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Car payments, house payments, child support, alimony, healthcare costs, and student loan debt. The average American household is straddled with $101,915 of debt, a number which is shocking when juxtaposed with the median American income of $56,368.1 The classic adage about death and taxes should be modified to read: “The only things certain in life are death, taxes, and debt.”
Public-Private Partnerships in Debt Collection
While most people imagine that the days of debtor’s prisons and criminal penalties for non-payment have passed, the realities of punitive fines and aggressive debt collection techniques blur the line and open the door for debtors to find themselves in criminal proceedings. California, alongside twenty-five other states, issues arrest warrants for debtors in civil cases for as little as failing to appear for a hearing.2 These civil cases can then lead to criminal charges and incarceration through contempt of court, especially in cases where individuals contest the fines or refuse to pay.3 Furthermore, the California Penal Code criminalizes a number of financial crimes that can overlap with the world of debt collection; acts such as writing a bad check are outlined as punishable by up to one year in jail and $1,000 in fines.4
While these criminal consequences are admittedly rare, once debt collection begins to escalate, it takes on a punitive nature that goes far beyond repaying any debts. One elderly individual received letters threatening arrest over a pair of bounced checks totaling $37.75. Ultimately, she had to pay $262.95 in restitution as well as the cost of a doctor's visit, which she needed to get a note to exempt her from an hours-long mandatory in-person financial accountability class.5
California, recognizing the excessively punitive nature of debt collection, recently passed SB 908, requiring debt collection agencies to be licensed by the state.6 This law went into effect in January of 2022, right in the middle of a political climate where debt seemed to be taking center stage. Now that over a year has passed, the question still lingers: did SB 908 resolve what it purported to address? Or did it merely hide the real issues of debt and debt collection behind a thin veneer of bureaucracy?
The pseudo-criminal nature of debt collection created an entire private industry of debt collectors who employed aggressive enforcement tactics to collect payments from individuals. In the 1980s, when bad checks started to become more prevalent, the district attorneys in several districts saw private collection companies as a way to outsource the tedious job of searching for and collecting repayment from those who used bad checks.7 While in the era of credit cards and Apple Pay, checks are used less and less, these companies continue to operate in alliance with the DA’s office around the country to manage many disparate forms of debt collection.8 Alameda County, for example, relies on a private company to run the “Bad Check Restitution Program” and collect fees for restitution.9
Oftentimes, though, these partnerships ran much deeper. In many counties, including Alameda, the DA would sell their letterhead to these private companies en masse. The debt collectors would then use them to write threatening letters to debtors, warning them of legal action and informing them of all of the punitive fees and the expensive course they would need to schedule if they wanted to avoid prosecution.10 While some counties claimed they reviewed the letters prior to their being sent, this is largely not the case. American Collective Counseling Services, one debt collection agency that was prolific in the early 2000s, was hit with a myriad of class action lawsuits over these practices, causing them to file for bankruptcy in 2009, but the practice persists in its successors.11 This, among other practices, brought California to pass SB 908, which aimed to restrict the predatory practices used by debt collectors, thereby avoiding frivolous arrest warrants and undue emotional stress for many debtors.
SB 908: Debt Collection Licensing Act
SB 908 did not pass without significant controversy. Banks and other agencies argued against the extra bureaucratic step, claiming it would be ineffective and make it more difficult to collect debt payments. Previous to the passage of SB 908, California was only one of sixteen states that did not license debt collectors.12 Seventy percent of all collections actions end in a default judgment, and one-third of all complaints received by the CFPB are about debt collection agencies.13 Many industry insiders knew this bill was likely to pass, and throughout the negotiation process managed to include amendments such as ensuring that violations would not result in the loss of a license.14 SB 908 also permits other controversial forms of collection to proceed normally, such as the collection of Homeowner Association assessments, as they are not considered part of “consumer debt.”15
SB 908 still permits public-private partnerships between debt collection agencies and prosecutor's offices, and as debt has only increased since COVID-19, many people continue to experience the same abuses of aggressive and often misleading notices from debt collectors.16 Admittedly, licensing is an important first step to being able to track and have an enforcement mechanism for debt collection agencies, but it will not be enough to address people’s complaints without a real reform of the way that we criminalize debt. Instead, a licensing process without a review of the guidelines that have permitted these predatory partnerships serves to validate these methods. For example, one of the restrictions with SB 908 is that written or digital communications must display the license number in at least 12-point font.17 While this doesn’t outright ban the use of letterhead from the prosecutor's office, it could be said it would make it more apparent that the letter does not solely come from the prosecutor's office. However, it isn’t going to change an individual's gut reaction to this letter, which still implies to many that a criminal or other legal proceeding is imminent.
While the passage and implementation of SB 908 is undoubtedly a win for consumers and helps strengthen the Consumer Financial Protection Bureau, the question of whether it goes far enough remains. Future actions toward restricting the activities of debt collection agencies will face opposition and become even more of a nationwide necessity as we get progressively more in debt. Future reforms should center loan forgiveness whenever possible, and use individualized approaches to restructuring debt to help individuals pay off their loans, instead of using fear and harassment. So long as we live in a world with debt, there will always be a need for debt collectors, but they should be closely scrutinized and given a narrow field to operate in rather than being granted discretion to pursue debtors however they see fit.
1 “Debt in America: Statistics and Demographics.” Debt.org, December 4, 2023. https://www.debt.org/faqs/americans-in-debt/demographics/.
2 ACLU Staff. “The Criminalization of Private Debt.” American Civil Liberties Union. https://www.aclu.org/issues/smart-justice/mass-incarceration/criminalization-private-debt#:~:text=Debtors’%20prisons%20were%20abolished%20by,relic%20of%20the%20Dickensian%20past.
3 ACLU Staff. “A Pound of Flesh: The Criminalization of Private Debt.” American Civil Liberties Union, February 21, 2018. https://www.aclu.org/publications/pound-flesh-criminalization-private-debt.
4 “Writing or Passing Bad Checks.” Cron Israels and Stark”. https://www.cronisraelsandstark.com/writing-or-passing-bad-checks-california-penal-code-476a#:~:text=Bad%20Checks%20Law%20%E2%80%93%20California%20Penal%20Code%20476a&text=In%20other%20words%2C%20PC%20476a,the%20intent%20to%20commit%20fraud.
5 “A Pound of Flesh: The Criminalization of Private Debt,” American Civil Liberties Union, February 21, 2018, https://www.aclu.org/publications/pound-flesh-criminalization-private-debt , 58.
6 “Senate Bill No. 908.” Bill Text - SB-908 Debt collectors: licensing and regulation: Debt Collection Licensing Act., September 29, 2020. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB908.
7 Silver-Greenberg, Jessica. “In Prosecutors, Debt Collectors Find a Partner.” The New York Times, September 15, 2012. https://www.nytimes.com/2012/09/16/business/in-prosecutors-debt-collectors-find-a-partner.html?pagewanted=all&_r=0.
9 “Resource Faqs.” Office of the Alameda County District Attorney, December 14, 2023. https://www.alcoda.org/resources-publications/resource-faqs/.
10 Jessica Silver-Greenberg, “In Prosecutors, Debt Collectors Find a Partner,” The New York Times, September 15, 2012, https://www.nytimes.com/2012/09/16/business/in-prosecutors-debt-collectors-find-a-partner.html?pagewanted=all&_r=0.
12 “State Financial Regulator Moves Forward to License California Debt Collectors.” The Department of Financial Protection and Innovation, September 1, 2021. https://dfpi.ca.gov/2021/09/01/state-financial-regulator-moves-forward-to-license-california-debt-collectors/.
13 Soter, Paul, Scott J. Hyman, and Laszlo Ladi. “CALIFORNIA’ S NEW DEBT COLLECTION LICENSING SCHEME AND MINI-CFPB LEGISLATION CREATE NEW REGULATORY AND COMPLIANCE OBLIGATIONS FOR COLLECTING CONSUMER DEBTS IN CALIFORNIA.” Severson & Werson, 2020. https://www.severson.com/wp-content/uploads/2021/03/CCFL-QR-74-2-3-Article.pdf.
15 Dennis, Burke. “Debt Collection Licensing Act Requirements Do Not Apply to Collection of Routine HOA Assessments.” California Lawyers Association, June 23, 2022. https://calawyers.org/real-property-law/debt-collection-licensing-act-requirements-do-not-apply-to-collection-of-routine-hoa-assessments/.
16 “State Financial Regulator Moves Forward to License California Debt Collectors,” The Department of Financial Protection and Innovation, September 1, 2021, https://dfpi.ca.gov/2021/09/01/state-financial-regulator-moves-forward-to-license-california-debt-collectors/.
17 “Senate Bill No. 908,” Bill Text - SB-908 Debt collectors: licensing and regulation: Debt Collection Licensing Act., September 29, 2020, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB908 .