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What Can Be Done Right Now to Fix the Legal System for Debt Collection

America’s out-of-date, unfair laws for collecting debts could be dramatically improved by these simple steps.

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 judgments 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 documentedrepeatedly, debtors often don’t know about these programs.

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Interactive: The Color of Debt

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