Defaults on loans surge in Minnesota

Minnesotans are defaulting on credit card payments and other bills in skyrocketing numbers.

Default judgments imposed on debtors who failed to make loan payments and then did not respond to lawsuits seeking to collect the money climbed to more than 36,000 in 2007, up 67 percent from 2006, according to state court administration.

As the state and national economy slowed over the past year, every county in the metropolitan area recorded huge increases in default cases.

In Hennepin County alone, the number of default filings surged 71 percent to 9,237 in 2007, the most since 1989, the first year for which records are available.

Default judgments rose 102 percent in Carver County, 82 percent in Anoka County and 59 percent in Ramsey County last year.

"This represents all the economic failures in people's lives," said Mark Thompson, Hennepin County court administrator, surveying the stacks of unprocessed cases piled high on a counter on Friday. "It's depressing."

The problem does not appear be abating, according to Lynn Fuchs, Hennepin court operations manager.

In January of this year, there were 944 new default filings in Hennepin County, a 66 percent rise over January 2007. The data do not include mortgage foreclosure cases.

Poster child for debt relief

Michael Kelly, 34, a respiratory therapist, said he had decent credit until his 2004 divorce. To avoid losing the south Minneapolis house his two children had known for seven years, he refinanced the mortgage to an adjustable-rate, interest-only loan. In just more than a year, the interest rate jumped from 6.875 percent to 10.875 percent.

He said he now pays almost $2,000 a month for the 1,000-square-foot rambler, "not some penthouse over-looking the Mississippi bluffs," he said. "That's insane."

His credit card bills also mounted. Court records show that he owes $3,853.73 on his Capital One card.

In the default judgment the company filed in Hennepin County District Court, lawyers also seek $482.50 in court costs, $577.95 in attorney fees and $891.28 in finance charges and interest, for a total of $5,804.73.

"I can't afford my house. I can't afford my credit card," Kelly said. "Which am I going to pay?"

For now, he's not paying either. And because of it, he said, he faces losing his house and having his wages garnished.

His attempts to refinance the home loan have gone unanswered. "I get the feeling they're dealing with a lot of people right now." He said he's working with Capital One attorneys to pay in smaller installments.

"I make $60,000 a year," Kelly said. "Shouldn't I be the poster child for President Bush's plan to freeze interest rates?"

Fewer options

For many debtors like Kelly, personal woes have combined with broader social and economic forces like the troubled housing market and tighter bankruptcy rules to foreclose their options.

"It's one of a number of signs we've had over the last three months that suggests the economy has slowed considerably," said Art Rolnick, director of research at the Federal Reserve Bank of Minneapolis.

Adds Tom Stinson, the state economist: "I think it is indicative of the general problem of credit difficulty spreading beyond the subprime mortgages. When economic times get tougher, people have less money and they're more apt to be defaulting on all types of credit -- auto loans, credit cards and in some instances home mortgages."

Under Minnesota law, a debtor can be served with a lawsuit before it's filed in court. If the person does not respond within 20 days, creditors can file court papers seeking a default judgment. Those are the filings that have climbed by more than 14,000 cases in Minnesota -- 67 percent -- from 2006 to 2007.

"We don't have the staff to [handle] it," said Thompson, the Hennepin administrator. It now takes six weeks to process the cases, instead of the more customary two, prompting complaints from some lawyers.

Once a judgment is entered, said Fuchs, collection agencies have the option of garnishing wages, seizing the owed money from bank accounts, or putting a lien on a person's home, so that the creditor will get paid if the house is sold.

Fueled by a growing caseload, Gustel, Staloch and Cargo, a Minneapolis law firm specializing in bad-debt collections, today has a payroll of 70, or 20 more than last year, said Heidi Staloch, a shareholder in the firm.

Staloch compares the confluence of a slow economy, lost jobs and rising mortgage payments to the devastation of a flood. She expects working through the problems will take debtors a long time, with default rates continuing to rise.

"These are people who want to pay their bills," Staloch said. "They simply don't have the means right now."

Swept away

Staloch could have been describing Sarah Shannon of north Minneapolis. Her ordeal began in 2006. Already saddled with several loans, she suddenly had to have emergency dental work, resulting in a $1,297 bill.

That was only the beginning. Shannon, 59, lost her job as a case worker and was unable to pay the dental bill, resulting in lawyers for the University of Minnesota School of Dentistry filing a default judgment against her earlier this month. Her furnace went out two weeks ago, she said, so getting it fixed has to be the priority.

"It's not like we're running around trying not to pay people. We're in survival mode," Shannon said. "But God is good. And a lot of people are in tough times."

Mike Meyers, Maria Baca and Jenna Ross contributed to this report. rfurst@startribune.com • 612-673-7382