Friday, July 6, 2007

Overzealous Debt Collection Contributes to Suicide

MacDermid v. Discover Financial, (6th Cir. 2007), is an extremely unfortunate example of the need for more stringent legislation in the area of debt collection.

Intentional infliction of emotional distress is more than merely a byproduct of bad debt collection practices; it is the avowed goal of many debt collection agencies. The most frequent bar to civil prosecution is whether the conduct is "outrageous," and -- although, as discussed by the Sixth Circuit in this case, the bar is set extremely high for what constitutes outrageous conduct -- debt collection agencies routinely engage in the most contemptible tactics that easily warrant civil censure.

The problem, however, is that overly-aggressive debt collection efforts are, by definition, directed at persons with financial difficulty. These victims, in turn, either lack the acumen to pursue legal remedies, or are otherwise dissuaded from pursuing redress by the nature of their circumstances.

Another problem facing these victims is a lack of sympathy for persons who fail to pay their debts. Each year, financial institutions earn billions of dollars on fees, sub-prime interest rates, default raters, and the like. An occasionally delinquent consumer can easily pay twice-over the principal on a credit card and have the entire sum swallowed by interest and fees. Often the legal remedies that could be sought by the creditor are intentionally delayed because a judgment, which could be collectible in a variety of fashions but yields perhaps 9% interest, is less profitable than letting the debt grow exponentially and then reaching a seemingly meager settlement.

It is counter-intuitive, but it is often extremely profitable for financial institutions to lend to people who they know cannot pay their debt. Then, in the event that the venture proves unprofitable, the institution will find some mechanism to shift the risk of loss to unsuspecting consumers. The sub-prime mortgage scandal is a perfect example.

When the creditor, rather than the debtor, is viewed as the victim, the threshold for what seems "outrageous" is drastically shifted.

Hopefully, this case will spurn efforts not only by lawyers, but also by psychological researchers. The psychological effect of debt collection is an area where there has been unfortunately little study. In this case, the debt collection efforts exacerbated an already existing condition, one that seems to have been rather severe. Poor financial management, however, is a frequent symptom of psychological illness and Mrs. MacDermid's situation may not be all that rare. Furthermore, it is entirely possible that aggressive debt collection efforts may trigger depression and other psychological difficulties in persons who are otherwise mentally healthy, thus imprinting a sense of defeatism and complacency that significantly worsens the financial trouble which caused the debt collection efforts in the first place.