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October 10, 2013

Report: Debt protection varies widely by state

WASHINGTON — Depending on where you live, debt collectors may be legally entitled to take your entire paycheck, house or car and completely clear out your bank accounts.

Families in the District of Columbia have a better chance of holding on to their vehicles than those in Maryland and Virginia. Yet Washington residents could have 25 percent of their wages transferred to a creditor.

In a report released Thursday, the National Consumer Law Center surveyed the patchwork of state "exemption laws" meant to protect struggling families from losing everything to creditors. The advocacy group found that few places met its five basic standards for protecting consumers — preserving at least $1,000 in a bank account as well as barring creditors from seizing vehicles, household goods, homes and most wages.

Only Massachusetts and Iowa came close to meeting those standards, each receiving a B-plus grade. The District of Columbia earned a B-minus for its fairly strong consumer protections, while Maryland and Virginia both received D's.

The District of Columbia prevents creditors from seizing anyone's home, but Maryland only protects homes worth up to $6,000. That's $1,000 higher than Virginia's limit, according to the report.

"I can't compare our laws to other states, but we have taken major actions to ensure those laws are enforced and worked with the courts to reform their rules for these lawsuits," said Mark Kaufman, Maryland's commissioner of financial regulation. Officials in Virginia had not reviewed the report by press time.

Christopher Weaver, associate commissioner for banking in the D.C. Department of Insurance, Securities and Banking, said the agency "plans to confer with the District's consumer affairs department and the D.C. Council about better protecting families' wages."

In some states, weak exemption laws simply reflect a failure to update statutes on the books, said NCLC researchers. Pennsylvania, for instance, protects Bibles and sewing machines, but has no coverage for household goods of more than $300.

"Almost all states exempt a pair of cows and an ox, but they haven't exempted computers or a car that actually works," said Robert Hobbs, deputy director of NCLC. "This is a call for states to update these laws."

Federal laws, he noted, mainly address personal bankruptcy, leaving states to ensure that residents do not wind up destitute as they try to pay off their debts. Hobbs said some states are updating their laws in piecemeal fashion, protecting a larger portion of wages but not cars, for instance.

"It's sort of like squeezing a balloon. They might be protecting the car, but the money in the bank account to make the car payments is wiped clean," Hobbs said. "States should be comprehensive in providing a foundation for families."

Exemption laws come into play when a creditor wins a judgment against a consumer in court. Creditors can then take steps to seize wages or property to pay the debt.

Members of the $12.2 billion debt-collection industry are critical of the restrictions consumer organizations want to place on their business. Industry officials argue that NCLC and other advocacy groups should put more emphasis on financial literacy than absolving consumers of their obligations.

"NCLC neglects to include any mention of the personal responsibility of consumers to communicate with creditors and debt collectors to seek solutions," said Pat Morris, chief executive of the Association of Credit and Collection Professionals, a trade group.

He added: "NCLC goes right to the lowest common denominator to incite fear — legal action, garnishment and repossession — which are actions of last resort by creditors."

About 30 million Americans have an average of $1,500 in debt subject to collection, according to the Consumer Financial Protection Bureau. In the wake of the financial crisis, state authorities and advocacy groups became alarmed by the tactics used by some debt collectors to get consumers to settle their balances.

A 2011 report by Consumers Union found debt collectors filing an increasing number of lawsuits against borrowers without proper documentation. In some cases, companies were suing people over debts that were already paid or winning court judgments without proof that they owned the debt.

California authorities, for example, argue JPMorgan Chase flooded the courts with lawsuits against credit card holders based on flimsy evidence that cardholders were in default, says a lawsuit filed in May by the state's attorney general.

Federal regulators have been investigating whether the nation's biggest banks used flawed documents and incomplete records to collect on delinquent credit card debts. Meanwhile, a group of 13 state attorneys general is also looking into the actions of banks as well as companies that buy defaulted debt and collect the proceeds for themselves.

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