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Collection Actions: 18.5.5.3 Abuse of Process

Abuse of process is often described as the use of “legal process against another in an improper manner to accomplish a purpose for which it was not designed.”201 In contrast to malicious prosecution, the tort of abuse of process is not based on the improper institution of legal proceedings but on the improper use of process after it has been issued to accomplish a purpose for which it was not designed.202 While courts vary in their listings of the elements of the tort, one common st

Collection Actions: 15.3.8 Earned Income Tax Credit and Additional Child Tax Credit

Many states make tax refunds consisting of the Earned Income Tax Credit (EITC) exempt as earnings, as support, or as public assistance benefits.386 However, this view is not universal.387 Courts formerly interpreted Missouri’s exemption for “local public assistance” not to exempt the EITC,388 but the word “local” was then removed from the statute by amendment and courts now hold that the EITC is exempt.

Collection Actions: 15.3.11.2 How the Rule Operates

The rule applies to state and federal banks, credit unions, and any other entity chartered under federal or state law to engage in the business of banking.454 Upon receipt of a garnishment order against an account holder, the bank must review all accounts owned by that individual to determine whether any of the specified federal benefits were electronically deposited during the preceding two months (the “look-back period”).

Collection Actions: 15.3.11.4 A Self-Executing Protection; Debtor No Longer Has Burden of Asserting Exemption at Any Stage

The primary problem that the rule was designed to address was the temporary freeze of a debtor’s bank account while the bank, the parties, and the court system sorted out the question of whether funds are exempt. But the effect of the rule is much more sweeping, as it nullifies any requirement that the debtor take any affirmative step to assert an exemption for the protected amount. The bank has an unconditional obligation to make the protected amount available to the debtor, in both the short term and the long term.

Collection Actions: 15.3.11.5 Commingled Funds, Co-Owners, Lump-Sum Payments

In some states, courts have held that exempt funds lose their protected status if they are commingled with non-exempt funds.467 The Treasury rule’s protections apply whether or not the protected funds have been commingled with other funds: as long as the specified federal benefits were electronically deposited into the account during the look-back period, they are protected regardless of what other funds might be in the account.468

Collection Actions: 15.3.11.7 What If the Debtor Wants to Pay the Debt?

Occasionally a debtor may want to allow a garnishment to be implemented in whole or in part as a way of paying the debt. For example, the debtor may want to protect other non-exempt assets and may be able to work out a release of the entire debt in exchange for allowing the bank to pay some part of the protected amount to the creditor.

Collection Actions: 15.3.11.10 Bank Setoff and Bank Fees

Under the Treasury rule, if a bank charges a fee for processing a garnishment order, it cannot set the fee off against the protected amount.501 In addition, the bank may collect such a fee only on the day the account is reviewed, so the bank cannot collect a fee at all if an account contains only the protected amount on that day.502 Except for these provisions, the rule is intentionally silent about bank setoff rights, including the key question of whether a bank can use setoff against exemp

Collection Actions: 15.3.12.1 Separate Accounts or Special-Purpose Accounts

There are a number of steps that recipients can take to protect exempt funds in a bank account. They should avoid placing the funds in a joint account, where the funds may be vulnerable to the other account holder’s creditors. If someone else needs to have access to the funds because of the beneficiary’s illness or absence, a power of attorney is a better approach. It is also best to avoid commingling the exempt benefits with non-exempt funds.

Collection Actions: 15.3.12.2 Direct Express Card

The Direct Express card is a MasterCard-branded prepaid (stored value) debit card that the federal government makes available as an alternative to direct deposit for most federal benefits payments, including Social Security, SSI funds, and VA benefits. It provides a way of protecting the full amount of these benefits from most garnishment orders.

Collection Actions: 15.4.2 Inherited IRAs and Other Retirement Funds

Courts were split on the issue of whether tax-qualified inherited IRAs, not inherited from a spouse, were exempt under the federal bankruptcy exemptions. The Supreme Court resolved this issue in Clark v. Rameker,547 concluding that inherited IRAs are not exempt because they do not serve the exemption’s purpose of protecting funds to be used for basic needs in retirement.

Collection Actions: 15.4.4 ERISA Preemption

The Supreme Court has ruled that state laws that single out Employee Retirement Income Security Act (ERISA) benefits for special protections are preempted by ERISA.557 While this decision dealt with an employee welfare plan, not an employee pension plan, it interpreted an ERISA preemption provision that is equally applicable to both.

Collection Actions: 15.4.5 Continuation of Exemption After Payment

Exemptions for pensions and retirement plans may continue after the benefits are paid out.560 However, this rule is not universally accepted,561 especially when the exemption statute refers only to benefits that are “payable,” or to the right to receive benefits.562 Most courts treat rollovers as simply transfers from one exempt form to another,563 as long as the funds are traceable.

Collection Actions: 15.5.3.3 The Contract Approach

A few courts have held that the agreement between the bank and the depositors is determinative and irrebuttable.613 These agreements (and the laws which regulate them) usually provide that, in the absence of customers’ instructions to the contrary, each co-depositor has a right to withdraw any or all of the funds at any time.

Collection Actions: 15.5.3.4 Evaluation of Debtor’s Actual Ownership Interest in the Joint Account

Other courts do not rely woodenly on the account agreement but hold that a third-party creditor can reach funds in a joint account only to the extent of the judgment debtor’s actual ownership interest.618 Courts generally place the burden on the account holders to establish their respective interests in the account and do not require the garnishee bank to investigate ownership.619 However, the bank does have a duty to abide by the terms of the account.

Collection Actions: 18.3.4 When a Dispute Fails to Correct the Credit Report

If the CRA fails to correct the consumer’s report, then the consumer has several ways to respond. The consumer can repeat the dispute process, providing additional explanations or details, and see if that works the second time around. New information should be specifically included and referenced as “new” because the CRA may refuse to investigate again on the basis that it has already done so. Submitting such additional disputes will always enhance the value of any subsequent litigation and sometimes may actually correct the inaccuracy.

Collection Actions: 2.1.1 Reason #1: Consumers Often Have Dispositive Defenses

Many people, including some judges, assume that when a collector sues on a debt the consumer almost always owes the money. Whatever the accuracy of this view in the past, changed practices in the marketplace have dramatically altered the facts. Today, consumers have complete defenses in a significant number of collection cases and partial defenses in many more.

Collection Actions: 2.1.2 Reason #2: Stopping Systematic Abuse of the Justice System and Educating Judges

Debt buyers today are using the courts to engage in wholesale litigation abuse. They sue huge numbers of consumers with no real knowledge of whether the consumer owes the debt or whether the statute of limitations has run. Debt buyers often sue with inadequate evidence to prove that the consumer owes the money, that the debt buyer in fact owns the debt, or even that they are suing the right consumer. This litigation strategy is effective because very few consumers obtain legal representation, and the overwhelming majority of consumer defendants default in the collection action.

Collection Actions: 2.1.3 Reason #3: Counterclaims Can Result in the Recovery of Damages and Attorney Fees

In many collection actions the consumer will have significant counterclaims. Being able to raise consumer claims as counterclaims has both advantages and disadvantages. Filing fees and arbitration requirements may be avoided and federal claims stay in state court. On the other hand, the collector may be less willing to dismiss its claims and may prosecute the collection case more aggressively in order to vigorously contest the counterclaim. Courts that hear collection cases may not have judges willing to put in the extra time that counterclaims require.

Collection Actions: 2.1.7 Reason #7: Collection Clients Often Have TCPA, FDCPA, FCRA, and Other Consumer Claims

Representing consumers in collection actions can lead an attorney to discover that the consumer has separate affirmative actions under the Telephone Consumer Protection Act (TCPA), FDCPA, FCRA, and other federal and state statutes that can result in significant actual and statutory damages and attorney fees, either on an individual or classwide basis. Investigating the facts relating to the collection action will often uncover various systematic law violations. Consumer attorneys taking collection defense cases find this an effective way to grow their practices.