The $2,400 Debt That Wouldn't Die

Eduardo Austin spent the summer of 2010 watching hundreds of dollars get sucked out of his paycheck every payday by the clerk’s office of the State Court of Fulton County, Georgia. Back in 2004, Discover card had won a $2,401 judgment against him for unpaid credit card bills. The money finally started coming out of his paycheck in June 2010. On Oct. 11 of that year, the final garnishment was taken — the payments totaled $3,312, to cover additional fees and interest. Austin assumed he was finally free of the debt. He wasn’t.

In April 2013, nearly three years later, another garnishment order appeared, indicating Austin owed $970 more. The court came for his paycheck again. The law firm acting as debt collector, Georgia-based Hanna & Associates, had filed a continuing garnishment affidavit for the right to collect additional interest on the Discover debt for an unexpected reason: the court clerk had been tardy in handing over the money.

In other words, Austin had paid the debt through his paycheck, but he owed even more because the court was too busy to pay the collection agency.

Austin decided that didn’t sound right to him, so he went to court to get the continuing garnishment reversed, a process called a “traverse.”

“I don’t like being bullied and I understand the logic that once someone pays a debt to zero, the other party can’t come back for more,” he said. He won, and a judge ordered the $277 taken from his paycheck returned.

When Is a Debt Fully Paid?

Austin wasn’t done fighting, however. He is the lead plaintiff in a lawsuit filed in February against Frederick J. Hanna & Associates that seeks class-action status, accusing the firm of trying to collect excessive interest from numerous debtors using continuing garnishment orders related to court delays, such as the one Austin faced.

Eduardo Austin

Meanwhile, Hanna is also being sued by the Consumer Financial Protection Bureau, which is accusing the firm of being a “debt collection lawsuit mill.” Austin is not a party to that lawsuit, filed last month, but his class-action case is getting considerable attention because of the CFPB case.

Many facts of Austin’s case are not in dispute. He did fail to pay his Discover bill, and Hanna lawyers were entitled to collect on behalf of Discover. Cicely Barber, the court clerk, confirmed the lengthy delay in transferring funds to Hanna. The disagreement stems from the continuing garnishment, and accrual of additional interest between 2010 and 2013, before Hanna obtained the garnishment funds.

Joseph Cooling, the managing partner with Hanna & Associates, said in an email that the $970 garnishment was legal under Georgia law.

“Post-judgment interest accrues in this fashion in every state in the country,” he said in an email. “The garnishment funds were paid into the court registry by Mr. Austin’s employer and we had no power to access those funds and the court refused to disburse them to us. Georgia law provides that interest continues to accrue while those funds sit in the court registry.”

Court delays are hardly rare. Cooling pointed to a 2008 story in the Atlanta Journal Constitution (note: it’s behind a paywall) highlighting a dramatic backlog in court garnishment disbursements blamed on the recession and a surge of unpaid bill lawsuits. The story explains that while bills remain unpaid, debtors are liable for additional interest, even if the funds are stuck in limbo because of a court backlog. “No one wants to talk about how unbelievably incompetent this major American metropolitan county is and the impact it is having on consumers,” said Cooling.

Barber explained that the court takes in somewhere in the area of 20,000 checks each month, and that the delays are the result of old technology. “Prior to November 2013, there was a delay in issuing payments due to our outdated case management system that was purchased in 1999,” she said. “It simply was not capable to efficiently process the volume of garnishment checks the Courts received. In November 2013, we converted to a new case management system that allows us to track and disburse funds more efficiently and timely.”

That likely offers little comfort to any of the parties involved in the Austin case.

“Despite our firm’s due diligence and exhaustive efforts to obtain the garnishment funds, it took a period of years for the court clerk to finally disburse the funds. In Georgia, we are completely at the mercy of the clerk as to when garnishment funds are paid out; and we have no power or remedy whatsoever in any form or fashion to access the funds,” Cooling said to Credit.com. “Post-judgment interest accrued during that time and our firm was entitled to collect it pursuant to Georgia law.”

Austin’s lawyer, Steven Koval, said Hanna’s argument is “a bunch of baloney.”

“It doesn’t pass the smell test,” Koval said. “My reaction when I saw the case was ‘This can’t be right. It’s just unfair.’” Once Austin paid the money, there wasn’t anything more he could do to satisfy the debt, Koval said. “It’s not his fault they didn’t get paid, it’s their fault.”

Despite Cooling’s assertion that Hanna was “at the mercy of the clerk” for disbursement of the funds, Koval said Hanna should have taken legal action against the court to compel payment.

The class-action case filed by Koval alleges violations of the federal Fair Debt Collection Practices Act. Part of that case has already been dismissed, but a federal magistrate recommended on July 10 that at least one claim be allowed to proceed, finding that Koval and Austin have a chance to win their argument that Hanna attempted to collect a debt “not expressly authorized by agreement or permitted by law.”

Final ruling on Hanna’s motion to dismiss is still pending.

“Our firm completely denies any wrong-doing whatsoever,” Cooling said, “and at all times our firm has completely complied with all provisions of Georgia garnishment statutes as set forth under the Georgia code, as interpreted by the Georgia Court of Appeals, and within the spirit of the Georgia Professional Rules of Conduct for attorneys in the practice of law.”

The CFPB Takes Aim

Meanwhile, the CFPB case means Hanna will be arguing about its debt collection efforts on two legal fronts. The consumer agency, in a lawsuit announced July 14, is accusing the firm of mass-producing lawsuits that have not been appropriately reviewed by legal staff.

“The Hanna firm relies on deception and faulty evidence to drag consumers to court and collect millions,” CFPB Director Richard Cordray said while announcing the lawsuit. “We believe they are taking advantage of consumers’ lack of legal expertise to intimidate them into paying debts they may not even owe.”

The CFPB says Hanna filed 350,000 lawsuits between 2009 and 2013, but dismissed 40,000 of those cases “because it cannot substantiate its allegations.”

Hanna responded to the lawsuit by saying that it has spent a year cooperating with CFPB investigators and was “completely surprised” by the filing.

“We strongly deny the allegations of the complaint and, moreover, the overall mischaracterization of our law firm as a ’mill’ or ’factory,’” the firm’s statement read. “Our law firm takes great pride in its commitment to compliance with all consumer protection laws and takes great pains every day to ensure compliance with state civil procedure and evidentiary laws, step by step. At all times, our firm has faithfully followed the long-established legal rules and due process guidelines set forth under Georgia law and the long line of established federal judicial precedent with regard to the Fair Debt Collection Practices Act.”

Among the legal arguments Hanna intends to pursue: That the CFPB should not be allowed to regulate the practice of law. Complaints against law firms should be handled by the state bar association, the firm maintains.

“The CFPB case against our law firm raises very serious constitutional questions for lawyers practicing law in every area of law throughout the entire country. It is not just about debt collection; and it is a very slippery slope,” Cooling said. “The federal government is attempting to regulate the practice of law, as well as the process by which lawyers exercise their professional legal judgment, literally down to how many minutes it might take an experienced lawyer to make a legal decision or judgment. That is a very concerning proposition for lawyers everywhere.”

Hanna is no stranger to legal attention from regulators; nor is it a stranger to winning such cases. In 2010, the Georgia Supreme Court dismissed a lawsuit filed by the state’s Office of Consumer Affairs on behalf of complaining consumers because it found the firm was exempt from the state’s Fair Business Practices Act. The judges ruled consumers must seek redress in the state bar association or the Federal Trade Commission.

For consumers with unpaid debts, the lesson from Austin’s case is simple: Bad debts have a bad habit of coming back to life, even a decade later. Consumers can’t assume they are paid in full until they receive paperwork saying they are. Even then, it’s important to hold on to that paperwork.

This is the first in a series of articles about people struggling with debt collection. If you have a story for the Debt Collection Files, write to Bob Sullivan at Bob (at) credit (dot) com.