Photo credit to dreamsjung. Click photo to view his Flickr page. 

Last fall, the National Consumer Law Center released a report, "No Fresh Start: How States Let Debt Collectors to Push Families into Poverty" in which it surveyed the exemption laws in each state. Exemption laws are laws that describe the limits of what a creditor can take from a debtor in order to collect on a judgment.

How much of a worker's paycheck can a creditor garnish? Can it foreclose on a debtor's home? Can it seize the debtor's car? What about household goods? Can a creditor take those to collect a debt?

These questions are largely answered by state, not federal, law. And, if you're a debtor in Kentucky, the answers are not good. The NCLC gave grades to all fifty states based on the protections the state has in place to ensure that a creditor's collection efforts cannot push a hard-working family into destitution.  

Kentucky is one of four states to receive an "F". (Mississippi, Michigan, and Delaware were the other three.)

The NCLC graded the states on the following criteria: 

• Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;
• Allowing the debtor to keep a used car of at least average value; 
• Preserving the family’s home—at least a median-value home;
• Preventing seizure and sale of the debtor’s necessary household goods; and
• Preserving at least $1200 in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses.

Kentucky failed all of these tests. 

• Kentucky workers can keep only 75% of their paychecks (or 30 times the federal minimum wage). Some states prevent garnishment of wages altogether. Others set the limit of what can be garnished at a much lower percent than 25% of a worker's check. 
• Kentucky gets a "D" for protecting a debtor's car. Kentucky law protects cars up to $2,500 in value. Any more than that and a creditor can seize the car to collect on a judgment. Other states protect cars worth up to $20,000 (Kansas) while others set the limit much higher than the unreasonable $2,500 Kentucky law provides (many states protect cars worth up to $7,500 or $10,000). 
• Kentucky homeowners who owe a creditor money have essentially no protection. Kentucky law protects the value of a home up to $5,000. NCLC rightfully gives this law an "F". Seven states protect homes from collection efforts regardless of value, while another 5 states protect homes up to the median value of a home ($211,312). 
• Kentucky law protects $3,000 worth of a debtor's household goods. This earns us another "F". Eight states protect all necessary household goods and another nine protect at least $10,000 of household goods.
• Finally, Kentucky law provides no protection from seizure of funds in a debtor's bank account. Other states set a limit of $1,200: below that amount, creditor's cannot go. Another "F" for Kentucky. 

The NCLC has drafted a Model Family Financial Protection Act that will protect the basic dignity and financial integrity of Kentucky's families, even those struggling to repay debts. I encourage my politically-minded friends and my friends that are legislators to take a close look at the NCLC's report and recommended legislation and work to do a better job protecting our families from debt collection efforts that push them into poverty and bankruptcy. 

At Ben Carter Law, I defend people from baseless collection efforts, prosecute debt collection abuses, and help people file for bankruptcy to get a clean financial slate. But, I wish Kentucky's laws did more automatically to help families protect the basic necessities of life from collection efforts and trust that the day is coming that the legislature will change the laws to benefit Kentucky's families, not creditors.  

I have written in the past about the generational war currently being waged by old people on America's young.

To me, the crushing student loan debt that our nation's young people labor underneath is the most striking, overt, and obvious front in this often quiet, subtle war. 

Public Citizen has a quote from a WSJ article that explains the most egregious aspect of student loan debt in America: it's not just that our young people are taking on huge, never-before-seen levels of debt getting their educations, it's not just that many of them incur this debt at bologna for-profit institutions that essentially function as funnels to shove federal money into the coffers of Wall Street banks through student loans sold to young people, it's not just that the prospect of actually finding work in your chosen field  has never been bleaker, it's that the federal government has withheld from our young people relief in bankruptcy from crushing student loan debt. 

“Unlike most other types of consumer credit, student debt is extremely difficult to discharge in bankruptcy. After falling behind on payments, a borrower typically finds it harder to obtain other types of consumer loans, or can only do so at higher interest rates… Since the end of 2007, just before the financial crisis hit, total student debt has grown by more than 56%, adjusted for inflation… During that time, overall household debt—including mortgages, student loans, auto loans and credit cards—fell by 18%, to $11.31 trillion as of Sept. 30 [of this year].”

— Wall Street Journal, 11/28/12

Student loan debt is crippling an entire generation of Americans. I'm not kidding. I see it with my law school classmates who can't leave jobs they hate and work that is unimportant because they need the paycheck. I see it with my clients—homeowners facing foreclosure, people who have been injured by the negligence or recklessness of others. I see it with family members who forgo advanced degrees because the specter of six-figure debt is too haunting. Certainly, the size of student loan debts is a problem. But, the fact that young people who need to file bankruptcy cannot (except in rare circumstances) get some relief from what is likely their single-largest debt is one of the true injustices of our time. 

When I was in Palau in December, the Island Times was nice enough to publish this letter. 

Dear Palau,

Palau needs a bankruptcy code. I did not know that four years ago when I was working as a Public Defender for Palau, but I know it now. Too many Palauans live with crushing debt from which they will never recover. If Palau wants to provide those families any hope, it needs a bankruptcy code that offers Palauans a fresh start following financial devastation.

I have spent most of the last four years defending homeowners in Kentucky from foreclosure. That is, I have spent the last four years discussing debt and household finances with thousands of families.

While I was a Public Defender in Palau, I had the opportunity to take a few civil cases for debtors who owed either a store or another person a significant amount of money. Unfortunately, the only relief I could provide was trying to negotiate a complete repayment of those debts over the course of a number of years—often at usurious interest rates. These negotiated settlements were frustrating and unsettling to me personally because it meant that these debtors would have to struggle for years if not decades before saving for retirement, investing in their or their children’s education, starting a business.

Allowing people to file for bankruptcy wouldn’t just help individual Palauans who find themselves in over their head due to unemployment, medical setbacks, or poor financial management. Rather, there are at least five distinct benefits to providing Palauan individuals and businesses with a fresh start through bankruptcy.

• Bankruptcy encourages economic development because it enables entrepreneurs to take risks with the understanding that if those risks don’t pay off, their lives and finances are not forever ruined.

• Bankruptcy also encourages economic development by incentivizing investors and businesses to lend only to the most creditworthy entrepreneurs and customers.

• A bankruptcy code would provide business partners with an orderly and predictable disposition of a failed business’s assets. This predictability reduces the cost of doing business and the cost of litigating the dissolution of the business.

• Because the bankruptcy code provides parties with an orderly way of winding down businesses and discharging indebtedness, the court system may enjoy less litigation and fewer collections actions.

• As I previously mentioned, Palauans deserve a fresh start. With a bankruptcy code, Palauans will know that getting laid off, encountering bad luck, or suffering through medical setbacks won’t forever plague their family’s chances at financial stability.

I hope you will not interpret this letter as the presumption of a haole thinking he knows what’s best for Palau. Having lived in Palau, I appreciate that Palauan bankruptcy will likely look very different than American bankruptcy—molded to respect tradition and the realities of life in Palau. But, I counseled plenty of hardworking Palauan families who will spend years struggling to pay back loans at unfair interest rates, struggling often with no realistic chance of ever actually catching up.

While I was in Palau, I failed to appreciate the benefits of having a bankruptcy code and failed to do anything to provide these families and individuals with the hope of a fresh start and the opportunity for financial stability. Now that I’m off-island, I look back and fear I missed an opportunity to leave a lasting impact in Palau and provide a lasting service to its people by advocating for passage of a bankruptcy code.

I am on-island over the holidays for a brief vacation and wanted to take this opportunity to urge the Palauan people to encourage their legislators to pass a bankruptcy code. To survive and thrive, Palauan families and businesses need the opportunity at a fresh start that bankruptcy promises.

I am happy to help this effort in whatever way I can from the United States. If you are interested in working on this issue, please contact me at ben [at] bencarterlaw [dot]com.

Sincerely,

Ben Carter

Here's a great article in the New York Times about an innovative approach to relieving the crushing medical debt that many American families experience. Buying debt for pennies on the dollar is big business. Forgiving that purchased debt, like the article says, is exactly in line with the Biblical tradition of jubilee years.