Interest rates

Dismantling unfair interest rates for debt collection judgments

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, more than 75% of all consumers to have at least one debt. Additionally, approximately one-third of all consumers to have part of this debt being collected.

Debt collection through the courts has become rather ubiquitous. From 1993 to 2013, the number of recovery actions deposit nationwide more than doubled, totaling around 4 million. It probably continued to increase. As of 2020, the debt collection industry consisted 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 legislators 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 promulgated groundbreaking regulatory reform to reduce pre-judgment and post-judgment interest rates on consumer debt judgments. The legislator 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. The 9% statutory rate in New York go effective over 40 years ago, in June 1981. From December 1980 to June 1981, the average constant one-year Treasury maturity rate – a relatively conservative benchmark rate and the post-judgment interest rate applied to federal judgments in civil actions –on average 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 9% judgment interest rate has been more than 4 times the benchmark or market rate over the past 20 years. This rate is on average less than 2%.

During the same 20 years, the legislature valued that millions of consumer debt lawsuits have been filed in the civil courts of New York. In the early 2000s, these actions in New York had a non-payment rate of up to 79%, which is not surprising because irregularities in the service of pleadings, namely the pure and simple omission to serve the defendants with a summons and a complaint,were rampant and well documented.

a scholar estimates that consumer debt judgments in New York City 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 studying and report how debt collection litigation drains wealth and how its processes have been abused. Debt collection lawsuits are much more common in black communities than in white communities, even controlling for income.

The structural racism that makes black communities more likely to have low income, are target with predatory financial products, Pay more for credit, and to have surprisingly less wealth also makes black communities more likely to be targeted by a debt collection lawsuit and face the debilitating consequences that come with it.

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.

Toppings to hit low-wage households that have little or no wealth like a bombshell. Since garnishments can be based on judgments that are 10 to 20 years old, the balance of judgments often has multiplied when a person has recovered from a financial shock and regained income. Inputs 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 a rate set in the market – the government is not motivated by profit and has an obligation to act in the interests 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 investment in the market instead of paying off a judgment is not rational when applied to people who often have difficulty paying 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 to diminish the availability of credit.

The New York Legislature, in accordance with its authority and after careful consideration, went further: the Legislature retroactively amended the statutory interest rate of 9% to 2% for unpaid amounts of consumer debt judgments.

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 provided an outdated boon to debt collectors who can continue to collect judgments rendered when systemic irregularities in debt collection litigation went largely unchecked.

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

In addition, judgments that incorporate 9% pre-judgment interest will not be reopened or altered. 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 ​​a retroactive modification of the law can be a source of discomfort because it raises the question of a socket under the Fifth Amendment of the United States 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 “a careful examination and weighing of all the relevant circumstances”. The plaintiffs arguing that they suffered a regulatory hold face a high bar for redress in court.

The Supreme Court has declared that “the government could hardly continue if to some extent the values ​​appertaining to property could not be diminished without paying for every change in the general law”. The Court also recognized as a result, 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.