Credit Card Debt Lawsuits Flawed Like Foreclosure Filings

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It's well known that credit card debt, like mortgage debt, is sold off to Wall Street, pooled, then diced and spliced into different parts that are subsequently sold to investors. But lately credit card debt resembles mortgage debt in another major way: Lenders are suing borrowers who have fallen behind on their payments and judges are rejecting some of those suits, citing inaccuracies and other flaws.

State civil court judge Noah Deah in Brooklyn told The New York Times' Dealbook that "roughly 90% of credit card lawsuits…can't prove the person owes the debt."

Michael Ciaffa, a district court judge in Nassau County, NY, said that one document in a suit brought by Citigroup had "the look and feel of a robo-signed affidavit," according to court records cited in the NY Times story.

Delinquent credit card debt currently totals $18.7 billion, according to Equifax and Moody's Analytics.

"Nobody is disputing that consumers borrowed money and now are not paying so somebody has a right to come in and collect," says The Daily Ticker's Henry Blodget.

But who?

Citigroup (C), JPMorgan Chase (JPM), American Express (AXP) and other lenders believe they do, and they're suing to recoup monies owed on credit cards they issued. But some consumers are fighting back and finding that judges are on their side.

Regulators are also weighing in on the controversy. The Federal trade Commission has found that some credit card issuers are basing lawsuits on incomplete or false documentation and it's working with the courts to improve the ways lenders pursue those delinquent borrowers.

The Comptroller of the Currency, which regulates the nation's biggest banks, is also focusing on the debt collection methods of the credit card industry.

Judges say consumers need to show up in court to contest lenders' lawsuits so that they, the judges, can question the lenders or look for suspicious documents.

There are other options for consumers. Blodget says they could do what corporations do: negotiate to pay less than 100% on the dollar, or declare bankruptcy to write off a lot of those debts.

"It works, you restructure everything...you get stung but it's an option open to a lot of people," he says.