US “Bankruptcy Mill” Lawsuits Target Debt Buyers: Due Diligence Costs Soar 200%

September 2025 – New York/Washington, D.C.

The U.S. debt-buying industry is under unprecedented legal and regulatory pressure as a wave of lawsuits targets so-called “bankruptcy mills” and the practices of filing mass debt claims. Court rulings and enforcement actions have already driven due diligence costs for debt buyers up by more than 200%, reshaping the economics of a multibillion-dollar business and raising questions about the future of consumer debt enforcement.

Mounting Lawsuits Against “Bankruptcy Mills”

Over the past year, multiple federal bankruptcy courts and state regulators have intensified scrutiny of firms accused of filing bulk claims in Chapter 13 cases without proper documentation. These “bankruptcy mills” allegedly submitted thousands of claims simultaneously, often with missing or inaccurate account details.

Plaintiffs argue that such practices not only overwhelm court systems but also exploit vulnerable consumers already facing financial distress. Several class-action lawsuits filed in different jurisdictions accuse debt buyers of violating bankruptcy rules, consumer protection laws, and fair debt collection standards.

Regulatory bodies have echoed similar concerns, noting that mass claims risk turning bankruptcy courts into processing centers for unverifiable debt. As one court memorandum highlighted, “systematic deficiencies in documentation undermine the integrity of the bankruptcy process.”

Soaring Compliance Costs

The legal pushback has forced debt buyers to dramatically expand compliance departments, hire bankruptcy specialists, and invest in advanced verification systems. Industry data shows due diligence costs have surged by more than 200% compared to pre-2023 levels.

These costs include:

• Document Authentication – Ensuring every claim has original account-level data, contracts, and payment histories.
• Bankruptcy-Specific Legal Reviews – Retaining specialized attorneys to review filings.
• Audit Systems – Implementing software and third-party verification to confirm debt ownership.
• Court Penalties – Settlements and fines for noncompliant claims, adding to overall expenses.

Smaller debt buyers are struggling to keep pace, while larger firms with deeper resources are consolidating market share. Analysts suggest that compliance burdens may trigger a wave of mergers and acquisitions in the sector.

Consumer Advocates Welcome Oversight

Consumer watchdog organizations argue that the lawsuits and higher costs represent long-overdue reforms. They maintain that unchecked bulk filings often leave consumers unable to challenge questionable debts.

Bankruptcy trustees and regulators have noted that a significant percentage of mass claims historically included errors—ranging from inflated balances to debts already discharged or past the statute of limitations. By forcing debt buyers to spend more on verification, courts hope to reduce abusive filings and restore confidence in the bankruptcy process.

“Heightened scrutiny brings accountability,” one consumer protection official observed in a recent policy briefing. “The industry is now being compelled to prove that every dollar claimed is legitimate.”

Industry Pushback

Debt buyers, however, warn that rising costs and litigation risks are threatening the viability of the sector. Industry associations argue that legitimate creditors are being punished alongside bad actors. They also claim that compliance demands are slowing down the bankruptcy process, leaving consumers in limbo while disputes are resolved.

Some firms have begun lobbying for standardized federal rules that would streamline bankruptcy claim submissions. They argue that uniform requirements could balance consumer protection with operational efficiency. Until such reforms are enacted, the patchwork of state and federal oversight continues to drive up costs.

Financial Impact on the Debt Market

The U.S. debt-buying market, valued at more than $25 billion annually, is entering a period of volatility. Rising compliance costs are reducing profit margins, leading some investors to pull back from the sector. Debt portfolios that once traded at high premiums are now being discounted due to the additional expense of verifying claims.

Larger institutional investors, particularly those involved in securitizing debt portfolios, are demanding more transparency before financing acquisitions. This shift is reshaping how debts are valued, with verified documentation becoming a central factor in portfolio pricing.

Courts Signal Tougher Stance

Several recent rulings suggest that bankruptcy judges are unwilling to tolerate mass filings with incomplete records. In multiple cases, courts have disallowed large batches of claims, ordered sanctions against debt buyers, and referred matters to regulatory authorities.

Judges emphasize that the burden of proof rests on creditors. If a debt buyer cannot produce the original contract, account statements, or clear evidence of ownership, the claim may be rejected outright. This approach represents a departure from past years, when many claims were approved by default.

Policy Debate in Washington

The growing number of lawsuits has sparked policy discussions at the federal level. Lawmakers and regulators are weighing whether additional reforms are necessary to curb abusive practices in bankruptcy proceedings.

Proposals under consideration include:

• Stricter Documentation Standards – Mandating that all claims include original signed contracts.
• Time Limits for Submissions – Preventing last-minute claims that delay bankruptcy plans.
• Centralized Verification Systems – Creating databases for creditors to submit verified documentation.

While no legislation has yet been passed, industry insiders expect that bankruptcy reform could emerge as a key policy issue in 2026.

International Comparisons

The U.S. crackdown on bankruptcy mills mirrors similar actions abroad. In Europe, regulators have tightened oversight of non-performing loan (NPL) sales, requiring extensive documentation. In Australia, courts have dismissed debt claims that lack proof of proper ownership.

Analysts suggest that the global debt-buying industry is entering a new phase where documentation, compliance, and consumer protections are central to market survival. The U.S. shift is seen as part of this broader trend.

Technology as a Solution

To manage escalating costs, some debt buyers are turning to technology. Artificial intelligence and blockchain-based verification systems are being tested to streamline documentation.

• AI Tools can analyze contracts, payment histories, and bankruptcy filings to identify errors before submission.
• Blockchain Platforms offer tamper-proof records of debt ownership, potentially reducing disputes in court.

While promising, these solutions require significant upfront investment—another barrier for smaller firms.

Investors Reassess Risk

The lawsuits and compliance demands are also reshaping investor sentiment. Hedge funds and private equity firms that once aggressively acquired distressed debt portfolios are now approaching the market with caution.

Some investors view the crackdown as an opportunity, arguing that firms capable of meeting compliance standards will emerge stronger and more profitable in the long run. Others, however, see heightened legal risk as a deterrent, predicting slower deal flow in 2025–2026.

Consumer Impact

For consumers, the wave of lawsuits could bring greater protections. By forcing debt buyers to substantiate every claim, courts are reducing the likelihood of illegitimate debts slipping through the system.

However, there are concerns that rising costs could ultimately be passed on to consumers through higher interest rates, reduced credit availability, or more aggressive collection practices outside of bankruptcy.

Consumer advocates argue that transparency and accountability outweigh these risks, insisting that the focus should remain on preventing systemic abuse.

The Road Ahead

Industry experts agree that the era of low-cost, mass bankruptcy claims is ending. Debt buyers are now expected to maintain meticulous records, invest in compliance infrastructure, and prepare for ongoing legal challenges.

The long-term consequences may include:

• Market Consolidation – Smaller firms are exiting, and larger firms are strengthening their positions.
• Higher Barriers to Entry – New players are discouraged by high compliance costs.
• Evolution of Business Models – Greater reliance on technology and specialized legal expertise.

A Costly New Era

The lawsuits against bankruptcy mills have set in motion one of the most significant shifts in the U.S. debt-buying industry in decades. Compliance costs have more than doubled, regulatory scrutiny is intensifying, and the future of mass claims remains uncertain.

For debt buyers, the message is clear: survival depends on rigorous due diligence and a willingness to adapt to new legal realities. For consumers, the reforms promise stronger protections against unverified debts.

As bankruptcy courts, regulators, and lawmakers continue to tighten oversight, one reality stands out—the business of buying and enforcing debt in America has entered a costly new era.