Good news for New York consumers is hard to come by these days, and for this reason the lack of news coverage on Albany’s recent passage of significant new consumer protections is somewhat surprising.

On September 29, 2008 Governor Patterson signed into law the Exempt Income Protection Act, which, as of January 1, 2009, will greatly improve the rights of New York state consumers against whom debt collectors have obtained court judgments .  The change – which prohibits creditors from freezing the first $1,716 (adjusted annually) of a person’s bank account — seems at first somewhat technical, but is in fact crucial when the real-world dynamics of debt collection in New York are considered.

Currently (and happily this situation will come to an end on 12/31/08) a great many consumers first find out that they have been sued on old credit card or other consumer debt when their bank accounts are frozen (“attached” in legalese) by a debt collection law firm.  This bank freeze is obtained on the basis of a court judgment which, in New York, will in the vast majority of cases be a default judgment, i.e. a judgment obtained without the consumer having ever appeared in court or filed any papers.  Indeed, a recent report by MFY Legal Services, entitled “Justice Disserved” examined lawsuits brought in New York City Court’s by the seven biggest debt collection law firms in 2007 and reported astonishing findings: These seven collection firms filed 180,177 cases last year in New York City courts, constituting almost 1/3 of all the civil cases filed (excluding landlord/tenant and small claims), and consumers only appeared in 8.5% of these cases. Although this author is not aware of any similar studies pertaining specifically to Westchester County, the consumer collection docket here is dominated by the same group of law firms and anecdotal experience teaches that the phenomenon of justice-by-default-judgment is no less pronounced than in the five boroughs.

While some people assuredly do ignore notifications regarding lawsuits, New York’s debt collection firms serve consumers with legal papers at obviously incorrect addresses or otherwise fail to act in good faith with regard to this process with appalling consistency.  These poor practices–which triggered hearings this May by New York City’s Department of Consumer Affairs and which NYC Consumer Affairs Commissioner Jonathan Mintz generously described in a press release as “too often unreliable”–have historically worked in close tandem New York’s bank attachment procedure. Under the soon-to-be-replaced existing procedure, the debt collection industry’s routine practice has been to leverage these default judgments into bank attachments and to use the consumer’s inability to access her funds as a means of forcing payment of the judgment.

Put differently, a New York consumer often first found out about the default judgment against her when her bank account became unavailable, causing checks to bounce, rent and utility payments to be missed, groceries to go unpurchased etc.  Not surprisingly, low and middle class consumers faced with no access to their money routinely settle claims for absurdly inflated amounts simply because having one’s bank account frozen is an abject nightmare.  Indeed, practictioners like myself in both private practice and legal services, routinely see consumers with rock-solid defenses and an absolute right to have the judgment thrown out look at the mounting bank fees, bounced checks, unpaid bills and other problems caused by a bank freeze and decide that their best option is to settle even if the debt collector does not have any claim to the money that can pass the laugh test.  As the New York Times noted in a July 5, 2006 article (“An Outcry Rises as Debt Collectors Play Rough”), debt collectors “often buy the debt from more established companies for pennies on the dollar and seek to collect even if the debt has been paid or was never valid to begin with. Sometimes, consumers pay up simply because they are worn down by threats from the companies. . .” That same article reported on the case of a woman whose bank account was frozen on the basis of a clearly bogus legal claim.

In this context, the importance  of the Exempt Income Protection Act’s new $1,716 exemption from attachment can clearly be seen.  It is low income consumers with relatively small bank balances that are most vulnerable to being pressured into paying debts which they only owe in part or do not owe at all based on the disruption caused by a bank freeze.  And it is precisely these consumers who are now protected.  No longer will a consumer have to decide between paying their utility bill and paying a judgment which, until the moment of the bank freeze they did not even know existed.  Even better, where social security, disability, or other benefit payments have been directly deposited into an account within 45 days, the automatic exemption rises to $2,500 (this replaces a cumbersome, anti-consumer process under the existing rule wherein obviously exempt benefits payments were frozen and it was up to the consumer to undo the freeze by making a petitition to the court.)  The Empire Justice Center expects that “the new law will virtually eliminate the problem of restrained bank accounts for low-income consumers.” We should all hope this statement is proved true.

Let there be no doubt, much work remains to be done to even the scales between the debt collection juggernaut and New York consumers.  New York’s consumer protection laws often lack meaningful teeth, leaving New York consumers without any practical legal remedy to even clear-cut abuse; and despite some recent efforts by New York City’s judges, creditors in New York are still typically able to sue consumers without providing even a modicum of supporting documentation — a situation that has allowed debt collection law firms to flood our courts with hundreds of thousands of computer-generated one-page form pleadings regarding disputes into which neither the creditor’s attorney nor the creditor has made even the slightest individualized inquiry. Nonetheless, the Exempt Income Protection Act is a step in the right direction and provides much needed relief to New York’s beleaguered consumers.

Daniel Schlanger is a partner at Schlanger & Schlanger, LLP in White Plains, New York, and a member of the National Association of Consumer Advocates. The author owes a debt of acknowledgement and gratitude to Kirsten Keefe, Esq. and Prof. Gina Calabrese, Esq., whose excellent article “New Protection Against the Garnishment of Exempt Funds”, provides a useful resource for those attorneys and others interested in the more technical aspects of the Exempt Income Protection Act.