A new report from the National Consumer Law Center (NCLC) surveyed 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 of debtors from seizure by creditors.
No Fresh Start: How States Let Debt Collectors Push Families into Poverty claims many state exemption laws are antiquated and holds Pennsylvania out as an example. NCLC said, “While Pennsylvania has strong protections for debtors’ wages, that state protects almost none of a debtor’s property — just clothing, a Bible, school books, sewing machines not held for resale, military uniforms and $300 of other property — in total.”
Other antiquated sate laws include Vermont’s, which protects one cow, two goats, three swarms of bees, but not a car worth more than $2,500; and Delaware’s, which 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“It’s a travesty when outdated state laws protect farm animals and their feed but not a living wage, a working car and a bare-bones checking account,” said Robert Hobbs, National Consumer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.”
According to NCLC, 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 (FTC) study.
Consumers disputed at least one million of these debts, yet only half of the disputed debts were verifiable at all by the debt buyer.
Hobbs said, “This report serves as a wake-up call for states to update their exempt property laws and stop putting millions of families at risk.”
Despite the importance of state exempt property laws, the National Consumer Law Center report finds that not one state meets five basic standards:
n Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;
n Allowing the debtor to keep a used car of at least “average” value;
n Preserving the family’s home — at least a median-value home;
n Preventing seizure and sale of the debtor’s necessary household goods; and
n Preserving at least $1,200 in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses.
Massachusetts, which recently modernized its archaic exemption laws, and Iowa each rate a B+ grade. States earning a solid B are Nevada, New York, North Carolina, Oklahoma, South Carolina, Texas, and Wisconsin.
The worst states
These 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. Arkansas, Georgia, New Jersey, Pennsylvania, Utah, and Wyoming rate a D–.
The NCLC report recommends that state exemption laws should be reformed to:
* 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.
Debt collectors assail ‘misleading’ NCLC report
ACA International, the largest trade group for the consumer debt collection industry, today responds to a report issued by the National Consumer Law Center titled: “No Fresh Start — How States Let Debt Collectors Push Families into Poverty.” Following is a statement from ACA International CEO Pat Morris.
“We take umbrage with the misleading title of this report, as it lumps together a broad-brush indictment of the entire consumer debt collection industry when, in reality, the report is far more narrowly focused on current state law that applies in extreme circumstances. Throughout its report, NCLC simply indicts state laws, not debt collection.
Instead of focusing on the experience of the typical American consumer, NCLC is focused solely on aiding the financial position of its primary audience - consumer attorneys — and the enactment of its extreme model state legislation.
Within the context of this report and others it has issued, the NCLC neglects to include any mention of the personal responsibility of consumers to do their best to communicate with creditors and debt collectors to seek solutions to their financial concerns. Rather, the NCLC goes right to the lowest common denominator to incite fear — legal action, garnishment and repossession — which are actions of last resort by creditors after all other attempts to work with a consumer to resolve a rightfully owed debt have failed.
Our industry takes its responsibility of working with consumers very seriously. Debt collectors want to work with consumers to find solutions and resolve complaints, which can only be done through communication. When given a chance, the industry has a high rate of success as outlined in the Council of Better Business Bureau’s 2012 report on inquiries and complaint statistics - United States collection agencies resolved 86 percent of the consumer complaints received in 2012; exceeding the national average of 77 percent for all industries.
Further, the NCLC focuses solely on its model legislation while completely missing the very real opportunity to emphasize the growing need for consumer financial literacy, which according to the Consumer Financial Protection Bureau, is among the most immediate forms of self-protection – ‘being able to avoid problems in the first place and to know what you can do about it when you do experience a problem.’ ACA has created a free resource called www.askdoctordebt.org which helps consumers get information about their rights when contacted about a debt.
ACA International and its members are supportive of modernizing outdated laws to reflect today’s technology and financial environment but believe that common sense solutions preserve balance between consumer protection and the ability of a creditor or debt collector to recover a rightfully owed debt. Our industry has and will continue to work with the CFPB, federal and state regulators, lawmakers and enforcement authorities and advocacy groups to identify reasonable solutions.
The collection of rightfully owed consumer debt is vital to maintaining a healthy credit-based system. By recovering these assets on behalf of businesses, government and non-profit organizations, consumer debt collectors provide immense benefit to the national, state and local economies. In addition, they are important employers, taxpayers and contributors to the betterment of their communities.”