Living with credit

Report: Laws should shield debtors’ survival assets from seizure

Fred Williams

Does your state protect you from being driven into dire poverty by debt collectors?

If creditors win court rulings against you, they can go after your savings, wages, your car and the equity in your home in order to collect. But there are limits. U.S. law protects federal benefits such as Social Security from seizure. It also limits seizure of your pay to 25 percent of your disposable income, above a minimum of about $217 a week.

Across the country, states set their own limits that protect essential belongings as well as income. The idea is to keep families from being pushed into desperate poverty and allow them to get back on their feet.

“Those laws date from the earliest history of our states,” said Robert Hobbs, deputy director of the National Consumer Law Center. “Protected items were like cows and an ox, a musket — what was needed to forage and survive the winter.”

These days, survival tools might include a basic car for driving to work, and enough money in the bank to pay utility bills.

The consumer law center has published a report on the protections called “No Fresh Start: How states let debt collectors push families into poverty.” No states received an “A” grade, which was defined as strong protections in five categories:  wages, a used car, family home, essential household goods, and at least $1,200 in the bank.

“It’s kind of like squeezing a balloon,” Hobbs said.  “If you protect wages in a strong way, it might make your bank account more vulnerable, or your car.”

North Carolina, for example, exempts all of a debtor’s wages from seizure if supporting a family, but allows only a $3,500 car and a $35,000 home, with exceptions for seniors, according to the report.

North Carolina earned a grade in the “B” range, along with Massachusetts, Iowa, Nevada, New York, North Carolina, Oklahoma, South Carolina, Texas, Wisconsin, the District of Columbia and New Hampshire.  At the bottom of the list with failing grades were Alabama, Delaware, Kentucky, Michigan, Arkansas, Georgia, New Jersey, Pennsylvania, Utah and Wyoming.

State limits on property seizure provide a backstop for people who do not qualify for bankruptcy, or who simply cannot afford the costs, Hobbs said. “If you spend all of your savings looking for a job, coming up with $2,000 or $3,000 for court costs and attorney fees … is out of reach,” he said.

The protections on seizure do not apply to secured debts. Homes subject to a mortgage can be foreclosed on by the secured creditor, and autos being financed can be repossessed by lien holders.  Also, separate rules with lower protections often apply to obligations such as taxes and child support.

The consumer law center is calling for a set of minimum standards to be adopted by all states. The model law would preserve people’s ability to work and pay essential bills, keep seniors from destitution and close loopholes that let payday lenders take protected household items as collateral.

“The economic downturn has strained families to the breaking point,” the consumer law center said in a statement, “and the growth of the debt buyer industry makes them increasingly vulnerable to seizure of essential wages and property.”

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