Richard M. Hynes, Broke but not Bankrupt: Consumer Debt Collection in State Courts

60 Fla. L. Rev. 1 (2008) | | | |

INTRODUCTION :: Virginia, with a population of about seven million, has averaged more than a million civil filings a year since the late 1980s. The overwhelming majority of these filings seek to collect debts from consumers, and most judgments go unpaid. Despite this apparent insolvency, civil litigation appears to be only tenuously related to consumer bankruptcy whether one looks at Virginia or at the nation as a whole. Nationally, the non-business bankruptcy filing rate rose by more than 350% between 1980 and 2002, while the civil filing rate rose by about 12%. Prior research suggests that relatively few bankrupt debtors have been sued by their creditors in state court, that most bankrupt debtors are drawn from the middle class, and that bankrupt debtors own homes at nearly the same rate as the general population. This Article finds that few civil defendants file for bankruptcy, that civil litigation is concentrated in cities and counties with lower socio-economic characteristics, and that civil defendants in Virginia have a significantly lower rate of homeownership than the general population. In other words, the bankruptcy statistics exclude many defaulting and insolvent consumers, and these consumers may be disproportionately drawn from the more disadvantaged segments of society.


Bankruptcy filing statistics provide a useful but incomplete measure of consumer financial distress. Although bankruptcy was relatively rare in prior generations, default and insolvency were not. Debtor’s prison might have been as common in early America as bankruptcy is today. The United States lacked a bankruptcy law for much of its history, and even today many, and probably most, consumers who fail to repay their debts do not file for bankruptcy. Instead, they refuse to pay, and they seek relief in a system of “informal bankruptcy.” About two-thirds of all consumer-credit loans that banks charge off as uncollectible are not owed by consumers in bankruptcy, and a similar percentage of credit card bad debt losses are charged off before the debtor files for bankruptcy.

It is hard to study defaulting consumers who do not choose bankruptcy. Credit reports are not publicly available, and defaulting consumers often do not want to be found. Many collection methods, such as telephone calls and dunning letters, leave no trace in the public record. This Article focuses on one collection device that does leave a paper trail-state lawsuits.

Specifically, this Article examines the civil courts of the Commonwealth of Virginia and finds a staggering amount of consumer debt collection litigation. Since the late 1980s, Virginia’s courts have averaged more than one civil filing each year for every five individuals, and the majority of these filings seek to collect debt from consumers. Most complaints result in a judgment for the plaintiff, and most judgments are apparently never paid. Virginia is somewhat unique; its rate of civil litigation is higher than that of nearly every other state. However, there are signs that consumer debt collection accounts for a substantial portion of the civil filings in many states.

Although one would expect most consumers sued in state court to be in financial trouble, surprisingly little overlap exists between the populations of bankrupt debtors and state court civil defendants. Prior research suggests that less than one- third of bankrupt debtors were sued by their creditors in state court. This Article finds that less than 20% of Virginia consumers sued in 2001 filed for bankruptcy by 2006, and this remains true even if the sample is limited to those consumers who have failed to pay a judgment. This lack of overlap between the populations of bankrupt debtors and civil defendants is not new. A 1971 study found that just 18% of bankrupt debtors cited actual litigation as an immediate cause of their bankruptcy filing, and a 1974 study found that just 7% of defendants sued for defaulting on consumer debt filed for bankruptcy.

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