Dismantling unfair interest rates for debt collection judgments

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States should follow New York’s lead by reducing the amount of interest payable on unpaid debt judgments.

The costs of credit and debt collection, which are inextricably linked, are frequent battlegrounds for the regulation of consumer financial products and services.

Over time, these industries have acquired outsized importance in the United States. For example, in 2019, over 75% of all consumers had at least one debt. Moreover, about a third of all consumers have some of that debt in the process of being collected.

Debt collection through the courts has become rather ubiquitous. From 1993 to 2013, the number of debt collection actions filed nationwide more than doubled, totaling approximately 4 million. It probably continued to increase. In 2020, the debt collection industry consisted of over 7,000 agencies with $13 billion in revenue.

In this context, reforming prejudgment and postjudgment interest rates for consumer debt collection actions could make a real difference to the regulatory landscape of consumer financial services. State lawmakers have the power to implement these reforms, and there are compelling reasons for more states to take bold action.

In 2021, the New York Legislature enacted groundbreaking regulatory reform to reduce pre-judgment and post-judgment interest rates on consumer debt judgments. The legislature recognized how out of step the 9% guideline was in the historically low interest rate environment. It lowered this rate from 9% to 2%.

Some facts and figures demonstrate the important context that compelled the New York legislature to act. New York’s 9% guideline came into effect more than 40 years ago, in June 1981. From December 1980 to June 1981, the average constant one-year Treasury rate – a benchmark rate relatively conservative and the postjudgment interest rate applied to federal judgments in civil lawsuits — averaging 14.6 percent. At the time the legislature set the rate at 9%, the judgment interest rate was less than the reference rate or the market rate. But, on average, the judgment interest rate of 9% has been more than 4 times the benchmark or market rate over the past 20 years. This rate is on average less than 2%.

In the same 20 years, the Legislature estimated that millions of consumer debt lawsuits were filed in New York civil courts. In the early 2000s, such actions in New York had a default rate of up to 79%, which is not surprising since irregularities in the service of proceedings – namely, the outright inability to serve defendants a summons and a complaint – were rampant and well documented.

A researcher estimates that consumer debt lawsuit judgments in New York civil courts amounted to $800 million in 2006 alone. These judgments can still be collected today in New York. At a post-judgment interest rate of 9%, the $800 million in judgments in 2006, if unpaid, would multiply to a staggering $1.88 billion in 2022, or 2 .35 times the original amount.

Nationally, organizations are investigating and reporting how debt collection litigation drains wealth and how its processes have been abused. Debt collection lawsuits are far more common in black communities than in white communities, even controlling for income.

The structural racism that makes black communities more likely to have lower incomes, be targeted by predatory financial products, pay more for credit, and have surprisingly less wealth also makes black communities more likely to be targeted by lawsuits. for debt collection and to face the attendant debilitating consequences.

Debt buyers who doctor these judgments, old and new, can find judgment debtors — or someone responsible for the debt — through public data sources and information subpoenas to employers and banks. They can garnish wages – withhold a portion of paychecks until the debt is paid – or freeze bank accounts as long as a judgment is collectible under state law – a minimum of 20 years in New York.

Garnishments hit low-wage households with little or no wealth like a bombshell. Since garnishments can be based on judgments that are 10 to 20 years old, the balance of the judgment has often been multiplied by the time a person recovers from a financial shock and has income again. Garnishments can plague middle- and low-income workers for years.

Each state legislature with a high fixed rate or a rate that is tied to a benchmark rate but adds a fixed amount by law must lower its judgment interest rate for consumer debt judgments. From a political point of view, an interest rate set by the government is different from one set in the market – the government is not motivated by profit and has an obligation to act in the interest of his people.

Most people who are sued for consumer debt and convicted have little or no income and little or no wealth. Most consumers who are sued in these contexts expected to continue paying their debts but, for one reason or another, were unable to do so. They do not keep large sums of money and avoid paying judgments.

The argument that a low judgment interest rate will encourage market investment instead of paying off a judgment is not rational when applied to people who often struggle to pay for basic necessities. .

Another common argument is that reducing credit yields in any way – regardless of the distance from the origin of credit – will reduce the availability of credit. In fact, the reform of litigation requirements for debt collection actions, which presumably increase the total cost of collection, has not diminished the availability of credit.

The New York Legislature, in accordance with its authority and after careful consideration, went further: the Legislature retroactively changed the statutory interest rate from 9% to 2% for outstanding consumer debt judgment amounts. .

In doing so, the legislature has taken a bold and significant step in mitigating the harm caused by the 9% rate on judgments issued over the past 20 years with balances that have multiplied due to interest, especially in the context unprecedented current economy. The 9% rate has provided an outdated boon to debt collectors who can continue to collect judgments that were issued while systemic irregularities in debt collection litigation went essentially unchecked.

Retroactive change is limited to avoid disrupting money that has changed hands and judgments that have been made. Lawmakers clarified that interest amounts paid before the effective date will not be refunded or applied to the main judgment amount to reduce it.

In addition, judgments that incorporate 9% prejudgment interest will not be reopened or amended. But the change will provide significant relief to people whose judgment balance continues to swell because their monthly payments or the amount of their wage garnishment is insufficient to cover the full amount of interest added to their balance by the 9% statutory rate. .

The idea of ​​retroactively changing the law may cause unease because it raises the question of a catch under the Fifth Amendment of the US Constitution and under many state constitutions.

The Fifth Amendment, however, does not require states to accept the application of economic laws that are unjust and that have perpetuated structural inequalities. The Fifth Amendment’s protection of property from regulatory seizure requires compensation when the government infringes an owner’s rights so seriously that the government action is in effect a physical seizure.

This analysis requires factual investigations that allow “careful examination and weighing of all the relevant circumstances”. Plaintiffs arguing they suffered a regulatory hold face a high bar for redress in court.

The Supreme Court said that “government could hardly continue if to some extent the values ​​incidental to property could not be diminished without paying for every change in general law”. The Court also accordingly recognized that often “the government may execute laws or programs that adversely affect recognized economic values” without conflicting with the Fifth Amendment.

This moment in history demands that policy makers take positive action to dismantle the unjust structures that will continue to siphon income and potential wealth from people who are historically marginalized and who can least afford it. High interest rates on consumer debt are one such structure that needs to be dismantled.

Karuna B. Patel is the Deputy Director of the Feerick Center for Social Justice at Fordham Law School.

This essay is part of a six-part series entitled Promote economic justice.

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