Trend of Skyrocketing Debt Collection Lawsuits Threatens Economic Recovery for Texas Families in Wake of Pandemic and Winter Storm

AUSTIN, Texas — In the period leading up to the pandemic, when the economy was booming, so were debt collection lawsuits — increasing by 162% from 2014 to 2019 in Texas justice courts, where most consumer debt collection cases are filed. The trend of increasing lawsuits parallels two harmful trends that do not bode well for Texans struggling to recover from the economic fallout of the COVID-19 pandemic and Winter Storm Uri. These findings and more are outlined in a new report: Debt, Access to Justice, and Racial Equity.

The first concerning trend is the increase in default judgments, leading to most cases being decided without considering both sides — including any defenses the person being sued may have, or if the debt is even legitimate to begin with. With a judgment in hand, the full powers of the legal system can be used to collect, including freezing and seizing all of the money in a person’s account. “The result of such actions can push struggling families into even deeper financial hardship, causing defaults on current debts, missed rent and utility payments, and lead to unmet basic needs,” said Ann Baddour, Director of Texas Appleseed’s Fair Financial Services Project.

The second trend is the growing use of turnover receivers to collect debts. Turnover receivers — usually chosen by the person who sued to collect the debt but appointed by the court — have historically been used to collect business debts. In a trend unique to Texas, they are being used more and more for consumer debts. They have vast powers to seize money and often take a 25% cut — adding substantially to the debt burden. As a result of aggressive tactics, protected money often is taken, like child support, pandemic stimulus aid, and unemployment insurance, because impacted Texans cannot navigate the complicated legal process to get their money returned.

This new study looks at debt collection data from justice courts statewide and includes a case study of Harris County justice courts to better understand how Texans are faring in the system, with a focus on access to justice — promoting fair access and outcomes in the courts — and racial equity.

Key findings include:

• Default judgments continue to dominate debt collection lawsuit judgments. During 2020, default judgments made up 65% of all judgments, and the total number increased over 2019 despite a temporary pause in issuing default judgments due to the pandemic.
• The system has a stark power imbalance. Based on the Harris County case study, just 8% of people sued had an attorney. Lawsuits were dominated by a few large bulk filers, and nearly 9 out of 10 judgments were in favor of the person suing. Default judgments played a major role in these outcomes, accounting for 75% of the wins.
• The Harris County case study also shows that these harmful debt collection lawsuit practices disproportionately impact African American and Latino neighborhoods. The data indicate that these neighborhoods still face economic harms from the vestiges of redlining — where they were intentionally left out of access to low-cost loans:
  • Black and Latino neighborhoods are twice as likely as white neighborhoods to be sued to collect high-cost loans.
  • The odds of being sued for a debt for residents of census tracts with a majority Black and majority Latino population are 1.6 times higher than residents in census tracts with a majority white population.
  • For judgments against Texans sued for debts, the odds disparities are similar or even higher — with residents of census tracts with a majority Black population facing judgment odds 1.6 times higher than for residents in census tracts with a majority white population. For residents of census tracts with a majority Latino population, the odds are 1.8 times higher.

“Skyrocketing debt collection lawsuit filings and high default judgment rates are cause for alarm, particularly in today’s economy with so many people still struggling,” said Dr. Ellen Stone, Director of Research for Texas Appleseed. “The disproportionate impact of harms from high rates of debt collection lawsuits on African American and Latino neighborhoods — the same neighborhoods that have suffered the most due to the pandemic — create further urgency for reforms,” said Dr. Stone.

The recommendations in the report include:

1. Modernize exemptions from debt collection to ensure that people can meet basic needs while still paying legitimate debts. 

2. Reduce the prevalence of default judgments through court reforms that ensure lawsuits are filed on valid debts and that make it easier for unrepresented Texans to participate effectively in the court process.

3. Create an expedited process and adopt clear notifications and forms for Texans to protect exempt funds from being wrongfully frozen and seized through post-judgment debt collection.

These recommendations are similar to resolutions adopted by the Texas Judicial Council, and bi-partisan bills have been filed, SB 644 (Sen. Zaffirini)/HB 3613 (Chairman Leach), in the current legislature to implement these court priorities. Making these reforms is crucial to supporting Texans to rebuild financial wellbeing and resilience in the post-pandemic period.

About Texas Appleseed
Texas Appleseed is a public interest justice center that works to change unjust laws and policies that prevent Texans from realizing their full potential. Our nonprofit conducts data-driven research that uncovers inequity in laws and policies and identifies solutions for lasting, concrete change. For more information, visit www.TexasAppleseed.org.

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