Category: Debt Collection

  • Hospitals Suing Patients – A New Study

    Posted by

    Melissa Jacoby

    screen shot of SSRN title and author list and beginning of abstract

    My first post on the original Credit Slips was about medical billing and collection; so is this first post on the new Credit Slips. I write to encourage more of you to read Hospitals Suing Patients: The Rise of Stealth Intermediaries, posted this summer on the Social Science Research Network.  This study, by law professor Barak Richman and coauthors at Stanford University’s Clinical Excellence Research Center reports on a hospital’s recent use of collection agencies to sue and enforce judgments (many of which were based on “unsubstantiated and inaccurate billing records”) against patients, and the impact of state law efforts to increase transparency in debt collection. And herein lies the end of my first post on the new Credit Slips, if only to expedite your decision to download this study.

  • Man Bites Dog, or Debt Collector Restructures Its Distressed Debt

    Posted by

    Jason Kilborn

    I couldn't let this one pass without noting it. The largest debt collection company in Europe has found itself on the other end of the dunning letter. Swedish debt collection company Intrum has achieved majority (barely) support for a deal with bondholders to swap 10% of its $5.8 billion debt for equity and push out the maturity of remaining notes. Intrum found itself in this mess after "years of borrowing heavily in the low-interest era to buy portfolios"–that is, to buy bunches of distressed debt owed by strapped borrowers all over Europe, which Intrum would then squeeze for repayment at a higher rate than Intrum had paid. Or so Intrum hoped. Apparently this investment strategy went sour after "a slowdown in its business." Hmmm. What an interesting euphemism! Borrowers resisting collection pressure more resolutely now? I wonder if the growing wave of personal insolvency procedures across Europe has contributed to this "slowdown" for Intrum's debt collection efforts. Good news for borrowers is bad new for the debt collector!  

  • The Consumer Debt Default Judgments Act

    Posted by

    Melissa Jacoby

    MapConsumer debt has been a difficult topic for uniform state law movements, but here's one more attempt recently approved by the Uniform Law Commission and the American Bar Association, and introduced in Colorado last week.  You can access the materials here. Meanwhile, here is ULC's summary:

    Numerous studies report that default judgments are entered in more than half of all debt collection actions. The purpose of this Act is to provide consumer debtors and courts with the information necessary to evaluate debt collection actions. The Act provides consumer debtors with access to information needed to understand claims being asserted against them and identify available defenses; advises consumers of the adverse effects of failing to raise defenses or seek the voluntary settlement of claims; and makes consumers aware of assistance that may be available from legal aid organizations. The Act also seeks to provide a uniform framework in which courts can fairly, efficiently, and promptly evaluate the merits of requests for default judgments while balancing the interests of all parties and the courts.

    Would welcome Credit Slips posters and readers chiming in on this act in the comments, especially if you were involved in the drafting process and/or if will be weighing in on this act with their state legislatures.

    And for previous recent coverage of other uniform acts being urged on state legislatures, see here and here.

  • New Book Alert: Delinquent

    Posted by

    Melissa Jacoby

    Cover ImageThe University of California Press has published Delinquent: Inside America's Debt Machine by Elena Botella. 

    Botella used to be "a Senior Business Manager at Capital One, where she ran the company’s Secured Card credit card and taught credit risk management. Her writing has appeared in The New Republic, Slate, American Banker, and The Nation."

    Here's the description from the publisher between the dotted lines below: 

    ——————

    A consumer credit industry insider-turned-outsider explains how banks lure Americans deep into debt, and how to break the cycle.

    Delinquent takes readers on a journey from Capital One’s headquarters to street corners in Detroit, kitchen tables in Sacramento, and other places where debt affects people's everyday lives. Uncovering the true costs of consumer credit to American families in addition to the benefits, investigative journalist Elena Botella—formerly an industry insider who helped set credit policy at Capital One—reveals the underhanded and often predatory ways that banks induce American borrowers into debt they can’t pay back.

    Combining Botella’s insights from the banking industry, quantitative data, and research findings as well as personal stories from interviews with indebted families around the country, Delinquent provides a relatable and humane entry into understanding debt. Botella exposes the ways that bank marketing, product design, and customer management strategies exploit our common weaknesses and fantasies in how we think about money, and she also demonstrates why competition between banks has failed to make life better for Americans in debt. Delinquent asks: How can we make credit available to those who need it, responsibly and without causing harm? Looking to the future, Botella presents a thorough and incisive plan for reckoning with and reforming the industry.

    ———————

    Looking forward to reading this book! Also expecting to see more from the University of California Press of direct interest to Credit Slips readers in the years ahead. 

  • Human Rights Watch on Imprisonment for Debt

    Posted by

    Jason Kilborn

    What happens in countries where no consumer bankruptcy regime exists as a safety valve to assuage the worst consequences of unpayable debt? A report this week from Human Rights Watch ("We Lost Everything": Debt Imprisonment in Jordan) offers one heart-wrenching answer. The following excerpt captures the essence:

    Jordan is one of the few countries in the world that still allows debt imprisonment. Failure to repay even small debts is a crime that carries a penalty of up to 90 days in prison per debt, and up to one year for a bounced check; courts routinely sentence people without even holding a hearing. The law does not make an exception for lack of income, or other factors that impede borrowers’ ability to repay, and the debt remains even after serving the sentence. Over a quarter-million Jordanians face complaints of debt delinquency and around 2,630 people, about 16 percent of Jordan’s prison population, were locked up for nonpayment of loans and bounced checks in 2019.

    The response from the Jordanian Ministry of Justice is well worth reading, and it concludes by offering some hope: "A committee is reviewing the Execution Law in such a way to ensure justice and account for the interests of both parties (borrower and creditor)." Let us hope that this review concludes as it has in many, many countries around the world in recent years–with a proposal for the adoption of a personal bankruptcy law, following the guidance of the World Bank and other international organizations.

  • Student Loan Relief Update

    Posted by

    Alan White

    Student loan relief provisions required by the CARES Act expire on September 30. Those protections included 1) for all federal direct loans: zero interest and automatic payment forbearance, 2) credit towards IDR and PSLF forgiveness for the 6 months covered by the Act, and importantly, 3) suspension of wage garnishments and other collections on defaulted loans. The Act called for student loan borrowers to receive notice in August that payments will restart October 1 and that borrowers not already in income-driven repayment plans can switch, so that borrowers with no or little income can remain on zero payments (but not if they were in default.)

    The President’s Executive Memorandum calls on the Secretary of Education to take action to extend economic hardship deferments under 20 U.S.C. 1087e(f)(2)(D) to provide “cessation of payments and the waiver of all interest” through December 31 2020.  These deferments are to be provided to “borrowers.” The Memorandum does not specify which loan categories (Direct, FFEL, Perkins, private) should be included, nor whether relief to borrowers in default should continue. Advocates also note that the Memorandum is vague as to whether borrower relief will continue automatically, or instead whether students will have to request extended relief, as under the Education Department’s administrative action just prior to passage of the CARES ACT. As of this writing the Education Department has posted no guidance for borrowers or servicers on its web site. Servicers will need guidance soon, and borrowers meanwhile will be receiving a confusing series of CARES Act termination letters and conflicting information about the latest executive action. UPDATE – USED has apparently issued guidance to collection agencies saying that borrowers in default are included in the Executive action so that garnishments and other collection should remain suspended through December 31, 2020.

    The HEROES Act passed by the House would extend all borrower relief until at least September 30 2021, would bring in all federal direct, guaranteed and Perkins loans, and would grant a $10,000 principal balance reduction to “distressed” borrowers. The House also included an interesting fix to the Public Service Loan Forgiveness program so that borrowers will not have to restart their ten-year clock towards loan forgiveness when they consolidate federal loans. In lieu of any extended student loan relief, Senate Republicans have proposed that borrowers just be shifted to existing income-dependent repayment plans. Existing IDR plans already allow zero payments for borrowers with zero or very low income, but do not stop the accrual of interest. They are not available to borrowers in default, so wage garnishments and collections for borrowers who were in default before March would resume October 1 under the Republican proposals.

  • CARES Act “Rebates” and Bankruptcy

    Posted by

    Dalie Jimenez

    Related to Pamela's last post and our article regarding garnishments and the CARES Act "rebates," the US Trustee issued a notice to Chapter 7 and Chapter 13 trustees giving them guidance on what to do about them in a bankruptcy case.

    The top line: these payments should not be included in the statutory definitions of "current monthly income" or "disposable income" per the CARES Act itself. But the Act failed to discuss whether these payments are property of the estate, which typically would mean that they are. I know bankruptcy lawyers have been dealing with this already and many feared that some trustees would try to obtain these mounts. I was therefore very pleased to read this in the US Trustee notice, in particular the part in bold:

    Regardless of whether the rebate is property of the estate, the United States Trustee expects that it is highly unlikely that the trustee would administer the payment after consideration of all relevant circumstances … Trustees are directed to notify the United States Trustee prior to taking any action to recover recovery rebates or objecting to a chapter 13 plan based on the treatment of recovery rebates.

  • Do Judges Do Contract Interpretation Differently During Crisis Times?

    Posted by

    Mitu Gulati

    Scholars of constitutional law and judicial behavior have long conjectured that judges behave differently during times of crisis. In particular, the frequently made claim is that judges “rally around the flag”.  The classic example is that of judges being less willing to recognize civil rights during times of war (for discussions of this literature, see here, from Oren Gross and Fionnuala Aolain; and here, for an empirical analysis of the topic from Lee Epstein and co authors).

    But what about financial crises?  Are judges affected enough by big financial crises to change their behavior and, for example, rule more leniently for debtors who unexpectedly find themselves being foreclosed on? In a paper from a few years ago, Georg Vanberg and I hypothesized that a concern with needing to help save the US economy from the depression of the 1930s may have been part of the dynamic explaining the Supreme Court’s puzzling decision in the Gold Clause cases (here).

    A fascinating new paper from my colleague, Emily Strauss (here), analyzes this question in the context of the 2007-08 financial crisis.  Emily finds that lower courts judges, in a series of mortgage portfolio contracts cases during the crisis and in the half dozen years after, made decisions squarely at odds with the explicit language of the contracts in question.  From a pragmatic perspective, it is arguable that they had to; the contracts were basically unworkable otherwise.  But, as mentioned, this conflicted with the explicit language of the contracts. And judges, especially in New York, like to follow the strict language of the contracts (or so they say).   Then, and I think this is the most interesting bit of the story, Emily finds that, starting in roughly 2015 (and after the crisis looked to have passed), the judges change their tune and go back to their strict reading of the contract language.

    Here is Emily’s abstract that explains what happened better than I can:

    Why might judges interpret a boilerplate contractual clause to reach a result clearly at odds with its plain language? Though courts don’t acknowledge it, one reason might be economic crisis. Boilerplate provisions are pervasive, and enforcing some clauses as written might cause additional upheaval during a panic. Under such circumstances, particularly where other government interventions to shore up the market are exhausted, one can make a compelling argument that courts should interpret an agreement to help stabilize a situation threatening to spin out of control.  

    This Article argues that courts have in fact done this by engaging in “crisis construction.” Crisis construction refers to the act of interpreting contractual language in light of concurrent economic turmoil. In the aftermath of the financial crisis, trustees holding residential mortgage backed securities sued securities sponsors en masse on contracts warranting the quality of the mortgages sold to the trusts. These contracts almost universally contained provisions requiring sponsors to repurchase individual noncompliant loans on an individual basis. Nevertheless, court after court permitted trustees to prove their cases by sampling rather than forcing them to proceed on a loan by loan basis.

    (more…)

  • New Guide to Money Judgment Collection/Defense

    Posted by

    Jason Kilborn

    EyesonthePrizecoverI excitedly tore into a small box this morning containing the first printing of my new book, Eyes on the Prize: Procedures and Strategies for Collecting Money Judgments and Shielding Assets (Carolina Academic Press 2019). Since the advent of the Bankruptcy Code in 1979, the study of how one collects a money judgment (or arbitral award) in law schools has become as rare as an involuntary bankruptcy petition against an individual debtor. But my students (and local lawyers) clamored for treatment of the topic for years, so I decided to do what I could to revive the subject. I was surprised at the diversity of approaches I found among the states (whose enforcement law applies to federal judgments, too, as described in the book), but I think I fairly survey the key variants by concentrating on a detailed exposition of the laws in New York, California, and Illinois, with a smattering of other salient state laws thrown in here and there (Texas, Florida, Pennsylvania, Iowa, etc.). In the past, I've used my state's statutes and a series of hypothetical practice problems (both of which included in this book) for years in my Civil Procedure classes, and the students have voraciously devoured that material. More detailed comparative knowledge has also sharpened my appreciation for how the battle between judicial lienholders and secured creditors works. I tried to offer soup-to-nuts coverage here, from discovery to asset protection to bankruptcy, so I think a lot of readers will find something useful, especially new practitioners who likely learned none of this in law school. A bit more of a preview than appears in the "Look inside" link on CAP's website is available for free download on SSRN, as well. Check it out–and let me know what you think!

  • The Student Loan Tax

    Posted by

    Alan White

    Democrats’ policy proposals have sparked a vital and overdue debate on our system to pay for post-secondary education, and how that system burdens and redistributes income. The existing system combines a small share of taxpayer funding (via the Pell Grant) with a large share from the student loan tax. The student loan tax requires the students themselves to pay a percentage of their income for 20 to 25 years, collected not by the IRS but by private contractors for the US Education Department. The Clinton and Obama administrations converted a clunky loan system involving banks and state guarantee agencies into a direct federal “loan” program. The federal government issues funds to colleges and universities, and then outsources to collection contractors to tax the earnings of college grads and noncompleters. Although not all students participate in income-dependent repayment, greater numbers are expected to do so if nothing changes. Not only are student loans different, they are looking less and less like loans at all.

    The current system is a tax on future earnings, rather than a true loan program, for several reasons. First, the income-dependent payment programs tie “borrower” payments to their disposable income, and cancel debt at the end of 20 or 25 years. Second, borrowers who are declared in default end up having wages garnished at a fixed percentage of income, as well as tax refunds intercepted, both of which are essentially taxes on earned income (or cancellation of earned income tax credits.) Third, a few (and so far badly administered) loan forgiveness programs allow students to stop repayment after 10 years if they remain in low-paying and socially valued jobs.

    When we talk about canceling student loan debt, we are really just talking about how much of college students’ future earnings we will tax. As I have noted previously, some, especially graduate degree holders, repay far more than the cost of their own education, because of above-cost interest rates. Others benefiting from various “forgiveness” programs repay less, at least on a present-value basis.

    The problem with costing out a one-time loan cancelation program is that each year a new cohort of students is assigned nearly $100 billion in new federal loans to repay. The combined federal payments under the major loan and grant programs (DL, Perkins and Pell) total about $125 billion annually. The issue going forward is whether to tax individuals and corporations in the present year, or the students in future years, and in what combination. There is also the problem of the disappearing role of states in funding public higher education, a topic I will write about separately.

    This is why the policy choices are not binary (full debt cancellation and free college, i.e. 100% taxpayer financing, versus the status quo.) A notable benefit of our expanded policy debate is some real attention to the distributive consequences of major changes in higher education funding. We could, for example, offer new and less onerous income-dependent repayment, taxing a lower percentage of earnings, setting a higher exemption than the poverty level, or shortening the 20-year repayment period. We could, as some have proposed, reduce student repayment even further for borrowers engaged in public service or national service, although as we have seen, defining eligibility categories creates big process costs. We can, and should, abolish “default” and re-evaluate payment obligations for borrowers who did not complete their college education. We could examine the pros and cons of IRS or private contractor collection. The value of elements of our existing system is the ability to apply income progressivity as measured both by students’ pre-college family income as well as their post-graduation income to allocate the burden of their college costs.