit-card or health-care bills, sue debtors without notifying them and then falsely state they had been properly served. Defendants, often poor minorities, didn’t show up in court. Default judgments were routinely entered, leaving collectors free to garnish debtors’ wages.
In legal circles that is known as sewer service. During the Obama administration the Consumer Financial Protection Bureau cracked down on it. Class-action attorneys also joined the fray, including a group that filed a case against debt collector Leucadia National Corp., a big Wall Street investment house, and law firm Mel S. Harris and Associates. In 2016 a federal judge in Manhattan approved a $59 million settlement in the Leucadia and Harris case; as a result, 353,000 New Yorkers got their debts eliminated, while others received compensation.
But it turned out there was a bit of money left over after the settlement funds were distributed, because some recipients didn’t cash their checks. The question of what to do with the money was resolved today when the class-action lawyers said they would donate $170,000 to the Civil Legal Advice and Resource Office, better known as Claro, a collection of clinics that last year provided free assistance to almost 6,000 New Yorkers sued by debt collectors.
“This award provides a tremendous boost to Claro, and will enable us finally to upgrade our technology—which will improve our efficiency and effectiveness,” said Dora Galacatos, executive director of Fordham Law School’s Feerick Center for Social Justice, which helps operate Claro programs in the Bronx, Manhattan and Staten Island. Claro programs are run by different nonprofits in conjunction with the court system and others.
The money comes at an opportune time because, as Crain’s reported in July, debt-collection lawsuits are making a comeback. One reason is the Trump administration has effectively defanged the Consumer Financial Protection Bureau.
“We are seeing a disturbing uptick in debt-collection lawsuits, and debt collectors engaging in the same racially disparate patterns that led us to bring the class-action lawsuit almost 10 years ago,” said Susan Shin, legal director at the nonprofit New Economy Project.
Six months ago Leucadia changed its name to Jefferies Financial Group.