A new report from the National Consumer Law Center surveys the property 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 so that debtors can continue to work productively to support themselves and their families.
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.
Despite the importance of state exempt property laws, this 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 $1200 in a bank account so that 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:
- 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.
Model language for states to achieve these goals is provided in the National Consumer Law Center’s Model Family Financial Protection Act. The model law also includes steps that states can take to reduce the pervasive abuse of the court system by debt buyers. Seizure of debtors’ wages and property would not be such a problem if debt buyers did not churn out such an endless stream of judgments on old, poorly documented debts—many of which are based on mistaken claims.
By updating exemption laws, states can prevent over-aggressive debt buyers from reducing families to poverty. These protections also benefit the state by keeping workers in the work force, helping families stay together, and reducing the demand on funds for unemployment compensation and social services.The report includes each state’s overall rating and ratings for the five primary asset-preservation standards as well as appendices with specific exemption information on all 53 jurisdictions. Also included: Recommendations for the minimal exemption amounts that will allow a debtor to continue to work to support a family.