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Collection Actions: 14.3.8.3 Bank Accounts

While it is clear that to execute upon tangible property, such as land or a vehicle, the creditor must use the courts of the state where the property is located, the issue becomes more complicated with a bank account. Creditors may argue that the location of the branch bank where the debtor maintains the bank account is not dispositive. Instead, they may argue that execution can issue in any state where any branch or office of the debtor’s bank is located, and that the bank then must restrain all the debtor’s accounts even if they are located in other states (or countries).

Collection Actions: 14.3.8.4 Wages

Earned but unpaid wages, like bank accounts, are not clearly “located” in a specific state like tangible property is. The question then is whether a court can issue a wage garnishment order that affects wages the consumer earns in a different state.

Collection Actions: 14.3.8.5 Application of the FDCPA’s Venue Abuse Prohibition

The Fair Debt Collection Practices Act (FDCPA) may provide a remedy in some cases in which a creditor files a garnishment action in a judicial district other than where the consumer resides or entered into the contract. The FDCPA provides that, in the case of an action that does not involve enforcing a security interest in real property, “[a]ny debt collector who brings any legal action on a debt against any consumer shall . . .

Collection Actions: 14.3.9.2 FTC Prohibition of Waiver of Exemptions

The FTC’s Credit Practices Rule prohibits lenders and retail installment sellers from including waiver of exemption clauses in their consumer contracts.201 The rule prohibits a clause that “[c]onstitutes or contains an executory waiver or a limitation of exemption from attachment, execution, or other process on real or personal property held, owned by, or due to the consumer.” There is an exception that makes it clear that this provision does not prohibit security interests in exempt property, but the effect of this exception is limited by

Collection Actions: 14.5.3 Prompt Post-Garnishment Notice Is Required

Courts applying the Matthews analysis have almost uniformly ruled that state laws violate due process when they allow garnishment without any notice (other than the actual notice the debtor gets upon, for example, receiving a smaller paycheck).252 The reason for this is fairly clear: a notice requirement places little burden on a creditor and gives the debtor an opportunity to challenge any improper garnishment.

Collection Actions: 14.5.5 Notice Must Inform Debtor of Procedures to Contest Garnishment

In a utility termination case, the Supreme Court held that notice of the customer’s right to dispute a municipal utility’s actions was not meaningful unless the notice included a statement of the procedure that the customer should use to challenge the deprivation of services.269 Federal courts have applied this principle to garnishment and execution notices by requiring that the notice state what action a debtor may take to contest the procedure.270

Collection Actions: 14.5.6 Debtor Has a Right to a Prompt Hearing

Due process also requires that debtors have the right to obtain a hearing to contest a garnishment or execution within a reasonable period after it has occurred.274 The courts have widely recognized that delays can impose severe hardship on debtors and that a statute allowing a significant delay prior to a hearing is unconstitutional. As with the timing of notice of garnishment or execution, however, no particular reasonable time before a hearing has been agreed upon.

Collection Actions: 14.5.7 Due Process Issues When Account Is Frozen upon Bank’s Receipt of Garnishment Notice

In general, state bank account garnishment procedures contemplate that the bank will freeze the debtor’s bank account upon its receipt of a garnishment order. Many state laws specifically authorize the bank to freeze only non-exempt funds.282 However, some state laws may be interpreted to require a bank to freeze a debtor’s bank account upon receipt of a garnishment notice, even if the account consists wholly or partially of exempt funds, such as Social Security benefits.

Collection Actions: 16.2.4.2 Abandonment

A homestead can be lost by abandonment, either by living elsewhere99 or by using it for non-homestead purposes.100 Because of the favored position of homesteads, the party asserting abandonment bears a heavy burden of proof.101

Collection Actions: 16.2.5.1 Generally

The extreme variation in state homestead amounts, and the existence of states with high or unlimited homestead exemptions and narrow fraud exceptions, led to concern about the use of homestead exemptions to shelter unreasonable amounts from creditors. The 2005 amendments to the Bankruptcy Code limit debtors from taking full advantage of state homestead exemptions in several circumstances.114

Collection Actions: 16.2.5.3 Extraterritoriality

Another issue created by the 2005 amendments to the Bankruptcy Code is the extraterritorial effect of state exemption laws. Section 522(b)(3)(A), enacted to close the “mansion loophole”—that is, to prevent wealthy debtors from immunizing their entire fortune by moving to a state with an unlimited homestead exemption and a narrow fraud exception and buying a mansion there with all funds available to them—has created serious problems for ordinary debtors who happen to have moved within 730 days before bankruptcy.

Collection Actions: 16.2.7 Mortgages and Other Consensual Liens on Home

Mortgages and deeds of trust are usually considered waivers or exclusions from homestead protections.135 However, a written waiver may be required.136 States may treat mechanics liens or debts for construction improvements on the debtor’s land as exceptions to the homestead exemption,137 and may afford the same treatment to condo fees138 and fees imposed by covenants running with the land.

Collection Actions: 16.2.8 Preexisting Debts and Advance Filing Requirements

Some states do not protect a homestead against debts which pre-date the acquisition of the homestead.150 The homestead exemption may, however, continue as to debts incurred during ownership of a former homestead, if the proceeds of its sale were used to purchase the debtor’s current home.151 A debt incurred after the effective date of a homestead exemption statute will be subject to the homestead law, even if it is incurred pursuant to a line of credit that pre-dated the statute.

Collection Actions: 16.3.4 Tools of the Trade; Property Used in Agriculture

A useful exemption found in many state statutes protects “tools of a trade.” In defining tools of the trade, many states apply a use test, holding that an item is a tool of the trade if it is actually used by the debtor in the debtor’s usual trade on a regular basis and is reasonably necessary to that trade.228 Others, however, use a narrower definition and confine the exemption to personal items of modest value.229 Some decisions hold that real estate cannot be a tool of the trade.

Collection Actions: 16.3.5 Tenancy by the Entireties in Personal Property

Some states recognize tenancy by the entireties, which protects marital property from attachment for individual debts of one spouse, not just in real property, but also in personal property.248 A number of states hold that, when a married couple jointly owns personal property, a presumption arises that it is owned by the entireties.249 Documentation, such as a bank signature card that states that the asset is held as a joint tenancy, does not necessarily rebut this presumption.

Collection Actions: 16.4.1.2 Does the Exemption Continue After Payment?

The Florida exemption for disability income benefits under a policy or contract of life, health, accident or other insurance has been construed to protect benefits deposited in a bank account, if traceable.264 Minnesota and Wisconsin achieve the same result by a statutory exemption for funds traceable to certain insurance benefits.265 Ohio exempts “an interest in” certain monthly or lump-sum disability benefits, and this provision has been construed to cover traceable proceeds.

Collection Actions: 16.4.4 Debts Owed to the Judgment Debtor

Sometimes another person or entity owes a debt to the judgment debtor. The state’s execution laws may have a special provision allowing the judgment debtor to garnish this obligation,321 or this asset may fall within some general category of property subject to execution. If it is subject to execution, then the creditor can obtain a garnishment order directing the person or entity that owes the debt to pay it to the judgment creditor rather than to the judgment debtor.322

Collection Actions: 3.1 Overview

This chapter focuses on consumer defenses that may precede litigation of the merits of the collector’s claim: whether the action is brought in the proper court, whether the collector is qualified to bring the action; whether pleading requirements have been met; whether any preconditions to bringing suit have been met; and whether the action is brought within the applicable statute of limitations. These defenses are typically raised at the beginning of litigation, before the merits are decided. But sometimes they are raised later in the proceeding.

Collection Actions: 3.4.4 Defective Summons and Service

Often a state’s technical requirements for a summons must be strictly construed and followed. Any noncompliance should be grounds to dismiss the action.189 Thus, an action should be dismissed when the plaintiff’s attorney’s address is not included as required by state rules or when the summons does not mention that it is from the state.190

Collection Actions: 11.4.3.3 Federal and State Public Benefits

The statutes that protect Social Security benefits, VA benefits, and pensions do not carve out criminal justice debt. Thus, except for fines and restitution, the usual restrictions on seizure195 protect these benefits when the federal government is attempting to collect criminal justice debt.