Updated garnishment and bankruptcy exemptions are needed to ensure the newly increased state EITC goes to vulnerable families, not out-of-state debt collectors
LANSING, Mich. (June 23, 2023) – Sen. Jeff Irwin (D-Ann Arbor) and Sen. Mary Cavanagh (D-Redford Twp.) introduced bills Thursday to better protect families’ housing, transportation, and other basic needs when they are struggling to pay their debts. Current garnishment law and bankruptcy exemptions allow debt collectors to drain bank accounts to zero, with no protections in place to prevent seizure of state public benefits or the recently increased state Earned Income Tax Credit (EITC).
Senate Bill 408 would provide for clearer notice when a person is sued over a debt and would update consumer debt garnishment exemption categories and amounts. Senate Bill 409 would update Michigan bankruptcy exemption categories and amounts.
“Most people want to pay their debts, but excessive debt collection gets in the way of that by seizing the assets they need to live and work,” Sen. Irwin said. “Michigan just expanded the EITC because we recognize that vulnerable families need that support, but we need to change our garnishment law to ensure those public dollars go where they’re intended instead of being funneled straight into the pockets of private debt collectors. Third-party debt collectors have been using our publicly funded Treasury Department and courts as their accounts receivable department, with very few legal protections to give them an incentive to work out payment plans instead.”
“Michigan families who are overwhelmed by debt need a chance at a fresh start,” Sen. Cavanagh said. “Sometimes bankruptcy is the only option when people hit hard times. But the Michigan bankruptcy exemptions are so low that deserving families often have to make the impossible choice between endless garnishment or filing bankruptcy and losing their homes and cars. In today’s world, a fresh start without a home or car is not a fresh start.”
The legislation draws from a data-driven report issued by the state’s Justice for All Commission last winter, which showed that debt collection lawsuits dominate district courts. These lawsuits typically feature a company represented by an attorney suing a person without legal representation for money owed. There are more debt collection cases filed than evictions, misdemeanors, felonies, and civil infractions. One in 50 Michiganders face these lawsuits, and this rate is almost double in communities of color. Further, a majority of debt collection lawsuits end by default without the court ever reviewing the case, despite the fact that they can have serious consequences such as garnishment of wages, property, and state income tax returns.
The report also emphasized that Michigan’s garnishment exemption laws have not been updated since 1964. Because the value of the minimum wage and other exemptions in the statute have not kept pace with inflation, they no longer serve the purpose of protecting from excessive garnishment. The home value exemption, for example, is just $3,500, 1.5% of the median Michigan home value in 2023.
Senate Bills 408 and 409 will increase the value of exemptions to ensure that Michiganders can pay off debts without losing their ability to work, retain housing, or provide a livable wage for their families. The legislation also authorizes automatic adjustments so the exemption amounts will keep pace with the cost of living, and authorizes the court to inform debtors directly about a debt lawsuit and their rights in the process. It will also prohibit the state EITC and all other means-tested state public benefits from being seized by debt collectors.
“I’m supportive of what this legislation can do for our communities,” Michigan Poverty Law Program Managing Attorney and Justice for All Commission workgroup member Lorray Brown said. “What we found is that oftentimes, people don’t even know that debt collection lawsuits have been filed against them, until they see that their wages are garnished or their bank accounts are frozen. I am hopeful that this bill can make our civil court processes more equitable and efficient moving forward.”
Jeremy B. Shephard, a Grand Rapids bankruptcy attorney, says widowed seniors in particular suffer under the current, insufficient bankruptcy exemptions. “When their spouse dies, they lose a vital source of income and take on all the bills of the household,” Shephard said. “They don’t have enough income to take out and repay a new loan, and the surviving spouse is left with an exemption insufficient to protect their house equity. If the survivor filed bankruptcy, the trustee would sell the house. They would have to move out.”
The legislation underscores the Michigan Senate and House Democrats’ commitment to building stronger communities and creating equal access to justice. It also complements the Michigan judiciary’s efforts to update court rules and processes that apply to debt collection lawsuits in response to the Justice For All Commission’s report.
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