A growing number of consumers whose outstanding debt has gone into collections are unexpectedly having their bank accounts seized by creditors after the debt collection companies creditors have hired to notify debtors of pending legal proceedings have failed to deliver the notices (“Cuomo Tries to Enforce Notification to Debtors,” The New York Times, April 14, 2009).

“Part of the problem is the business model for these debt collection lawsuits,” said Carolyn Coffey, a staff lawyer for MFY Legal Services, a nonprofit law firm in New York.

Creditors often buy outstanding loans from other financial companies and then hire third-party companies specializing in collections to notify debtors about their pending lawsuits. But because collections companies have little incentive to deliver the lawsuit notifications – some creditors only pay them $5 for successful deliveries – unscrupulous creditors are simply pocketing the money without ever notifying the defendants, according to reports by the New York Attorney General’s office.

Maryann Dorrian, for example, told the attorney general’s office she only found out about the legal proceedings against her after discovering her account balance was negative when she attempted to withdraw money from an ATM last April. Dorrian’s creditors withdrew $2,000 from her account without her knowledge to collect on the credit card charges owed to them but she says they never informed her about the legal proceedings.

Dorrian said she had begun working with a debt settlement company to negotiate a payment plan for the credit card debt, but, because she was never notified about the legal proceedings against her, she ultimately had to pay the full amount of her credit card debt as well as all the overdraft fees she incurred as a result of her bank funds being withdrawn unexpectedly.

To help prevent a situation like Dorrian’s from happening to other consumers, New York Attorney General Andrew Cuomo is investigating the companies responsible for informing debtors about collections proceedings. He has already filed a civil suit against American Legal Process of Lynbrook, N.Y., one of the nation’s largest companies specializing in such notifications.

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