Skip to main content

Search

Collection Actions: 6.7.2.2.1 Significance of the contract rate versus the legal rate

The question of whether the rate set forth in the postjudgment interest statute can be overridden by a contract term specifying a different rate can have significant consequences. For some business transactions and prime mortgage loans, the contract rate may be lower than the legal rate, and on a large loan even a reduction of a few points can make a big difference.256

Collection Actions: 6.7.2.2.2 Does the state postjudgment interest statute allow the contract rate to be used?

Nevada is an example of a state that allows postjudgment interest at the lower of the rate set by contract or statute.259 However, many postjudgment interest statutes explicitly allow the statutory rate to be overridden by a contract clause. For example, many postjudgment interest statutes provide for postjudgment interest at the legal rate—usually a relatively low rate such as 8%—but then go on to provide that this rate can be overridden by a contract clause specifying another rate.260

Collection Actions: 6.7.2.3 Compounding

Many states prohibit or restrict compounding of interest—that is, charging interest on unpaid interest.271 If a state statute allows postjudgment interest only on the “unpaid principal balance,” then postjudgment interest can only be charged on the portion of the judgment that represents the principal, not on any prejudgment interest.272 A number of courts have held, however, that charging postjudgment interest on a judgment that includes prejudgment interest that the debtor has failed to pa

Collection Actions: 6.7.4 Proof of a Contractual Postjudgment Interest Rate

Whether in state or federal court, a creditor that wants to take advantage of a contract term allowing a higher rate than the legal rate must prove the existence of that contract and that the contract provides for postjudgment interest at a particular rate.293 A court in issuing a judgment should not state in its order a specific rate for postjudgment interest if there is no proof of a contract providing for this rate.

Collection Actions: 10.1.1 The Federal Government’s Administrative and Judicial Debt Collection Powers

Consumers and businesses owe billions of dollars in nontax debts to federal administrative agencies, including $1.5 trillion to the Department of Education, $124 billion to the Department of Agriculture, and $70 billion to the Department of Housing and Urban Development (HUD).1 Most of these debts arise from defaulted loans.2 This chapter addresses the special non-judicial and judicial collection powers that are available to the federal government to collect these debts.

Collection Actions: 10.1.2 The Federal Government’s Collection of State Debts

By statute, the federal government makes its non-judicial collection powers available to collect delinquent debts of certain types owed to states. It makes offset of federal tax refunds available to states as a means of collecting unemployment compensation debts incurred through fraud or failure to report earnings, delinquent state income tax, and past-due child support obligations.6

Collection Actions: 10.2.1.1 Federal Collection Statutes

The extrajudicial collection of debts by federal administrative agencies is governed primarily by the Federal Claims Collection Act.12 The Act requires federal agencies to attempt to collect overdue obligations. It also permits those agencies to settle, suspend, terminate collection activity on, or discharge claims when appropriate.

Collection Actions: 10.2.15.1 Generally

The joint regulations expressly prohibit raising agency misconduct as a defense to a claim: “[T]he failure of an agency to comply with the provisions of this chapter shall not be available as a defense to any debtor.”305 In addition, the joint regulations state that they do “not create any right or benefit, substantive or procedural, enforceable at law or in equity by a party against the United States, its agencies, its officers, or any other person.”306 Nonetheless, there are a number of ju

Collection Actions: 10.2.1.2 Regulations Under the Claims Collection Act

The Claims Collection Act calls for the collection of debts to be carried out under guidelines promulgated jointly by the attorney general and the Secretary of the Treasury.24 These regulations (the “joint regulations”)25 detail the procedures that all agencies must follow in their collection efforts.

Collection Actions: 10.2.1.3 What Debts the Claims Collection Act Governs

The Claims Collection Act is applicable to any “claim” or “debt,” defined as any amount of funds or property that has been determined by an appropriate official of the federal government to be owed to the United States.31 The statute includes a non-exhaustive list of examples, including funds owed on loans made, insured, or guaranteed by the government, fines and penalties assessed by an agency, deficiency judgments, and overpayments.32 A criminal restitution order meets the definition of “c

Collection Actions: 10.2.2 The Federal Agency Must Make Proper Written Demand for Payment

Until 2000, the joint regulations required federal agencies, in most cases, to make three written demands for payment before taking further action against the debtor, other than charging interest.40 That requirement has now been reduced to a single demand letter.41 The demand letter must inform the debtor of the basis for the indebtedness; the debtor’s right to seek review within the agency; the standards for imposing interest, penalties, or administrative costs; the date by which payment sh

Collection Actions: 10.2.4 Contracts with Private Debt Collection Agencies and Collection Lawyers

The Claims Collection Act authorizes agencies to contract with private collection agencies and attorneys to collect debts,72 except those arising under the Internal Revenue Code and the tariff laws and certain claims arising under the Social Security Act.73 (A separate law—a 2015 amendment to the Internal Revenue Code—requires the IRS to contract with private debt collectors for the collection of certain tax debts.74 This law is discussed in

Collection Actions: 10.2.5 Interest, Administrative Charges, and Penalties

The Claims Collection Act requires federal agencies to charge interest on overdue claims of at least the annual average rate the Treasury Department earns on bank accounts into which it deposits taxes and loan repayments that it collects.83 Each year the Treasury Department publishes a notice in the Federal Register stating the rate it will charge for that year.84 The interest rate is to be a fixed rate, determined when the agency first notifies the debtor of the amount due.

Collection Actions: 10.2.6 Administrative Wage Garnishment

The Claims Collection Act empowers federal agencies to which delinquent debts are owed to issue administrative orders requiring debtors’ wages to be withheld “notwithstanding any provision of state law.”106 In 2020, $930 million was collected from debtors through administrative wage garnishment.107 In 2021, however, that figure dropped to $31 million, largely because the Department of Education suspended certain student loan payment obligations and ceased collection activities on defaulted s

Collection Actions: 10.2.7 Offset Against Federal Employee’s Salary

Federal agencies can collect on debts owed them by a federal employee through an offset against the employee’s pay or other compensation.121 Agencies are required to refer debts to the Treasury Department, which conducts a centralized computer match to identify federal employees who owe debts to the federal government for the purpose of offsetting the debts against their earnings.122

Collection Actions: 10.2.11 Denial of Federal Loans, Loan Insurance, and Guarantees

The Claims Collection Act prohibits federal loans, loan insurance, or guarantees, other than disaster loans, to debtors delinquent on federal nontax claims.249 This restriction may be waived by an agency head as to an individual debtor or a class of claims.250 It does not apply if the debt has been discharged in bankruptcy or is being challenged by a timely appeal.251 It does apply, however, to debts for which the creditor agency has suspende

Collection Actions: 10.2.8.1 When Tax Refund Interception Is Allowed; Governing Regulations

The federal government may intercept federal income tax refunds to offset a federal agency’s claim against a taxpayer.141 For example, a consumer who is entitled to a federal income tax refund because of over-withholding of taxes may have that refund intercepted and applied to an old student loan claim by the Department of Education or to an old manufactured-home loan claim by HUD.142 The debt must be past due143 and legally enforceable.

Collection Actions: 10.2.8.3 Joint Returns and the Earned Income Tax Credit

In the case of a joint tax return, the Treasury Department’s regulations provide that the entire refund is subject to offset for the debt of either filer.168 However, the non-debtor can claim a portion of the refund by filing an “injured spouse” form with the IRS.169 The notice sent by the IRS at the time of the intercept must advise any non-debtor spouse who filed a joint tax return with the debtor of the steps to take to secure the non-debtor spouse’s proper share of the tax refund.

Collection Actions: 10.2.8.4 Practical Steps to Avoid Tax Refund Interception

The best way for consumers to avoid a tax intercept is to adjust their income tax withholding so there is no refund to intercept. This approach is not available, however, to protect the Earned Income Tax Credit (EITC). In the past, employees who were eligible for the EITC and who had a qualifying child were entitled to receive their EITC payments bit by bit in their pay during the year. This approach meant that only a small part of the EITC would be owed as part of the employee’s tax refund, so only that part would be vulnerable to offset.

Collection Actions: 10.2.9.2 Benefits and Other Federal Payments Against Which Debts Can Be Offset

In general, debts can be offset against any type of federal payment,190 including payments under federal contracts.191 When the federal government seizes money from a criminal suspect with the intent of seeking forfeiture of the funds, but then returns them, some courts have even allowed the government to set off federal debts against the funds.192 However, another court held that the government’s return of cash seized as suspected drug proce