by Melanie Cuevas, VP of Government Relations
Deals on debt collection legislation benefit industry and consumers alike.
As advocates representing California’s banks, we offer support for legislative proposals that are beneficial to the financial industry or the greater business community and we are often tasked by our association members with halting detrimental legislation from becoming law. In California’s current political climate, where the latter is becoming increasingly difficult, sometimes we are able to work collaboratively with those who are on the opposite side of the philosophical table, negotiating compromises that strike a balance, for example, between increasing consumer protections and preserving a creditor’s right to be made whole.
Routinely, consumer advocates attempt to strengthen protections in the debt collection statues of California, where some of the most expansive consumer protection laws are in place. This year, we were able to reach compromise on a few debt collection-related measures that were generally viewed as favorable proposals by lawmakers.
Adjusting Wage Garnishment Formulas
In California, the existing Wage Garnishment Law (WGL) authorizes a judgment creditor to seek garnishment of a judgment debtor’s wages to satisfy a court judgment. Under the WGL, the most that can be garnished from wages is the lesser of 25% of disposable earnings for that week or 50% of the amount by which weekly disposable earnings exceed 40 times the state hourly minimum wage. This formula, which protects consumers from excessive wage garnishment, earned California a “B” rating from the National Consumer Law Center. The few states that earned an “A” rating exempt all wages but allow for more severe methods of recovery, like unrestricted bank account levies.
Measure SB 1477 proposed to rewrite California’s recently updated statues in a way that would nearly eliminate wage garnishment entirely: altering the formula to the lesser of 25% of disposable earnings for the week or 10% of the amount by which weekly disposable earnings exceed 80 times the state hourly minimum wage. The practical effect of this proposal was a de facto ban on wage garnishment for all debtors earning an annual salary of approximately $75,000, well above the state’s median income of $62,171, and for individuals making $100,00 per year, only $34 of their wages could be garnished weekly. To put that in scale – a debt of $5,000 would go from taking three months to repay, to over just under three years.
Proponents argued that because California is one of the most expensive states to live, low-income earners need additional protection from garnishment. In this context it is important to note that, effective in 2016, SB 501 by the same author raised the floor level for exempt salaries, slashed the allowable garnishment percentages for nonexempt low-to-medium income earners, and created a sliding scale that automatically increases protections as the minimum wage adjusts, rather than routinely updating garnishment laws.
With a coalition of creditors and collectors, the we argued that SB 1477 was both premature and unnecessary due to SB 501’s recent approval; that the measure benefitted wealthy debtors the most to the detriment of a single parent whose spouse refuses to pay child support, a private citizen tort suit, or a small business damaged by criminal conduct trying to recoup damages, all of whom may also benefit from the garnishment tool; and that the ultimate consequence would be to borrowers who suffer as a result of restrictions on access to credit.
We were successful in negotiating amendments to the measure which adjusted the garnishment floor to 40% of the amount by which weekly disposable earnings exceed 48 times the state hourly minimum wage, effective September 1, 2023.
Renewal & Interest Rates of Money Judgment
As introduced, SB 1200 by Senator Skinner proposed to restrict the renewal of money judgments to those pursuant to which a lien has been created, reduce the interest rate applied to outstanding money judgments to 3% per annum, and extend the period of time within which a judgment debtor can move to vacate or modify a renewal to 60 days.
Existing California law provides that interest accrues at the rate of 10 percent per annum on the principal amount of a money judgment remaining unsatisfied. Existing law also authorizes 10-year renewals of judgments from the date the application is filed.
With a coalition of creditors and collectors, we argued that the measure took an extreme and unequal approach to adjusting post-judgment interest; that comparing California’s post-judgment interest rate to a federal prime interest rate was an apples to oranges comparison; and that placing severe restrictions on collection of validly owed debt will cause the availability of credit to decrease.
Proponents stated that SB 1200 was intended to provide relief to financially burdened Californians, increasing their ability to pay off personal debt by reducing the interest rate and removing unlimited renewals of personal debt judgments. We were successful in negotiating amendments that authorize one 5-year renewal of judgments and change the interest rate to a fixed 5% for judgments entered into or renewed after January 1, 2023, meaning existing judgment remain at 10% until their renewal.
Establishing Systems to Address Coerced Debts
In an attempt to create a process whereby survivors of domestic violence, elder or dependent adult abuse, and foster youth can be relieved of liability for debts they were coerced into entering, Senator Min introduced SB 975. As introduced, the measure proposed the creation of a new civil cause of action for coercion of debt that would allow a debtor to bring an action or claim against an innocent third party in the form of a lender, provider of credit or debt collector rather than the perpetrator of the abuse. The measure proposed that if the debtor establishes that a creditor’s claim arises from coerced debt, the measure entitled the debtor to a unilateral cancelation of the debt in its entirety by way of an injunction restraining the creditor from holding or attempting to hold the debtor personally liable on the claim or from enforcing a judgment related to the claim against the debtor.
These provisions impacted secured debts as well as commercial debts, lacked a path for lenders to be made whole, and lacked any accountability for perpetrators of abuse. We asserted that, as drafted, the measure was deficient in robust assurances and standards essential to ensuring that there is no collusion and that claims are properly vetted for veracity, thus the measure opened the door to nullifying valid debts potentially years after the making of the loan – including those secured by real and personal property – by holding a lender or debt collector financially liable for the debt that is found to be coerced as defined by the bill, which would have had a chilling impact on the financial marketplace.
Through many negotiation sessions, we ultimately came to a compromise with the author and sponsors – the final version of SB 975 focuses on unsecured personal debts, creating a two-step process for victims seeking relief, whereby debtors would first contact their lender or creditor directly. If that claim was denied, only then would a debtor be able to file an action against a creditor or collector. If that debtor proves in a court of law by a preponderance of the evidence that the debt was coerced, they would be entitled to relief from the specifically identified debt(s) or portions thereof. Under these circumstances, a court shall also issue a judgement against the coercer in favor of the lender/collector when that coercer has been brought within the jurisdiction of the court. The latter language ensures not only an ability to be made whole for lender/collector, but also that perpetrators of this abuse will not entirely evade responsibility for their actions.
Preserving the rights of creditors to be made whole while ensuring that debt collection practices are responsible and fair acknowledges that the extension of credit promotes an efficient and productive economy and that collections are a critical part of the credit ecosystem. Access to credit allows consumers to use future income to purchase goods and services that might otherwise be our of reach. However, when the ability of a lender to recover valid balances is compromised, lenders will be forced to limit access to credit and/or raise the cost of credit – credit tightening impacts all consumer, rippling throughout the economy. Striking compromise on these debt collection-related measures is an example of the importance and impact of the advocacy work that is done in Sacramento.