The economic downturn has strained millions of families to the breaking point, and the astronomical growth of the debt buyer industry makes them increasingly vulnerable to seizure of essential wages and property to pay their oldest debts.
A new report from the National Consumer Law Center surveys the exemption laws of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands that protect wages, assets in a bank account, and property from seizure by creditors. No Fresh Start: How States Let Debt Collectors Push Families Into Poverty finds that not one jurisdiction’s laws meet basic standards that allow debtors to continue to work productively to support themselves and their families.
Some state exemption laws are still parked in the horse and buggy days. Pennsylvania, for example, protects clothing, a Bible, school books, sewing machines not held for resale, military uniforms and $300 of other property - in total. Vermont protects one cow, two goats, three swarms of bees, and a car worth no more than $2,500. Delaware protects a seamstress’s sewing machine, $75 of work tools, and an additional $500 of property unless the debtor files bankruptcy.
“It’s a travesty when outdated state laws protect farm animals and their feed but not a living wage, a working car, and a bare-bones checking account,” said Robert Hobbs, National Consumer Law Center’s deputy director and author of "Fair Debt Collection."
The worst states allow debt collectors to seize nearly everything a debtor owns, even the minimal items necessary for the debtor to continue working and providing for a family. Alabama, Delaware, Kentucky, and Michigan each rate an F grade.
Darlene Battle, executive director of Delaware Alliance for Community Advancement, said, “Delaware should be ashamed. We need to reevaluate what is really important. We need to keep families together, not force them out of their homes and into the streets. We need to change the law.”
States’ archaic exemption laws fuel the lucrative and fast-growing debt buyer industry. For example, nine of the nation’s largest debt buyers purchased (for just a few pennies on the dollar) nearly 90 million consumer accounts with a face value of $143 billion, according to a January 2013 Federal Trade Commission study. Consumers disputed at least 1 million of these debts, yet only half of those debts were verifiable at all by the debt buyer.
“In 2012, the FTC received more than 125,000 consumer complaints about debt collection, representing almost 25 percent of all consumer complaints it received. Debt collection lawsuits are clogging up civil courts across the nation,” said Hobbs. “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.”
Despite the importance of state exempt property laws, the National Consumer Law Center report finds that not one state meets five basic standards: 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 $1,200 in a bank account so the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses.
The NCLC report recommends that state exemption laws should be reformed to include the following: 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 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; and 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 goods exemptions. Laws should be self-enforcing to the extent possible, so 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.