A new report from the National Consumer Law Center surveyed laws around debt collection and what is and what is not “exempt” from debt collectors when they are pursuing debts. The report examines state laws that protect wages, assets in a bank account, and property from seizure by creditors.
The report, entitled “No Fresh Start: How States Let Debt Collectors Push Families into Poverty” explains that no single state (or District of Columbia, or Puerto Rico, or Virgin Islands) met the five basic standards of exemptions that NCLC suggests would allow debtors to continue working productively while also paying off debts.
The standards are:
- Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;
- Allowing the debtor to keep a used car of at least average value;
- Preserving the family’s home—at least a median-value home;
- Preventing seizure and sale of the debtor’s necessary household goods; and
- Preserving at least $1200 in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses.
Robert Hobbs, the Deputy Director at NCLC, explained: “In 2012, the FTC received more than 125,000 consumer complaints about debt collection, representing almost 25% of all consumer complaints it received. Debt collection lawsuits are clogging up civil courts across the nation. This report serves as a wake-up call for states to update their exempt property laws and stop putting millions of families at risk. Doing so will allow local courts to redirect their focus from the insatiable appetite of a debt machine that churns out millions of undocumented debt collection lawsuits each year.”
California was rated poorly on some standards, and rated higher on others:
1) While NCLC’s Model Family Financial Protection Act Recommendation is that a state exempt 80 times federal or state minimum wage or 10% of disposable income (15% if weekly disposable income exceeds $1200), California received a “D” grade because it only preserves 40 times the state minimum wage for an individual, more if a debtor proves a higher amount is needed.
2) While NCLC’s Model Family Financial Protection Act Recommendation is to exempt up to a $15,000 car ($25,000 if adapted for disability), plus $10,000 wild card (see report for detailed explanation of wild card, briefly, the “wild card” allows consumers to apply an exemption to several items- for example, a car and a refrigerator, if the total is less than the wild card limit), California received a “D” grade because it only protects a car valued at up to $2,900.
3) While NCLC’s Model Family Financial Protection Act Recommendation is to exempt the value of a house up to the median house price, California received a “C” grade because it only protects a home value of up to $75,000 ($100,000 for people who are married, and $175,000 for certain elder, disabled, or low-income debtors).
4) California did receive an “A” for one category: NCLC’s Model Family Financial Protection Act Recommendation is that all household goods are exempt, but creditor can seek court order to seize any item worth over $3,000. California follows this recommendation, exempting “all necessary household goods.”
5) California received a “B” in the category of “Family Bank Accounts.” While NCLC’s Model Family Financial Protection Act Recommendation is to exempt $10,000 in a bank account, or $700 in a bank account plus car and household goods worth at least $9,000 or to explicitly exempt deposited wages, California received a “B” because it explicitly protects deposited wages.
NCLC makes specific recommendations to reform state exemption laws in the following ways:
- Preserve the debtor’s ability to work, by protecting a working car, work tools and equipment, and money for commuting and other daily work expenses.
- Protect the family’s housing, necessary household goods, and means of transportation.
- Protect a living wage for working debtors that will meet basic needs and maintain a safe, decent standard of living within the community.
- Protect a reasonable amount of money in bank accounts so that debtors can pay commuting costs as well as upcoming rent and utility bills.
- Protect retirees from destitution by restricting creditors’ ability to seize retirement funds.
- Be automatically updated for inflation.
- Close loopholes that enable some lenders to evade exemption laws. For example, states that allow payday lending enable these lenders to evade state laws that protect wages and exempt benefits from creditors. States that allow lenders to take household goods as collateral enable these lenders to avoid state household good exemptions.
- Be self-enforcing to the extent possible, so that the debtor does not have to file complicated papers or attend court hearings.
Model language for states to achieve these goals is provided in the National Consumer Law Center’s Model Family Financial Protection Act, available at www.nclc.org/mffpa.
The model law also includes steps that states can take to reduce the pervasive abuse of the court system by debt buyers. Seizure of debtors’ wages and property would not be such a problem if debt buyers did not churn out such an endless stream of judgments on old, poorly documented debts—of which many are based on mistaken claims.
By updating exemption laws, states can prevent over-aggressive debt buyers from reducing families to poverty. These protections also benefit the state by keeping workers in the work force, helping families stay together, and reducing the demand on funds for unemployment compensation and social services.
The CFPB, FTC, and advocates have also raised the alarm about the fact that 3rd party debt collectors may be pursuing people who never owed a debt. NCLC cites a 2013 study from the Federal Trade Commission that found nine of the largest debt buyers purchased nearly 90 million consumer accounts (with a face value of $143 billion). While consumer disputed at least one million of these debts, only half of the disputed debts were verifiable by the debt buyer.
Need more resources on debt collection? We’re pasting in a few below: