By Paul Kiel/ProPublica
Laws governing debt collection lawsuits and garnishments are often antiquated, poorly thought out and place the burden on debtors to know their rights. Below are ideas for commonsense reforms.
1. Lower How Much Can Be Taken From Debtors’ Wages.
The federal law limiting wage seizures to 25 percent of after-tax income passed in 1968. Lawmakers appear to have pulled this percentage out of a hat. Some states protect more of a worker’s pay – and four (Texas, Pennsylvania and the Carolinas) prohibit garnishment for most debts – but most allow the federal level. Federal surveys show that low-income workers can’t afford to lose a quarter of their pay.
2. Restrict How Much Can Be Taken From Debtors’ Bank Accounts.
The 1968 federal law is so old that it is silent on the subject of bank account garnishments, which are now a common form of collection for collectors. As a result, a plaintiff can seize no more than a quarter of a worker’s pay, but if that paycheck is deposited into a bank account, the entire amount can be seized.
3. Provide Clear Notice To Debtors About Laws That Protect Them.
When states do provide legal protections for debtors – such as allowing those with children to keep more of their pay under a “head of family” exemption – the burden is typically on the debtor to assert these protections. But there’s frequently no clear notice provided to debtors that the protections exist.
4. Limit Attorneys’ Fees To Reflect Actual Work On A Suit.
When companies sue, they often request an “attorney’s fee,” which is routinely granted and added to the judgment. The fees are usually set at arbitrary, fixed amounts, even though attorneys may spend only a few minutes on a suit. In 2013, we reported that one subprime lender in Mississippi added an attorney fee equal to one-third of the principal balance to each suit, even though the attorney was a company executive.
5. Cut Interest On Judgments To A Reasonable Level.
Under Missouri law, lenders can request that judgements grow at the contracts’ rate of interest. Particularly when high-cost lenders sue, this can result in what one St. Louis judge called a form of “indentured servitude”: A debt can balloon at triple-digit interest even as the debtors’ wages are seized. A $1,000 loan can become a $40,000 debt, forcing the debtor to declare bankruptcy or make payments for a life.
6. Improve Enrollment In Programs To Help Low-Income Debtors.
Some common plaintiffs, such as utility companies and non-profit or public hospitals, have an obligation to serve the public. These sorts of entities often have a program of some kind to help lower-income patients or customers, and yet, as ProPublica has documented repeatedly, debtors often don’t know about these programs.
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More From This Story
*How Collection Suits Squeeze Black Neighborhoods.
Our first-of-its-kind analysis shows that the suits are far more common in black communities than white ones.
* Interactive: The Color of Debt.
The black neighborhoods – including those in Chicago – where collection suits hit hardest.
* How We Reported It.
An explanation of how we analyzed whether debt-collection lawsuits disproportionately impact black communities.
* Have You Ever Been Sued Over A Debt?.
You can help us investigate questionable debt collection practices by completing a short survey about your experience.
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Posted on October 9, 2015