It is a well established moral principle that debtors should be responsible to creditors for financial obligations. It even dates back to Mosaic times, and perhaps even before. That being said, however, Congress as well as state legislatures across the country have limited circumstances in which debtors are liable to creditors, and placed limitations on the ways in which creditors can collect debts. It’s the law.
Law protecting debtors has five (5) main sources:
- The Federal Debt Collection Practices Act (“FDCPA”). The FDCPA is far too complex and lengthy for this type of blog post, but I can break it down in summary fashion. The objective of the legislation is to put in place procedural mechanisms that prevent creditors from unnecessarily harassing debtors, and to require creditors to allow debtors to dispute debts prior to filing a lawsuit. According to the FDCPA, if a creditor does not send a letter at least 30 days prior to filing a lawsuit giving the debtor an opportunity to dispute the creditor’s claim, the creditor can be counter-sued in the underlying claim for an amount up to and including $1,000.00 for the reimbursement of attorney fees incurred to enforce the violation, and the action for collection can be dismissed entirely as a result. The FDCPA also provides that when a debtor files bankruptcy and provides notice to the creditor of the proceedings, the creditor MUST immediately refrain from any attempt to collect the debt. The same remedy applies here.
- State Exemption Laws and Trial Rules. In almost every state, debtors are entitled to certain “necessities of life” and certain assets are exempt from actions to collect on debts. In Indiana, this is even written into our state Constitution. Article 1, Section 22, of the Indiana Constitution states: “The privilege of the debtor to enjoy the necessary comforts of life, shall be recognized by wholesome laws, exempting a reasonable amount of property from seizure or sale, for the payment of any debt or liability hereafter contracted: and there shall be no imprisonment for debt, except in case of fraud.” To enforce this, the Indiana General Assembly enacted I.C. 24-4.5-5-105which limits the amount of one’s wages that are subject to garnishment. The Statute provides that a creditor may take the lesser of twenty five percent (25%) of a person’s “disposable income” or that amount that exceeds thirty (30) times the prescribed minimum wage. In addition, a person’s equity in his/her residential family dwelling is protected up to fifteen thousand dollars ($15,000), tangible personal property up to eight thousand dollars ($8,000) and intangible personal property, e.g. checking accounts, up to three hundred dollars ($300).
- Federal Exemption Law for Federal Benefits. Under Federal law, benefits such as Social Security Disability and Veterans’ Benefits are exempt from garnishment or collection. These are exempt assets and cannot be touched by any creditor.
- Federal Bankruptcy Law. The “Automatic Stay” is a stay on any and all actions to collect a debt. A creditor must cease any and all such actions immediately upon receiving notice that the debtor has filed a bankruptcy petition with the federal bankruptcy court. (As mentioned above, the FDCPA enacted provisions enforcing the automatic stay.)
- State Common Law (judicial precedent). In Indiana, there are two (2) main cases on point. The first is Kirk v. Monroe County Tire, 585 N.E.2d 1366 (Ind. App. 1 Dist 1992). In Kirk, the Indiana Court of Appeals ruled that in order to conduct more than a single (1) proceeding supplemental (an equitable action in which a creditor seeks to determine the repayment of a judgment debt by questioning a debtor about non-exempt assets) 1) the subject of the subsequent action(s) must involve different property of the debtor; 2) a different issue is being presented; 3) different evidence is necessary to support the allegations in both proceedings; or 4) a different party is involved than in previous proceeding(s). In Branham v. Varble, 937, N.E.2d 340 (Ind. App. 2010) the Indiana Court of Appeals reasoned that a small claims judge abused his discretion in granting an increase in garnishment pursuant to a proceeding supplemental after an order for garnishment had already been entered. This was later reversed by the Indiana Supreme Court. Basically, however, these two cases stand for the proposition that creditors cannot use the proceedings supplemental process to harass debtors into making payments from exempt income or assets.
A major problem with the collections process that I have noticed in my experience is that, contrary to Indiana Constitution, Article I, Section 22, warrants are frequently issued for debtors’ arrests. Technically speaking, the warrants are for the debtors’ failure to appear in court as ordered, but for all intents and purposes, it is used as leverage by creditors to further harass debtors into paying their debts, regardless of non-exempt property. In my estimation, approximately ninety percent (90%) of debtors fail to appear for one part of the collection process or another. In fact, if all (or even a substantial cross section) of debtors did appear, it would bring the small claims system to a crashing halt. The system is designed for debtors not to appear, and the final result is to usurp the Indiana Constitution, and for creditors to ultimately get what they desire–‘their’ money.
The law here is well established and fairly clear. The courts should take the next steps to enforce the law, but unfortunately, that has not been my experience. In the end, the system is set up to heavily favor creditors. This may be because creditors make up an overwhelming majority (and therefore end up paying for courts to operate) of small claims cases. Often, creditors will file thousands of cases per month. At ninety dollars ($90.00) each, this results in large sums of money going to support the overhead required to operate a small claims court. Regardless of the economics, however, the average person is at a huge disadvantage once a collection action has been filed.
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