(1)Existing law authorizes a judgment creditor to levy upon the property of a judgment debtor to satisfy a judgment, and authorizes the judgment debtor to claim that certain property is exempt from the levy by following a specified procedure. Existing law authorizes a claimant to assert an exemption by filing a claim of exemption with the levying officer within 10 days after the date the notice of levy on the property claimed to be exempt is served on the judgment debtor. Existing law authorizes a judgment creditor who opposes a claim of exemption to file a notice of opposition to the claim and a notice of motion for an order determining the claim within 10 days after service of the notice of claim of exemption.

This bill would authorize a claimant to file a claim of exemption with the levying officer either in person or by mail and would specify that the period for filing the claim is 15 days if the judgment debtor is personally served with a notice of levy on the property claimed to be exempt, and 20 days if the claimant is served with notice by mail. The bill would deem the filing by mail complete on the date the claim is postmarked if the mailing is assigned a tracking number. If the mailing is not assigned a tracking number, the bill would deem the filing by mail complete on the date the claim is received by the levying officer. The bill would extend the period of time in which a judgment creditor may give notice of opposition to a claim of exemption to 15 days after service of the notice of claim of exemption. These provisions of the bill would become operative on September 1, 2020.

(2) Existing law authorizes a judgment creditor to levy upon the earnings of a judgment debtor through specified wage garnishment procedures, and specifies the maximum amount of a judgment debtors disposable earnings, as defined, that are subject to that garnishment. Existing law specifies certain property of a judgment debtor as exempt, including 75% of paid earnings of an employee that can be traced into deposit accounts or in the form of cash or its equivalent if prior to payment to the employee those earnings were not subject to an earnings withholding order or an earnings assignment order for support.

This bill would instead, in the case of paid earnings that were not subject to an earnings withholding order or an earnings assignment order for support prior to payment to the employee, specify that disposable earnings that would otherwise not be subject to levy under the wage garnishment procedures described above are exempt. The bill would exempt from levy money provided to the judgment debtor by the Federal Emergency Management Agency.

With certain enumerated exceptions, the bill would exempt from a levy money in a judgment debtors deposit account in an amount equal to or less than the minimum basic standard of adequate care for a family of four, as specified. The bill would require a levy against a judgment debtors deposit account to include a description of these requirements. The bill would also exempt from a levy money in a judgment debtors deposit account that is not otherwise exempt under these provisions to the extent that money is necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor. This bill would require the Judicial Council to amend or adopt necessary forms. These provisions of the bill would become operative on September 1, 2020.

 UNFINISHED BUSINESS  

Bill No: SB 616

Author: Wieckowski (D), et al.

Amended: 9/6/19

Vote: 21

SENATE JUDICIARY COMMITTEE: 7-0, 4/9/19

AYES: Jackson, Allen, Caballero, Monning, Stern, Umberg, Wieckowski

NO VOTE RECORDED: Borgeas

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SENATE FLOOR: 26-9, 5/29/19

AYES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NOES: Bates, Borgeas, Chang, Grove, Jones, Morrell, Nielsen, Stone, Wilk

NO VOTE RECORDED: Moorlach, Pan, Portantino

ASSEMBLY FLOOR: 48-23, 9/10/19 - See last page for vote

SUBJECT: Enforcement of money judgments: exemptions

SOURCE: California Low Income Consumer Coalition

Western Center on Law and Poverty

DIGEST:

This bill extends and clarifies a deposit account holder’s timeline for filing a claim of exemption when a judgment creditor seeks to extract money from the account through a levy. This bill also establishes an automatic exemption from bank account levies, with specified exceptions, of no more than the minimum basic standard of adequate care for a family of four, as defined and annually adjusted by the State Department of Social Services (currently $1,724).

Assembly Amendments

(1) change the amount of the automatic exemption from $2,000 to the minimum basic standard of adequate care for a family of four, as defined and annually adjusted by the State Department of Social Services (currently $1,724); (2) extend the time a judgment creditor has to file an objection to a claim of exemption from 10 to 15 days; and (3) clarify how the automatic exemption in the bill interacts with existing state and federal exemptions that banking institutions are required to apply.

ANALYSIS:

Existing law:

1. Authorizes a judgment creditor to levy upon the property of a judgment debtor to satisfy a judgment. (Code Civ. Proc. § 695.010.)
2. Permits a judgment creditor who wants to use a bank levy as a means to satisfy a judgment to fill out a writ of execution, file it with the court, and then bring the writ to the sheriff for execution. The bank freezes the debtor’s account and as much as all of the money in the account can be seized by the sheriff and passed on to the creditor to pay the debt. (Code Civ. Proc. § 700.140.)
3. Allows an account holder to claim that certain property is exempt from levy by filing a claim of exemption with the levying officer within 10 days after the date the notice of levy is served on the account holder. (Code Civ. Proc. § 703.520.)
4. Provides an additional five days to file the claim of exemption, if notice of the levy is served on the account holder by mail. (Code Civ. Proc. § 684.120(b).)
5. Provides that, if a claim of exemption is filed, the judgment creditor shall be notified and has 10 days from that time to file an objection. (Code Civ. Proc. §§ 703.540 and 703.550.)
6. Provides for a hearing within 30 days in the event that a judgment creditor objects to an account holder’s claim of exemption. (Code Civ. Proc. § 703.570.)

This bill:

1. Gives an account holder subject to levy the following deadlines to file a claim of exemption:
   1. 15 days from personal service of the notice of levy; or
   2. 20 days from the date the notice of levy was deposited in the mail, if service of the notice is accomplished by mail.
2. Gives a judgment creditor 15 days in which to file an objection to a claim of exemption.
3. Declares that a claim of exemption is filed on the date mailed if it is assigned a tracking number; and otherwise, on the date received by the levying officer.
4. Establishes an automatic exemption for all funds in an account under the minimum basic standard of adequate care for a family of four, established by Section 11452 of the Welfare and Institutions Code (currently $1,724). An account holder would not receive this automatic exemption when the judgment is based on wages, spousal, or child support owed. Clarifies that, when a banking institution is required to apply other state or federal exemptions to the account, those other exemptions count toward the automatic exemption amount. If the other state or federal exemptions exceed the automatic exemption amount, then only the state or federal exemptions apply.
5. Limits the automatic exemption to one bank account per debtor. Where the debtor has multiple accounts at the same financial institution, the financial institution has discretion to select the account to which the exemption will apply, unless the court orders application to a specific account after hearing requested by either the judgment creditor or debtor. Where the debtor has accounts at more than one financial institution, the judgment creditor must seek a court order specifying to which account the exemption will apply. The judgment debtor may do so as well. None of these provisions create a cause of action against the judgment creditor for execution of the levy or against the financial institution that carries out a levy in compliance with a court order.
6. Makes provisions (1) through (5), above, operative as of September 1, 2020.
7. Exempts from levy all funds in a bank account provided to the account holder by the Federal Emergency Management Agency (FEMA).

Comments

1. Overview. When someone fails to make payments on a debt, the person or company to whom the money is owed (known in legalese as “the creditor”) may seek a judgment from the courts for the amount unpaid plus fees and interest. This judgment, by itself, is just a piece of paper. With a judgment in hand, however, the creditor can proceed with a number of different tools for collecting the money owed: placing a lien on real property, seizing personal property for sale, or garnishing wages, for example. Another tool is to levy on a bank account.

When a court approves a levy on someone’s bank account, it instructs the bank to freeze the money in that account and notifies the account holder that the creditor is about to remove money from the account to satisfy some or all of a debt owed. In theory at least, the bank account holder then has time to respond to the court, asking for some or all of the money to be unfrozen and left in the account based on certain legal justifications. A request like this is known as a “claim of exemption.” Under current law, the person who is about to have their money taken from their account has 10 days to file such a claim of exemption. Current law does not specify how the time of filing is calculated.

This bill makes two primary changes to this system. First, this bill extends and clarifies the timelines regarding filing a claim of exemption. Bank account holders under threat of levy would have 15 days to file a claim of exemption if they are notified of the impending levy in person, and 20 days if the notice is mailed to them. A claim of exemption would be deemed filed on the date it is mailed if it is assigned a tracking number; and otherwise, on the date the claim of exemption is received by the levying officer.

Second, this bill creates an automatic exemption equal to the minimum basic standard of adequate care for a family of four, as defined and annually adjusted by the State Department of Social Services. In essence, this ensures a minimum balance that people can keep in their accounts, if they have it, in order to pay for necessities of life.

1. The significance of making the exemption automatic. There are, as both the proponents and opponents of this bill agree, a number of existing exemptions from bank levy that, if claimed successfully, do eventually provide the same protection against financial calamity that this bill’s minimum balance exemption aims to achieve.

The proponents of this bill do not dispute that these exemptions are theoretically available to protect debtors and that some debtors are able to claim them successfully. The real crux and point of contention is, therefore, the fact that this bill makes its standard minimum exemption apply automatically, without the need for the debtor to be notified of the levy and without the need for the debtor to file a claim of exemption. That minimum balance is simply protected against bank levy.

From the proponents’ point of view, the automatic nature of the exemption is essential for two reasons. First, as a practical matter, account holders frequently do not have the ability, through no fault of their own, to file a claim of exemption. Sometimes the account holder does not have notice of the levy; sometimes they do not have sufficient time to file claims of exemption; and sometimes the process is just too complicated to navigate. The scarce availability of legal aid services only exacerbates this problem. Second, even if the account holder does manage to file the claim of exemption successfully, the account holder’s account balance is frozen for the time it takes the courts to process the exemption, which can be weeks. By making a certain minimum balance automatically exempt from bank levy, SB 616 would eliminate these problems.

1. Rationale for extending and clarifying the claim of exemption filing timeline.

According to the proponents of this bill, the current lack of clarity about when and how someone can file for a claim of exemption prevents the law from serving its purpose. They assert that while a notice of levy must be served on the debtor, in practice, the debtor often only gets the notice after the levy has occurred and the money has been released to the creditor. At that point, even if the debtor files a claim of exemption, the funds are out of the levying officer’s hands and cannot be returned to the debtor, no matter how legally legitimate or morally compelling the debtor’s need to retain the funds.

For its proponents, this bill’s brief extension of the time that debtors have to file their exemption would help to alleviate this problem. Moreover, by clarifying how the deadline interacts with mailing, the bill reduces confusion.

In contrast, the opposition to this bill contend that they deal regularly with claims of exemption and that, in their experience, debtors do not seem to have a problem getting their claims of exemption filed within the current 10-day period.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations committee, minor and absorbable costs (General Fund/Trial Court Trust Fund) to the trial courts to hear and adjudicate creditor requests involving multiple bank accounts and possible additional claims for exemption.

SUPPORT: (Verified 9/10/19)

California Low Income Consumer Coalition (co-source)
Western Center on Law and Poverty (co-source)

Alliance of Californians for Community Empowerment

Asian Law Alliance

Bet Tzedek Legal Services

California Asset Building Coalition

California Partnership to End Domestic Violence

California Reinvestment Coalition

Californians for Economic Justice

Centro Legal de La Raza

Courage Campaign

Consumer Action

Consumer Reports

Consumers for Auto Reliability and Safety

Disability Rights California

East Bay Community Law Center

Elder Law & Advocacy

Equal Rights Advocates

Health Access

Housing and Economic Rights Advocates

Jose Cisneros, Treasurer, City and County of San Francisco

Law Foundation of Silicon Valley

Legal Aid Association of California

Legal Aid Foundation of Los Angeles

Legal Aid Society of San Bernardino

Public Counsel

Public Law Center of Orange County

Riverside Legal Aid

Santa Clara University, Alexander Community Law Center

Service Employees International Union

The Justice & Diversity Center

United Domestic Workers

United Way

University of California, Irvine Consumer Law Clinic

Watsonville Law Center

OPPOSITION: (Verified 9/10/19)

California Association of Collectors

California Financial Services Association

Encore Capital Group

Receivables Management Association International

USCB America

ARGUMENTS IN SUPPORT: According to the author:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065 / month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector – ending the “Debt Collector Takes All” status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

In support, Consumer Action writes:

[I]n California there is no limit to how much a collector can seize from someone’s bank account. Drawing down accounts to $0 can happen with little or no warning, imperiling those with incomes garnished because of court judgments won (often unfairly) by debt collectors. These consumers may be left without the ability to pay for rent, food and other necessities. This unconscionable practice can multiply a struggling household’s financial difficulties.

Although California does have a mechanism by which debtors can attempt to convince the court to exempt necessary funds, the process is too slow and cumbersome to adequately assist Californians struggling to pay for immediate needs.

ARGUMENTS IN OPPOSITION: In opposition to the bill, a coalition of debt collection and banking trade industry associations writes:

This bill creates a broad and automatic exemption that benefits any debtor regardless of income or assets and in the long run will make less credit available to those who need it. […]

[SB 616] ignores the current laundry list of literally hundreds of exemptions available for low-income consumers and creates a blanket exemption that would protect higher-income consumers who cannot claim an exemption under current law. […] This automatic exemption amount is so high that it would eclipse (and thus prohibit) almost all bank levies. […]

[T]he practical effect of the bill is that the state of California stands to lose tax revenue as creditors, including banks, retailers, and small businesses are unable to collect valid debts.

ASSEMBLY FLOOR: 48-23, 9/10/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooley, Eggman, Frazier, Friedman, Gabriel, Cristina Garcia, Eduardo Garcia, Gipson, Gonzalez, Gray, Holden, Irwin, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Mullin, Muratsuchi, Nazarian, Petrie-Norris, Quirk, Reyes, Luz Rivas, Robert Rivas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Brough, Chen, Choi, Cunningham, Diep, Flora, Fong, Gallagher, Grayson, Kiley, Lackey, Mathis, Mayes, Medina, Melendez, Obernolte, Patterson, Ramos, Blanca Rubio, Salas, Voepel, Waldron

NO VOTE RECORDED: Burke, Cooper, Daly, Gloria, Jones-Sawyer, O'Donnell, Quirk-Silva, Rodriguez

Prepared by: Timothy Griffiths / JUD. / (916) 651-4113

9/10/19 23:01:49

**** END ****

SENATE THIRD READING

STR Bill Id:SB 616

Author:(Wieckowski)

As Amended Ver:September 6, 2019

Majority vote

SUMMARY:

Automatically exempts an amount up to $1,724 (the current state Minimum Basic Standard of Adequate Care for a family of four) in a bank account from being levied to satisfy creditors. Applies this exemption on a per-individual, rather than a per-account, basis. Provides, if a debtor holds money in multiple bank accounts, a procedure for creditors to seek a court order allocating the exemption among those accounts.

Major Provisions

1. Establishes an automatic exemption from levy in a bank account equal to the state Minimum Basic Standard of Adequate Care for a family of four for Region 1—currently $1,724—as established annually by the Department of Social Services.
2. Clarifies that the automatic exemption applies per individual, not per bank account, so that a debtor is only entitled to $1,724 in automatic protection no matter how many bank accounts the debtor has opened.
3. Permits a creditor, if a debtor has more than one account at a bank, to seek a court order allocating how and to which account the automatic exemption should be applied.
4. Requires a creditor, if a debtor has accounts at two or more banks, to seek a court order allocating how and to which account the automatic exemption should be applied.
5. Permits a debtor who has more than one account at a bank, or has multiple accounts at two or more banks, to seek a court order allocating how and to which account the automatic exemption should be applied.
6. Ensures that a bank does not add the automatic exemption in 1) to other automatic exemptions from levy, for social security and certain public benefits. If the debtor is entitled to these latter exemptions, and they exceed $1,724, the accountholder only receives the latter exemptions; otherwise, the debtor only receives the $1,724 exemption.
7. Extends the time limits in which a debtor may file a claim of exemption with a Sheriff or other levying officer in response to a levy, as follows:
   1. If the debtor is personally served with a notice of levy, the debtor would have 15 days to file a claim of exemption.
   2. If the debtor is served by mail with a notice of levy, the debtor would have 20 days to file a claim of exemption.
8. Establishes an automatic exemption from levy for all funds in a bank account that are provided to a debtor by the Federal Emergency Management Agency (FEMA).

COMMENTS:

According to the bill's co-sponsors, many low-income Californians live one step away from "catastrophic downward financial spirals," triggered by having the money in their bank accounts seized by creditors through the use of levies. In response, the bill would automatically protect from levy an amount up to the state Minimum Basic Standard of Adequate Care for a family of four (currently $1,724). By comparison, New York automatically exempts 90% of 240 times the applicable minimum wage (currently $2,664) from levy.

It is the automatic nature of this bill's protections that would make it effective. Low-income debtors need access to the money in their accounts to pay for immediate needs, such as rent and food. While there are undoubtedly ways to improve the existing claim of exemption process, without this bill, it is unclear how one could sufficiently streamline sheriffs' departments, banks, the courts, and the U.S. postal service in order to ensure a speedy return of necessary funds to low-income debtors—before their rent check bounces or they need to pay for groceries.

The bill includes procedures for a creditor to seek a court order as to how to allocate the exemption if a debtor holds multiple accounts, whether at a single bank or at multiple banks. Banks (unlike debt buyers, which purchase uncollectable debts from banks for pennies on the dollar) are among the creditors that stand to lose essentially all of their money if loans are not repaid, and therefore, are invested in the workability of these procedures.

According to the Author:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065/month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector—ending the "Debt Collector Takes All" status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

Arguments in Support:

Like exemptions of income from wage garnishment, property exemptions from enforcement of judgment are best understood as a form of insurance for debtors against unexpected circumstances that affect their ability to repay their debts. It is important to recognize that such exemptions…do not decrease the amount that debtors owe their creditors. […] Exemptions can lengthen the period of repayment, but lenders in California are entitled to post-judgment interest to compensate them for this delay. (Source: Dr. Prasad Krishnamurthy, Professor, UC Berkeley School of Law.)

Arguments in Opposition:

We are sensitive to the need for consumers to have access to funds in their bank accounts to pay for basic necessities such as rent, food, and utilities, and as such, have worked with the Legislature to establish a process to protect low income consumers. This process is known as the claim of exemption process and it specifically covers necessaries of life. (Source: California Association of Collectors, et al.)

FISCAL COMMENTS:

According to the Assembly Appropriations committee, minor and absorbable costs (General Fund/Trial Court Trust Fund) to the trial courts to hear and adjudicate creditor requests involving multiple bank accounts and possible additional claims for exemption.

VOTES:

SENATE FLOOR: 26-9-3

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Borgeas, Chang, Grove, Jones, Morrell, Nielsen, Stone, Wilk

ABS, ABST OR NV: Moorlach, Pan, Portantino

ASM JUDICIARY: 9-3-0

YES: Mark Stone, Chau, Chiu, Gonzalez, Holden, Kalra, Maienschein, Petrie-Norris, Reyes

NO: Gallagher, Kiley, Obernolte

ASM APPROPRIATIONS: 11-5-2

YES: Gonzalez, Bloom, Bonta, Carrillo, Chau, Eggman, Gabriel, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

ABS, ABST OR NV: Calderon, Eduardo Garcia

ASSEMBLY FLOOR: 53-16-10

YES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Boerner Horvath, Bonta, Burke, Carrillo, Chau, Chiu, Chu, Cooley, Daly, Eggman, Frazier, Friedman, Gabriel, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Lackey, Levine, Low, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NO: Bigelow, Brough, Chen, Choi, Cunningham, Diep, Flora, Fong, Kiley, Mathis, Mayes, Melendez, Obernolte, Patterson, Quirk-Silva, Voepel

ABS, ABST OR NV: Bloom, Calderon, Cervantes, Cooper, Gallagher, Limón, Maienschein, Ramos, Smith, Waldron

UPDATED:

VERSION: September 6, 2019

CONSULTANT: Jith Meganathan / JUD. / (916) 319-2334 FN: 0002144

SENATE THIRD READING

STR Bill Id:SB 616

Author:(Wieckowski)

As Amended Ver:August 13, 2019

Majority vote

SUMMARY:

Automatically exempts an amount up to $1,724 (the current state Minimum Basic Standard of Adequate Care for a family of four) in a bank account from being levied to satisfy creditors. Applies this exemption on a per-individual, rather than a per-account, basis. Provides, if a debtor holds money in multiple bank accounts, a procedure for creditors to seek a court order allocating the exemption among those accounts.

Major Provisions

1. Establishes an automatic exemption from levy in a bank account equal to the state Minimum Basic Standard of Adequate Care for a family of four—currently $1,724—as established annually by the Department of Social Services.
2. Clarifies that the automatic exemption applies per individual, not per bank account, so that a debtor is only entitled to $1,724 in automatic protection no matter how many bank accounts the debtor has opened.
3. Permits a creditor, if a debtor has more than one account at a bank, to seek a court order allocating how and to which account the automatic exemption should be applied.
4. Requires a creditor, if a debtor has accounts at two or more banks, to seek a court order allocating how and to which account the automatic exemption should be applied.
5. Permits a debtor who has more than one account at a bank, or has multiple accounts at two or more banks, to seek a court order allocating how and to which account the automatic exemption should be applied.
6. Extends the time limits in which a debtor may file a claim of exemption with a Sheriff or other levying officer in response to a levy, as follows:
   1. If the debtor is personally served with a notice of levy, the debtor would have 15 days to file a claim of exemption.
   2. If the debtor is served by mail with a notice of levy, the debtor would have 20 days to file a claim of exemption.

Note that any additional exemptions claimed by a debtor would have to be reduced by the amount automatically protected by this bill.

1. Deems a claim of exemption filed as of the day it is received by the levying officer; unless the claim of exemption is mailed using a tracking number, in which case it is deemed filed as of the day it is postmarked.
2. Establishes an automatic exemption from levy for all funds in a bank account that are provided to a debtor by the Federal Emergency Management Agency (FEMA).

COMMENTS:

According to the bill's co-sponsors, many low-income Californians live one step away from "catastrophic downward financial spirals," triggered by having the money in their bank accounts seized by creditors through the use of levies. In response, the bill would automatically protect from levy an amount up to the state Minimum Basic Standard of Adequate Care for a family of four (currently $1,724). By comparison, New York automatically exempts 90% of 240 times the applicable minimum wage (currently $2,664) from levy.

It is the automatic nature of this bill's protections that would make it effective. Low-income debtors need access to the money in their accounts to pay for immediate needs, such as rent and food. While there are undoubtedly ways to improve the existing claim of exemption process, without this bill, it is unclear how one could sufficiently streamline sheriffs' departments, banks, the courts, and the U.S. postal service in order to ensure a speedy return of necessary funds to low-income debtors—before their rent check bounces or they need to pay for groceries.

The bill includes procedures for a creditor to seek a court order as to how to allocate the exemption if a debtor holds multiple accounts, whether at a single bank or at multiple banks. Banks (unlike debt buyers, which purchase uncollectable debts from banks for pennies on the dollar) are among the creditors that stand to lose essentially all of their money if loans are not repaid, and therefore, are invested in the workability of these procedures.

According to the Author:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065/month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector—ending the "Debt Collector Takes All" status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

Arguments in Support:

Like exemptions of income from wage garnishment, property exemptions from enforcement of judgment are best understood as a form of insurance for debtors against unexpected circumstances that affect their ability to repay their debts. It is important to recognize that such exemptions…do not decrease the amount that debtors owe their creditors. […] Exemptions can lengthen the period of repayment, but lenders in California are entitled to post-judgment interest to compensate them for this delay. (Source: Dr. Prasad Krishnamurthy, Professor, UC Berkeley School of Law.)

Arguments in Opposition:

We are sensitive to the need for consumers to have access to funds in their bank accounts to pay for basic necessities such as rent, food, and utilities, and as such, have worked with the Legislature to establish a process to protect low income consumers. This process is known as the claim of exemption process and it specifically covers necessaries of life. (Source: California Association of Collectors, et al.)

FISCAL COMMENTS:

According to the Assembly Appropriations analysis, minor and absorbable costs (General Fund/Trial Court Trust Fund) to the trial courts to hear and adjudicate creditor requests involving multiple bank accounts and possible additional claims for exemption.

VOTES:

SENATE FLOOR: 26-9-3

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Borgeas, Chang, Grove, Jones, Morrell, Nielsen, Stone, Wilk

ABS, ABST OR NV: Moorlach, Pan, Portantino

ASM JUDICIARY: 9-3-0

YES: Mark Stone, Chau, Chiu, Gonzalez, Holden, Kalra, Maienschein, Petrie-Norris, Reyes

NO: Gallagher, Kiley, Obernolte

ASM APPROPRIATIONS: 11-5-2

YES: Gonzalez, Bloom, Bonta, Carrillo, Chau, Eggman, Gabriel, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

ABS, ABST OR NV: Calderon, Eduardo Garcia

UPDATED:

VERSION: August 13, 2019

CONSULTANT: Jith Meganathan / JUD. / (916) 319-2334 FN: 0001442

Date of Hearing: August 21, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 616

Author:(Wieckowski) – As Amended Ver:August 13, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill automatically exempts an amount deemed the minimum basic standard of adequate care (MBSAC) for a family of four from being levied out of a debtor’s bank account to satisfy creditors. This bill also excludes claims for unpaid wages, unpaid taxes, spousal support and child support from eligibility for the automatic exemption. This bill also permits a creditor, if the debtor has more than one account at a bank, to seek a court order allocating how and to which account the automatic exemption should apply.

FISCAL EFFECT:

Minor and absorbable costs (GF/Trial Court Trust Fund) to the trial courts to hear and adjudicate creditor requests involving multiple bank accounts and possible additional claims for exemption.

COMMENTS:

1. Background and Purpose. Under existing law, a creditor may attach any judgment debtor’s assets, including bank accounts and property. A creditor may levy a debtor’s bank account by filing and serving a writ of execution. Any amounts on deposit at the time the writ of execution is served may be levied to service the outstanding debt. 100% of the deposits may be seized regardless of the consequences to the debtor. The only way to prevent losing all deposits is for the debtor to file a claim of exemption and demonstrate to the court that the specific amount is not subject to attachment. Most California debtors would easily qualify for the existing exemptions, but they still have to go through the lengthy court process to do so. According to the author:

With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector—ending the “Debt Collector Takes All” status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses. It is essential to keep people who have debt in collections…from losing their home or not being able to feed their children simply because they (like one of every three people in the state) owe a debt [in collections].

Sixteen other states protect funds from bank levy. Amounts protected range from $300 in Arizona and Pennsylvania to $10,000 in Mississippi and Tennessee. Three of these states —Massachusetts, Nevada, and most recently New York – automatically exempt a certain amount of funds. As amended, this bill would exempt the MBSAC for a family of four as defined in the Welfare and Institutions Code. The MBSA for a family of four is $1,724 a month.

1. Support. According to Western Center on Law & Poverty:

Bank seizures happen with little or no warning. They leave people with no way to pay for their rent, food, medicine, transportation, and other life necessities in the month that they happen and subsequent months. Oftentimes, individuals do not owe the debts for which their accounts are levied in the first place or they have a valid basis for contesting the amount of debt being claimed.

1. Opposition. According to the California Association of Collectors:

[SB 616] ignores the current laundry list of literally hundreds of exemptions available for low-income consumers and creates a blanket exemption that would protect higher-income consumers who cannot claim an exemption under current law.

1. Prior Legislation. SB 16 (Wieckowski), of the 2017-2018 Legislative Session, reduced the maximum amount a creditor could garnish from the wages of a debtor for a judgment based on private student loan debt. SB 16 failed passage on the Assembly floor.

Analysis Prepared by: Kimberly Horiuchi / APPR. / (916) 319-2081

Date of Hearing: June 25, 2019

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

SBPCA Bill Id:SB 616

Author:(Wieckowski) – As Amended Ver:May 24, 2019

SENATE VOTE: 26-9

SUBJECT: Enforcement of money judgments: exemptions

KEY ISSUE: should THE LEGISLATURE AUTOMATICALLY EXEMPT FROM CREDITOR LEVY UP TO $2,000 IN A DEBTOR’S BANK ACCOUNT, WITHOUT the debtor NEEDing TO FILE A CLAIM FOR EXEMPTION, SO LONG AS EACH DEBTOR IS ONLY ENTITLED TO A SINGLE EXEMPTION?

SYNOPSIS

This bill is intended to protect Californians from the harms that ensue when all of the funds in their bank accounts are seized for the benefit of their creditors. It would automatically safeguard $2000 per debtor, not per account, from bank levy. The bill also extends and clarifies the time in which debtors may contest a levy, and provides a procedure for creditors to determine how the $2000 exemption should be allocated if the debtor holds multiple bank accounts. This analysis addresses seven issues that have been raised by stakeholders:

1. Does the existing claim of exemption process suffice to protect debtors?
2. Would this bill reduce the availability of credit, particularly to low-income Californians?
3. Are levies a tool of last resort for creditors?
4. Will the automatic exemption benefit affluent debtors seeking to shield assets?
5. Will this bill encourage unbanked Californians to become banked?
6. Will this bill help judgment creditors eventually be repaid?
7. Do other states automatically restrain levies?

A final issue, whether this bill will be too expensive to implement, is the province of the Committee on Appropriations.

SB 616 is sponsored by the California Low-Income Consumer Coalition and the Western Center on Law & Poverty, and supported by a variety of consumer, legal aid, labor, and charitable organizations. It is opposed by California Association of Collectors, California Financial Services Association, Encore Capital Group, Receivables Management Association International, and USCB America.

SUMMARY: Automatically exempts an amount up to $2,000 in a debtor’s bank account from being levied to satisfy creditors. Applies the exemption on a per-debtor, rather than a per-account, basis. Provides, if the debtor holds money in multiple bank accounts, a procedure for creditors to seek a court order allocating the exemption among those accounts. Specifically, this bill:

1. Establishes an automatic exemption from levy for up to $2,000 in funds in a bank account.
2. Clarifies that the automatic exemption applies per debtor, not per bank account, so that each debtor is only entitled to $2,000 in automatic protection.
3. Exempts claims for unpaid wages, unpaid taxes, spousal support, and child support from eligibility for the automatic exemption.
4. Requires that the amount of the automatic exemption be adjusted every three years to account for inflation.
5. Permits a creditor, if the debtor has more than one account at a bank, to seek a court order allocating how and to which account the automatic exemption should be applied.
6. Requires a creditor, if the debtor has accounts at two or more banks, to seek a court order allocating how and to which account the automatic exemption should be applied.
7. Permits a debtor who has more than one account at a bank, or has multiple accounts at two or more banks, to seek a court order allocating how and to which account the automatic exemption should be applied.
8. Permits a bank, if a debtor has more than one account there, to allocate the automatic exemption among the accounts in its discretion, unless the bank receives a court order pursuant to 5) – 7) above, in which case it must follow the instructions in that order.
9. Clarifies that 5) – 8) above do not create a cause of action against a creditor or bank which follows the procedures outlined in a court order.
10. Extends the time limits in which an account holder may file a claim of exemption with a Sheriff or other levying officer in response to a levy, as follows:
    1. If the account holder is personally served with a notice of levy, the account holder would have 15 days to file a claim of exemption.
    2. If the account holder is served by mail with a notice of levy, the account holder would have 20 days to file a claim of exemption.
11. Deems a claim of exemption filed as of the day it is received by the levying officer; unless the claim of exemption is mailed using a tracking number, in which case it is deemed filed as of the day it is postmarked.
12. Provides that the automatic exemption shall not take effect until September 1, 2020 and directs the Judicial Council to prepare the forms necessary to implement the provisions above.
13. Establishes an automatic exemption from levy for all funds in a bank account that are provided to the judgment debtor by the Federal Emergency Management Agency (FEMA).

EXISTING LAW:

1. Establishes that, except where the law provides otherwise, all property of a judgment debtor can be seized to satisfy a money judgment. (Code of Civil Procedure Section 695.010. All further references are to this code, unless otherwise noted.)
2. Permits a judgment creditor who wants to use a bank levy as a means to satisfy a judgment to obtain a writ of execution from the court, and then provide the writ to a levying officer (usually the sheriff in the county where the account is located). The sheriff then personally serves the writ on the bank for execution. (Sections 699.510, 699.520, 700.140 (a).)
3. Provides that the execution lien that arises upon service of a writ of execution and notice of levy reaches only amounts in a deposit account at the time of service on the financial institution, including the amount of any deposit not yet finally collected unless the deposit is returned unpaid to the financial institution. (In other words, without any limitation, as much as 100% of the money in the account can be seized by the sheriff and conveyed to the creditor to pay the debt.) (Section 700.140 (b).)
4. Permits an account holder to claim that certain property is exempt from levy by filing a claim of exemption with the levying officer within 10 days after the date the notice of levy is served on the account holder. (Section 703.520 (a).)
5. Provides for an additional five days to file the claim of exemption, if notice of the levy is served on the account holder by mail. (Section 684.120 (b).)
6. Provides that, if a claim of exemption is filed, the judgment creditor shall be notified and has 10 days from that time to file an objection. (Sections 703.540 and 703.550.)
7. Provides for a hearing within 30 days in the event that a judgment creditor objects to an account holder’s claim of exemption. (Section 703.570.)
8. Exempts from wage garnishment, with certain categorical exceptions, the portion of a judgment debtor's earnings which the judgment debtor proves is necessary for the support of the judgment debtor or their family supported in whole or in part by the judgment debtor. (Section 706.051.)

FISCAL EFFECT: As currently in print this bill is keyed fiscal.

COMMENTS: According to the bill’s co-sponsors, many low-income debtors in Californians live one step away from “catastrophic downward financial spirals,” triggered by having the money in their bank accounts seized by creditors through the use of bank levies. To address this reported problem, the bill would automatically exempt an amount up to $2,000 from being levied from a debtor’s bank account. Nothing in this bill would act to discharge any part of the underlying debt.

Background re: debts in collections. An estimated 29% of adults in California have a debt in collections: a past-due account that the original creditor has written off or otherwise deemed uncollectable, reported as such to a credit reporting agency, and then placed with a third-party debt collector or sold to a third-party debt buyer in a last-ditch attempt at collecting the debt. (For the sake of readability, these debt collectors and debt buyers are collectively included in the term “creditors” throughout this analysis.)

Debts in collections may arise from a variety of sources, including medical bills, credit cards, auto loans, student loans, and utility bills. Because they can harm a debtor’s credit score, and impair the search for employment and housing, debts in collection are typically taken as a sign of financial distress. (See Hassani & McKernan, 71 million US adults have debt in collections, Urban Institute (Jul. 19 2018), available at https://www.urban.org/urban-wire/71-million-us-adults-have-debt-collections; see also Ratcliffe, et al., Delinquent Debt in America, Urban Institute (Jul. 30, 2014), available at https://www.urban.org/
sites/default/files/publication/22811/413191-delinquent-debt-in-america_0.pdf.)

Creditors typically begin trying to collect debts in collections through informal methods such as writing to debtors and contacting them by phone. If these methods are unsuccessful, creditors can sue debtors for unpaid debts and any accrued interest. Collections actions, among the most common form of lawsuit, are generally a one-sided affair. One study showed that 85% of the defendants in the collection actions surveyed did not file an answer, and only 2% were represented by attorneys. (See Peter A. Holland, Junk Justice: A Statistical Analysis of 4,400 Lawsuits Filed by Debt Buyers (2014) 26 Loyola Consumer L. Rev. 179, 208.) As a result, nearly all collection actions result in a judgment entered in favor of the creditor, in the amount sought by the creditor. Interest accrues on these debts at the statutory rate of 10% simple interest per year from the date when the judgment is entered.

What is a bank levy? California law provides a creditor with a variety of methods to collect on a judgment against a debtor. (It is important to note that there is no judicial oversight of these collection methods, which are typically performed by county sheriffs’ offices.) Typical collection methods include garnishing the debtor’s wages, seizing and selling the debtor’s personal property, placing a lien on any real property that a debtor owns, and seizing funds from a debtor’s bank account. It is the latter method—known as a “bank levy”—that is the subject of this bill.

Creditors typically obtain bank account information in one of two ways. They may possess a check from the debtor (this is one of the reasons that debt collectors implore debtors to “pay just $5” towards a debt), or use a skip tracing service: a commercial operation which aggregates information from a variety of sources in order to pinpoint debtors’ assets.

Once a creditor has identified a bank account that it wishes to levy, the creditor obtains a document (known as a “writ of execution”) from the court, which describes the judgment owed by the debtor. The creditor then provides the writ to the sheriff in the county where the bank account is located or the bank is headquartered. The sheriff, in turn, personally delivers the writ to the bank and mails a copy to the debtor. When it receives the writ, the bank collects a levy fee (according to bill supporters, in an amount between $20 - $125) for itself and then freezes the money in the account, so that no withdrawals can be made and no checks can be honored. As a practical matter, because delivery is faster than mail, the funds are frozen before the debtor has notice of the levy, so the debtor has no opportunity to withdraw the funds beforehand. The bank must then, within 10 days, turn over any levied funds to the sheriff, who in turn conveys the funds to the creditor. Under current state law, up to 100% of the money in an account can be levied. Federal regulations exempt a certain amount of federally-deposited funds, such as social security, from levy.

How often do bank levies occur? The East Bay Community Law Center, a nonprofit provider of free legal services to low-income residents of Alameda County, attempted to ascertain how many bank levies are conducted annually in California. In 2017, EBCLC submitted Public Records Act requests to all 58 county sheriffs’ departments in California, seeking documents showing the number of writs of execution for bank levies each department served during the period from January 1, 2014 to December 31, 2016. Sheriffs’ departments in 45 counties, including Los Angeles County, responded with data showing that they conducted 290,723 levies during this period— an average of 96,907 levies per year. In order to account for counties that did not respond, EBCLC then extrapolated this data to estimate that 110,406 bank levies per year occur in California.

In other words, between 96,907 and an estimated 110,406 times per year, Californians have their bank accounts frozen and the money withdrawn to pay off creditors.

How would this bill change the bank levy process? Under this bill, a bank served with a writ of execution would leave $2,000 in a debtor’s bank account unfrozen, and therefore allow those funds to be accessible to pay previously-written checks and otherwise be used for the debtor’s everyday needs. Each debtor would be entitled to only one $2,000 exemption, so that if the debtor has multiple bank accounts, the exemption can only apply to one of these accounts. (There is further discussion of this point below.)

The author justifies the $2,000 amount as follows:

This amount is even less than the asset limit for Federal Supplemental Nutrition Assistance Program (SNAP, or food stamp) eligibility ($2,250 in 2018). The Federal government, in the SNAP program and elsewhere, has recognized that people need some minimal amount of money to survive, and has determined that the baseline amount of approximately $2,000 is the minimum.

What problems do proponents of this bill identify with the current levy process? According to this bill’s supporters, the current levy process often triggers unexpected downward financial spirals in an already-vulnerable population.

The Western Center on Law & Poverty, one of the bill’s sponsors, writes:

These bank seizures happen with little or no warning. They leave people with no way to pay for their rent, food, medicine, transportation, and other life necessities in the month that they happen and subsequent months. Oftentimes, individuals do not owe the debts for which their accounts are levied in the first place or they have a valid basis for contesting the amount of debt being claimed. In other cases, while debtors may owe the debts for which their accounts are being levied, the destabilizing effects—job loss, eviction, hunger, unfilled prescriptions, auto repossession—of having so much money seized at one time create social harms that outweigh any benefit to creditors.

The United Way of California, Capitol Region, a bill supporter, adds:

Every year, debt collectors serve tens of thousands of levy orders on banks and credit unions. The people whose bank accounts are frozen or emptied as a result of these orders are put at high risk of homelessness, loss of child custody, hunger, illness, unemployment, and auto repossession. We have to do something to protect Californians from the financial shock of having all of their assets seized.

The author summarizes:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065/month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector—ending the “Debt Collector Takes All” status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

It is essential to keep people who have debt in collections…from losing their home or not being able to feed their children simply because they (like one of every three people in the state) owe a debt [in collections].

Basic policy question: what is the appropriate trade-off between creditor rights and debtor protections in California? The question that this bill poses is the appropriate balance that our legal system ought to strike between the obligation to pay one’s debts and individuals’ baseline need for assets in order to function in society. This isn’t only a question of the balance between individual creditors and individual debtors; it has statewide implications. Erecting too high a wall around debtors’ assets risks encouraging scofflaws and deadbeats to evade their creditors and may ultimately reduce the availability of credit—including credit cards, auto loans, student loans, and mortgages—for all borrowers. But making it too easy for creditors to seize debtors’ assets risks imposing costs on other actors in society—including employers, family members, landlords, other creditors, charities, and government—if debtors lack the minimum of assets necessary to house, feed, and transport themselves every day.

Simplistic phrases like “People should pay their debts,” or “We need to protect people from debt collectors,” are unhelpful and obscure the complexity of this question.

This analysis will review the arguments advanced by proponents and opponents of this bill. But first, it is important to review the method that California law currently provides debtors to attempt to reclaim levied funds.

The claim of exemption process. California law provides debtors with a process—known as the claim of exemption—to submit documents to the sheriff asking that levied funds be returned because these funds are necessary to support the debtor and the debtor’s family.

The claim of exemption process works as follows. Within 15 days after the sheriff mails a copy of the writ of execution to the debtor, the debtor must complete and submit a claim of exemption form, together with a financial statement form showing the debtor’s monthly income and expenses, to the sheriff. Once completed, these forms are meant to establish how much of the levied funds the debtor and the debtor’s family need to meet their monthly needs, such as rent, food, medicine, and transportation. If these forms reach the sheriff within the 15-day window, the sheriff mails the forms, instead of the levied funds, to the creditor. The creditor has 10 days from mailing in which to decide whether to contest the claim of exemption. If the sheriff does not hear from the creditor within 10 days, the sheriff will return the levied funds to the debtor’s bank. In other words, in the speediest scenario, the debtor will have been without access to the levied funds for approximately 30 days before they are returned.

Alternately, the creditor can decide to contest the claim of exemption by filing an opposition to the claim of exemption with the court, which then sets a date for a court to hear the dispute. The court is supposed to set the hearing within 30 days of the creditor’s request, but has the discretion to change the date as it sees fit. Once the date is set, the creditor must mail the notice of opposition and notice of the hearing to the sheriff and the debtor, again, within the 10-day window.

At the hearing, the court is supposed to review the debtor’s claim of exemption and financial statement, the creditor’s opposition, and hear argument from both sides as to the debtor’s need for the funds. The court then decides how much, if any, of the levied funds the debtor is entitled to, and issues an order to the sheriff to distribute the levied funds to the creditor and debtor accordingly. There is no time limit on when the sheriff must process the order and distribute the levied funds to the parties, so it is difficult to know when any funds will be returned to the debtor’s bank account. As discussed below, it can take many months before debtors once again have access to their levied funds.

Issue #1: Does the existing claim of exemption process suffice to protect debtors? The bill’s opponents argue that the existing claim of exemption process suffices to protect low-income debtors. They write:

We are sensitive to the need for consumers to have access to funds in their bank accounts to pay for basic necessities such as rent, food, and utilities, and as such, have worked with the Legislature to establish a process to protect low income consumers. This process is known as the claim of exemption process and it specifically covers necessaries of life. The claim of exemption process is specially intended to protect low income debtors and allows them to exempt their funds, if necessary. Additionally, under federal Department of Treasury rules, debtors’ banks and credit unions must perform a review of the debtor’s account for the prior two months to identify all deposits and to protect from levy all benefit payments and exempt wages. This includes any deposits of 75% of wages, social security benefits, supplemental security income, federal employee and civil service retirement benefits and veterans benefit. SB 616 ignores the current federal and state bank levy protections and the need-based claim of the exemption process.

In other words, according to the bill’s opponents, this bill is unnecessary because California law already provides the claim of exemption process as a means for indigent debtors to reclaim needed funds. The bill’s proponents contest this claim, arguing that the claim of exemption process is a slow and unworkable means of ensuring that debtors can access the baseline funds they need to survive.

The first problem, according to the bill’s proponents, are delays in notice to the debtor. The Western Center on Law & Poverty writes:

Delays in mailed notice mean that debtors only receive notice of a levy days after it has occurred, sometimes after the deadline to file a claim of exemption. In cases where the judgment creditor does not have a current address for the judgment debtor, [the debtor] may never receive notice of the levy or the forms to file a claim of exemption. In either case, whether notice is delayed or received, the judgment debtor generally finds out about the levy only when she tries to withdraw funds or bounces a check…. For low-income debtors, who likely need the levied funds immediately to pay rent, grocery, or pharmacy bills, or bus fares, the harm of delayed or non-existent notice is immediate.

The second problem, according to the Western Center, are delays in receiving needed funds—even if the debtor prevails at a hearing on a claim of exemption:

Debtors often find themselves without access to frozen funds for months while claims and any resulting court orders are processed. Judgment creditors typically oppose claims of exemption, and it can take weeks or months for a court to schedule a hearing on a contested claim. Because California does not protect any amount of funds in a bank account from levy, courts must engage in a fact-intensive review of a judgment debtor’s expenses and income in order to determine whether levied funds should be returned by the creditor. Even if the judgment debtor prevails at this hearing and the court issues an order determining the claim of exemption in the debtor’s favor, the order must be processed by the levying officer before funds are returned to the debtor. Processing an order can take weeks or months because of a lack of personnel at Sheriffs’ offices; in the meantime, despite having been judged in need of the funds, the debtor continues to suffer.

The author provides the following story in illustration:

A client at the East Bay Community Law Center, Grace Alcantar, was barely able to find a lawyer in time to file a claim of exemption. She was able to get to the Law Center in time and be represented by an attorney, and once she was able to get to court, the judge agreed that the money should not be taken from her account. However, even though she “won” her claim of exemption, she still didn't get her money back for five months. In that time she had to borrow from her retired farmworker parents in order to pay her rent…

Public Counsel, a legal services organization in Los Angeles and a bill supporter, adds:

As an example of the devastating effects bank levies can have, Public Counsel worked with an unemployed client subject to a levy that cleared out the entire balance of $9,100 from his bank account. The money was taken three days after the client suffered an injury so severe that he was unable to work or look for work. The money levied was all he had to pay for the basic necessities of life. The client did not understand the exemption process but luckily contacted Public Counsel on the last possible day to file a claim. After a hearing some weeks later, the court ordered the bulk of the money be restored to him; however, the client had to wait several more weeks to gain access to the funds. In total, the client was without the money levied for over three months. During that period, his financial situation progressively worsened: he became behind on his rent and had to borrow what little money he could from friends just to eat.

It is important to note that under the current system, the financial burden is borne by the debtor, not the creditor. The previous client example shared by Public Counsel highlights the dire consequences that can result when this burden is placed, even temporarily, upon poor debtors who are at the same time being deprived of perhaps their only safety net. Even if the court eventually concludes that funds are exempt and must be returned to the debtor, proponents contend that the burden of being deprived of those funds in the interim may thrust the debtor deeper towards an inescapable cycle of poverty.

In other words, it is the automatic nature of this bill’s protections that would make it effective. Low-income debtors need access to the money in their accounts to pay for immediate needs, such as rent and food. Even if California law were amended to allow debtors to retain, say, a $10,000 exemption (the amounts currently protected in Tennessee and Mississippi), this level of protection wouldn’t help debtors to necessarily avoid the crises that are created when funds are unavailable to meet their basic life needs.

This argument, that people need access to a baseline, liquid amount of funds to meet life needs, is difficult to dispute. While there are undoubtedly ways to improve the claim of exemption process (as this bill does, by clarifying and extending certain statutory timelines), it is unclear how one could sufficiently streamline the operations of sheriffs’ departments, banks, the courts, and the U.S. postal service in order to ensure a speedy return of necessary funds to low-income debtors—before their rent check bounces, their auto loan comes due, or they need to pay for groceries.

Finally, it is worth noting that debtors are already automatically protected from having more than 25% of their wages garnished for the benefit of creditors. California law recognizes the importance of ensuring that debtors have access to a substantial portion of their paychecks. It seems inconsistent for California not to similarly ensure that debtors have consistent access to a minimum of funds for their regular expenses.

Based on the foregoing, it would seem that this bill strikes an appropriate balance between creditor rights and debtor protections, because the debtor in financial distress is almost certainly less likely to be able to bear the burden of frozen funds than the creditor, particularly in cases where the entire balance of the debtor’s account has been seized.

Issue #2: Would this bill reduce the availability of credit, particularly to low-income Californians? The bill’s opponents argue that, “[I]n the long run, [SB 616] will make less credit available to those who need it.” They add:

Perhaps most concerning, this bill will decrease access to credit for low income consumers. Multiple research studies by academics from Princeton University, the New York Federal Reserve, George Mason University, and Harvard Kennedy School of [Government] all point to one conclusion: bills like SB 616 result in less access to mainstream credit. This impact is most severe for lower-income consumers–those who need affordable credit the most. In fact, the study from Harvard Kennedy School of Government noted that a 250% surge in credit card related restrictions by regulators since 2007 has contributed to a 50% drop in annual credit card originations to lower-risk-score Americans.

The four papers cited by the opposition are, respectively: Fonseca, Strair, and Zafar, Federal Reserve Bank of New York Staff Reports no. 814 (May 2017); Debt Collection Agencies and the Supply of Consumer Credit, Philadelphia Federal Reserve Working Paper 15-23 (June 2015); Zywicki, The Law and Economics of Consumer Debt Collection and its Regulation, Mercatus Center at George Mason University (Sep. 2015); and Lux and Green, Out of Reach: Regressive Trends in Credit Card Access, Harvard Kennedy School of Government (April 2016).

Dr. Prasad Krishnamurthy, a professor at UC Berkeley School of Law who holds a doctorate in economics, criticizes attempts to draw conclusions from these papers about the effects of SB 616. He writes:

The opposition refers to two working papers by economists at the Federal Reserve as evidence of the cost of SB 616. In fact, these papers have no relevance to considering the effects of SB 616. Both papers analyze the effects of state laws governing: (1) licensing requirements for third-party collectors, (2) surety bond requirements for such collectors, and (3) the availability of administrative penalties and private rights of action for violations of state and federal law. They find that more stringent laws governing debt collection—again, on these three dimensions—reduced the number of debt collection firms and the number of persons employed in debt collection. This had the effect of lowering the quantity of credit and increasing the likelihood of credit card delinquencies. These studies provide no useful information on the effect of exemptions from judgment [such as those in SB 616]. They also say nothing about the benefits of these three types of laws, which may well exceed their costs and therefore be worth considering in California.

The other two papers cited by the opposition are also of little relevance to SB 616. One [by Zywicki] provides a high level survey of the various costs and benefits involved in all consumer financial regulation. The other [by Lux and Green] documents the lesser availability of credit card debt to lower-income borrowers in the aftermath of the financial crisis and hypothesizes that increased regulation may play a role, but is unable to separate the effects of regulation from the economy-wide trends in the restriction of credit during and after the crisis.

If Professor Krishnamurthy is correct, it would seem that the papers cited by the opposition have little value in assessing the impact of this bill on the availability of credit, particularly to the extent that these papers focus only on the costs, and not the benefits, of consumer protections.

Professor Krishnamurthy goes on to make a counterintuitive argument: that this bill may actually increase the availability of credit to consumers. He writes:

Like exemptions of income from wage garnishment, property exemptions from enforcement of judgment are best understood as a form of insurance for debtors against unexpected circumstances that affect their ability to repay their debts. It is important to recognize that such exemptions are distinct from forgiveness. Exemptions do not decrease the amount that debtors owe their creditors. Exemptions provide debtors protection against a future repayment schedule that would result in undue financial hardship. Exemptions can lengthen the period of repayment, but lenders in California are entitled to post-judgment interest to compensate them for this delay. 

[…]

Research [by Felipe Severino at Dartmouth College and Meta Brown at Stony Brook University] shows that increasing asset exemptions can actually increase the availability of credit. […] [R]esearch that provides an economically sound approach to determining both the costs and benefits of judgment exemptions suggests that the socially optimal level of such exemptions is likely to be high. This research compares the benefits to borrowers in the form of increased insurance against any potential increase in the upfront cost of credit in a competitive market. While the bill may have a modest effect on the price of credit for higher-risk borrowers, this would be protection against future hardship that is worth paying.

In other words, judgment exemptions function as a form of insurance in case debtors’ life circumstances change in such a way (e.g., due to job loss, illness, divorce, or death) that they cannot repay debts; moreover, borrowers are willing to pay a small markup for this credit, knowing that the law provides them with insurance; and more credit is available as a result.

While evaluating the soundness of the proponents’ and opponents’ economic arguments is beyond the purview of this analysis, it is worth nothing that Professor Krishnamurthy has actually grappled with the text of the bill and its potential economic implications, unlike the economists cited by the opponents.

Issue #3: Are levies a tool of last resort for creditors? The bill’s opponents argue that levies are a collection device of last resort, writing:

A bank levy is a post-judgment tool utilized by creditors only after they have made numerous efforts to contact the consumer and other collection efforts have failed. The process requires returning to court to get a writ, contacting the sheriff, providing notice to the consumer, allowing the consumer time to make a claim of exemption and, if a claim is made, having a court determine the amount that may be levied.

The Western Center on Law & Poverty disagrees, writing:

The opponents will say that there is plenty of notice, but that defies logic. If our clients knew a levy was coming, they wouldn’t keep their money in the bank to be levied. We expect this should also be obvious to committee staff and members of the committee.

Relatedly, opponents have also claimed that they do not contest claims of exemption filed by low-income debtors. The East Bay Community Law Center counters with the following:

At EBCLC, we talk to hundreds of low-income Alameda County consumers who have been subjected to a bank levy. I reviewed a random sample of thirty income-eligible clients with bank levies for whom we filed a claim of exemption over the last three years. The creditor opposed twenty-eight of these thirty claims.

Issue #4: Will the automatic exemption benefit affluent debtors seeking to shield assets? The opponents argue that this bill will function to provide debtors a windfall, by giving them a $2,000 exemption in every bank account that they hold. This despite the language in the bill which reads, “The exemption applies per debtor, not per account.” In support of their position, the opponents write:

[T]here is no way for a financial institution to know whether another financial institution has one or more accounts in the name of the debtor or whether the $2,000 exemption has been applied to one of those accounts. As a result, the “per debtor” limitation is unenforceable and the bill in its current form unworkable.

According to the author, the California Bankers Association (CBA) and the California Community Banking Network were opposed to the bill for this very reason. As a result, CBA proposed, and the author accepted, the following amendments to the bill, after which these organizations removed their opposition:

Code of Civil Procedure Section 704.220 (e) […]

(2) If a judgment debtor holds an interest in multiple accounts at a single financial institution, the judgment creditor or judgment debtor may file an ex parte application in the superior court in which the judgment was entered for a hearing to establish how and to which account the exemption should be applied. Subject to a service of an order issued in that hearing, if any, the financial institution may determine how and to which account the exemption should be applied. This paragraph does not create a cause of action against a judgment creditor who executes a levy or against a financial institution that complies with a levy pursuant to the court’s determination.

(3) If a judgment debtor holds an interest in multiple accounts at two or more financial institutions, the judgment creditor shall, and the judgment debtor may, file an ex parte application in the superior court in which the judgment was entered for a hearing to establish how and to which account the exemption should be applied. Subject to a service of an order issued in that hearing, if any, the financial institutions shall comply with the levy subject to the exemption. This paragraph does not create a cause of action against a judgment creditor who executes a levy or against a financial institution which complies with a levy pursuant to the court’s determination.

These provisions establish procedures for a creditor that has knowledge that a debtor holds multiple accounts, whether at a single bank or at multiple banks, to seek an order from the court as to how to allocate those exemptions. The court’s order is then served on every bank at which the debtor holds accounts; these banks must then levy accounts in compliance with this order.

Opponents’ claims that it is impossible to know whether a debtor has accounts at multiple institutions are undermined, first, by the efficacy of the skip tracing industry in locating debtors’ assets, and, second, by the fact that banks are confident that these amendments will enable them to make themselves whole.

Further, an action lies under the Uniform Voidable Transfers Act against a debtor that seeks to hide assets in order to avoid its creditors. (See Civil Code Sections 3439-3449.) Fraudulent conveyance is also a crime in California, punishable as a misdemeanor. (Penal Code Section 154.) If this bill’s opponents argue that bringing an action to void a fraudulent transfer is too difficult an undertaking for the amount of debt that is typically at issue in a collection action, then they have conceded the premise of this bill: that most debtors do not owe large debts, and further, that they don’t have enough money to shield assets in multiple banks accounts. This point essentially nullifies the opposition’s argument that, the bill will “only benefit wealthy Californians by allowing them to game the system and avoid financial responsibility while vulnerable consumers pay the price.”

Banks are the creditors that stand to lose essentially all of their money if loans are not repaid, and therefore, are most invested in the workability of these procedures. It is therefore unclear why the Committee should accept the representations of debt buyers, which purchase uncollectable debts from banks for pennies on the dollar, that they cannot utilize these procedures.

It should be noted that nothing in these amendments, or in the remainder of the bill, is meant to prevent a debtor from continuing to have access to liquid funds in an amount up to $2,000 at all times.

Issue #5: Will this bill encourage unbanked Californians to become banked? Proponents of this bill argue that fear of bank levies is one of the primary reasons why low-income individuals are unbanked. According to the author:

Workers who owe debts but who need their paychecks and savings to survive and pay for rent and food are refraining from depositing their money in a bank account for fear of exposing themselves to a 100% seizure of their funds. Current bank levy laws have left many Californians who would like use a bank account unbanked. Being unbanked harms low-income Californians in many ways: (i) it results in their paying heavy charges for check-cashing services, money orders, and other expensive financial services, hindering their ability to build assets and escape poverty; (ii) it leaves them vulnerable to crime, because they are forced to hide cash on their persons, in their vehicles, and in their homes, and often leads them to spend this money rather than have it stolen; and (iii) it forces them into high-interest borrowing when faced with emergency expenses, since they are unable to maintain anything in bank accounts.

The Western Center on Law & Poverty adds:

Financial advisors typically recommend that households save at least three months’ of their earnings for unexpected emergencies such as job loss and illness. Yet 21.4% of households earning less than $15,000 and 15.1% of households earning $15,000-$30,000 in California—i.e., the households most vulnerable to financial shocks—lack bank accounts. One reason: many Californians have been the victims of creditor bank levies which have seized all or most of the money in their account, causing them to fall short of monthly necessities and forcing them to abandon the banking system altogether.

Our clients who have experienced bank levies have suffered not only the levy down to zero, but the bank charges levy fees in excess of the levy, leaving our clients with a less than zero balance. As a result, additional bank fees for bounced checks or automatic pay fees also pile up. At the end of the day, most people end up with less than zero in their account and no means to pay their bills that month.

From any number of perspectives, whether it be access to healthcare, stable housing, or financial resources, agricultural workers may be the most vulnerable working population in California. With regards to the importance of this bill to banking agricultural workers, California Rural Legal Assistance Foundation writes:

The availability of seasonal agricultural employment in California fluctuates enormously. Many tens of thousands of seasonal farm workers, who regularly go without work for months at a time, must save whatever money they can from their earnings in order to survive the offseason.

It is critical that these workers be able to deposit their earnings in a bank. Unfortunately… after experiencing the harm of a single bank levy, many workers choose not to use conventional banking services any more. They instead rely on check-cashing services and money orders, and more dangerously, resort to hiding cash in their homes and on their persons. This fact is well-known in farm worker communities; as a result, farm worker families are often the victims of home invasions. Even if they escape physical harm in these situations, the loss of the cash they were depending on drives the victim families into deeper spirals of debt and poverty.

By automatically safeguarding a minimum dollar amount per individual, SB 616 should lead more farm workers to use conventional banking services, reducing both the risk that they will be unable to make ends meet, and the danger that they will be-come crime victims. In our view, the bill will promote both financial stability and safety for farm worker families, our most vulnerable population.

The bill’s opponents do not rebut the claim that this bill would encourage unbanked individuals to use banking services.

Bank levies are not the only reason why low- and middle-income households are unbanked: overdraft fees and negative experiences with banking systems in other countries play their parts. But it does seem credible that once debtors lose funds to an unexpected bank levy, they would stop using the bank system rather than experience the hardships attendant on losing their money unexpectedly.

Issue #6: Will this bill help judgment creditors eventually be repaid? The Western Center on Law & Poverty argues that this bill, by helping keep debtors solvent, will help ensure that their creditors are eventually repaid. Western Center writes, “Debtors are also in far better position to repay their debts if they are housed, healthy, fed, employed… and they have a bank account.”

This point is echoed in a leading California collections treatise: “Perhaps the most serious drawback to [levy] is that it is a highly intrusive procedure that may prompt the debtor to file for bankruptcy.” (The Rutter Group, California Practice Guide: Enforcing Judgments and Debts (2016) Section 6:310.)

The bill’s opponents do not rebut this point.

Issue #7: Do other states automatically restrain levies? According to information provided by the author and the sponsors, 16 other states protect funds from bank levy. Amounts protected range from $300 in Arizona and Pennsylvania to $10,000 in Mississippi and Tennessee. Three of these states—Massachusetts, Nevada, and most recently, New York—protect funds automatically, as this bill would. According to the author:

New York automatically exempts 90% of 240 times the applicable minimum wage (currently, $3240) unless the judgment creditor can prove that the exemption amount is unnecessary. The source of the money does not need to be wages to get this exemption. There is also an exemption for up to $2500 if any of the money in the bank account comes from a reasonably identifiable exempt payment within the prior 45 days

The Western Center on Law & Poverty adds:

Opponents of SB 616 have failed to show how these protections have harmed banks, industry or access to credit for consumers as they have stated would be the case if this policy were to become law in California. There is no evidence that from these sixteen states that this policy has caused the havoc that debt collectors and banks, the only opponents to this policy, have claimed would happen.

The bill’s opponents do not rebut this point.

Issue #8: Will this bill be too expensive to implement? The bills’ opponents argue that this bill will be unduly expensive for the state to implement, writing:

The state will bear the cost of implementing SB 616. The current language requires the Judicial Council to prepare all forms necessary for implementation. Such forms would have to include a way to identify whether a debtor “holds an interest in multiple [bank] accounts” because creditors do not know this information. Additionally, the superior courts would have to process an influx of ex parte applications to determine how the $2,000 exemption should be applied when debtors are found to hold multiple bank accounts. The cost of governmental oversight to ensure that the exemption is only used once per consumer, rather than repetitively by consumers spreading money into multiple accounts to avoid exceeding the $2,000 threshold, must be considered.

Should this bill pass this Committee, the questions of its costs would be addressed by the Appropriations Committee. It should be noted that the Judicial Council will not be preparing forms in a vacuum, as both the creditor bar and legal aid organizations will likely participate in any notice-and-comment process. It is hoped that both groups’ expertise in representing creditors and debtors, respectively, will make the process more efficient than it would be otherwise.

REGISTERED SUPPORT / OPPOSITION:

Support

California Low-Income Consumer Coalition (co-sponsor)

Western Center on Law & Poverty (co-sponsor)

Asian Law Alliance

California Asset Building Coalition

City and County of San Francisco, Treasurer’s Office

Consumer Action

Disability Rights California

Dr. Prasad Krishnamurthy, J.D., Ph.D.

East Bay Community Law Center

Housing and Economic Rights Advocates

Legal Aid Association of California

Mission Asset Fund

Public Counsel

Public Law Center

Service Employees International Union (SEIU)

United Way California, Capital Region

Opposition

California Association of Collectors

California Financial Services Association

Encore Capital Group

Receivables Management Association International

USCB America

Analysis Prepared by: Jith Meganathan / JUD. / (916) 319-2334

 THIRD READING  

Bill No: SB 616

Author: Wieckowski (D), et al.

Amended: 5/24/19

Vote: 21

SENATE JUDICIARY COMMITTEE: 7-0, 4/9/19

AYES: Jackson, Allen, Caballero, Monning, Stern, Umberg, Wieckowski

NO VOTE RECORDED: Borgeas

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Enforcement of money judgments: exemptions

SOURCE: California Low Income Consumer Coalition

Western Center on Law and Poverty

DIGEST:

This bill extends and clarifies a deposit account holder’s timeline for filing a claim of exemption when a judgment creditor seeks to extract money from the account through a levy. This bill also establishes an automatic exemption from bank account levies, with specified exceptions, of no more than two thousand dollars ($2,000) per debtor.

Senate Floor Amendments of 5/24/19 establish a procedure for financial institutions to follow when a judgment debtor has multiple accounts. When a debtor has multiple accounts at the same financial institution, the institution will have discretion to select the account to which it will apply the exemption, unless either the judgment debtor or the judgment creditor seeks a court order directing the financial institution to apply the exemption to a particular account. If the judgment debtor has accounts at multiple financial institutions, then the judgment creditor must seek a court order specifying to which account the exemption will apply. A judgment debtor has the option of seeking such an order as well. The amendment also states that its provisions do not create a cause of action against a judgment creditor who executes a levy, nor against a financial institution that has complied with a levy pursuant to a court’s determination.

ANALYSIS:

Existing law:

1. Authorizes a judgment creditor to levy upon the property of a judgment debtor to satisfy a judgment. (Code Civ. Proc. § 695.010.)
2. Permits a judgment creditor who wants to use a bank levy as a means to satisfy a judgment to fill out a writ of execution, file it with the court, and then bring the writ to the sheriff for execution. The bank freezes the debtor’s account and as much as all of the money in the account can be seized by the sheriff and passed on to the creditor to pay the debt. (Code Civ. Proc. § 700.140.)
3. Allows an account holder to claim that certain property is exempt from levy by filing a claim of exemption with the levying officer within 10 days after the date the notice of levy is served on the account holder. (Code Civ. Proc. § 703.520.)
4. Provides an additional five days to file the claim of exemption, if notice of the levy is served on the account holder by mail. (Code Civ. Proc. § 684.120(b).)
5. Provides that, if a claim of exemption is filed, the judgment creditor shall be notified and has 10 days from that time to file an objection. (Code Civ. Proc. §§ 703.540 and 703.550.)
6. Provides for a hearing within 30 days in the event that a judgment creditor objects to an account holder’s claim of exemption. (Code Civ. Proc. § 703.570.)

This bill:

1. Gives an account holder subject to levy the following deadlines to file a claim of exemption:
   1. 15 days from personal service of the notice of levy; or
   2. 20 days from the date the notice of levy was deposited in the mail, if service of the notice is accomplished by mail.
2. Declares that a claim of exemption is filed on the date mailed if it is assigned a tracking number; and otherwise, on the date received by the levying officer.
3. Establishes an automatic exemption for all funds in an account under two thousand dollars ($2,000). An account holder would not receive this automatic exemption when the judgment is based on wages, spousal, or child support owed.
4. Limits the automatic exemption to one bank account per debtor. Where the debtor has multiple accounts at the same financial institution, the financial institution has discretion to select the account to which the exemption will apply, unless the court orders application to a specific account after hearing requested by either the judgment creditor or debtor. Where the debtor has accounts at more than one financial institution, the judgment creditor must seek a court order specifying to which account the exemption will apply. The judgment debtor may do so as well. None of these provisions create a cause of action against the judgment creditor for execution of the levy or against the financial institution that carries out a levy in compliance with a court order.
5. Takes effect on September 1, 2020.

Comments

1. Overview. When someone fails to make payments on a debt, the person or company to whom the money is owed (known in legalese as “the creditor”) may seek a judgment from the courts for the amount unpaid plus fees and interest. This judgment, by itself, is just a piece of paper. With a judgment in hand, however, the creditor can proceed with a number of different tools for collecting the money owed: placing a lien on real property, seizing personal property for sale, or garnishing wages, for example. Another tool is to levy on a bank account.

When a court approves a levy on someone’s bank account, it instructs the bank to freeze the money in that account and notifies the account holder that the creditor is about to remove money from the account to satisfy some or all of a debt owed. In theory at least, the bank account holder then has time to respond to the court, asking for some or all of the money to be unfrozen and left in the account based on certain legal justifications. A request like this is known as a “claim of exemption.” Under current law, the person who is about to have their money taken from their account has 10 days to file such a claim of exemption. Current law does not specify how the time of filing is calculated.

This bill makes two changes to this system. First, this bill extends and clarifies the timelines regarding filing a claim of exemption. Bank account holders under threat of levy would have 15 days to file a claim of exemption if they are notified of the impending levy in person, and 20 days if the notice is mailed to them. A claim of exemption would be deemed filed on the date it is mailed if it is assigned a tracking number; and otherwise, on the date the claim of exemption is received by the levying officer.

Second, this bill creates an automatic exemption of two thousand dollars ($2,000). In essence, this ensures a minimum balance that people can keep in their accounts, if they have it, in order to pay for necessities of life.

1. The significance of making the exemption automatic. There are, as both the proponents and opponents of this bill agree, a number of existing exemptions from bank levy that, if claimed successfully, do eventually provide the same protection against financial calamity that this bill’s minimum balance exemption aims to achieve.

The proponents of this bill do not dispute that these exemptions are theoretically available to protect debtors and that some debtors are able to claim them successfully. The real crux and point of contention is, therefore, the fact that this bill makes its standard minimum exemption of two thousand dollars ($2,000) apply automatically, without the need for the debtor to be notified of the levy and without the need for the debtor to file a claim of exemption. That minimum balance is simply protected against bank levy.

From the proponents’ point of view, the automatic nature of the exemption is essential for two reasons. First, as a practical matter, account holders frequently do not have the ability, through no fault of their own, to file a claim of exemption. Sometimes the account holder does not have notice of the levy; sometimes they do not have sufficient time to file claims of exemption; and sometimes the process is just too complicated to navigate. The scarce availability of legal aid services only exacerbates this problem. Second, even if the account holder does manage to file the claim of exemption successfully, the account holder’s account balance is frozen for the time it takes the courts to process the exemption, which can be weeks. By making a certain minimum balance automatically exempt from bank levy, SB 616 would eliminate these problems.

This bill’s proponents also assert that making the minimum balance exemption automatic might alleviate pressure on the courts as an additional benefit. As it stands, most California debtors would easily qualify for the existing exemptions, but they still have to go through the lengthy court process to do so. By making a minimum exemption available automatically, without the necessity for the court process, fewer debtors would need to file in court for exemptions, reducing the associated burden on the courts.

The opponents of this bill agree that the court will no longer be as involved in determining basic exemptions, but they argue that this eliminates some of the creditors’ due process rights. According to the California Association of Collectors:

Under existing law, a consumer needs to claim an exemption and demonstrate that the funds are exempt. When an exemption claim is made, the court determines the amount, if any, that may be levied. This bill makes the exemption automatic. No claim of exemption is needed. The court is no longer involved and the consumer has no burden of proof.

More generally, the opponents of this bill assert that permitting a minimum automatic exemption from bank levies will effectively eliminate the use of bank levies, since “[t]he vast majority of successful bank levies are for far less than $2,000.”

1. Establishing consistency with wage garnishment law. Wage garnishment is another avenue through which a judgment creditor can force a judgment debtor to pay the money owed. When a court orders someone’s wages garnished, it instructs the employer of the person who owes the money to withhold a portion of the debtor’s pay and to redirect those funds to payment of the debt. So that the debtor can still pay for at least the basic necessities of life, however, state and federal laws impose certain limits on the amount of pay that can be garnished.

Under current law, no more than 25 percent of a person’s wages can be garnished for the purpose of collecting on a debt. The percentage is even lower for low-wage workers. (Code Civ. Proc. § 706.050(a).) The idea is to protect enough of a worker’s wages to allow that person to pay for the basic necessities of life even as the worker pays off the debt.

As a practical matter, however, while a creditor who wants to use a wage garnishment to satisfy a debt cannot take more than 25 percent of a worker’s paycheck, there is nothing under current law that automatically protects that same worker from having the worker’s entire paycheck seized from the worker’s bank account with a bank levy. A worker can seek an exemption for account deposits corresponding to up to 75 percent of the worker’s wages, but to do so, the worker must know about and successfully navigate the legal process for asserting such an exemption. For this bill’s proponents, one of its virtues would be to close this loophole, since at least a minimal amount of the worker’s wages, once deposited into a bank account, would be safe from levy, thus ensuring the continued availability of those funds to pay for basic necessities.

1. Rationale for extending and clarifying the claim of exemption filing timeline.

According to the proponents of this bill, the current lack of clarity about when and how someone can file for a claim of exemption prevents the law from serving its purpose. They assert that while a notice of levy must be served on the debtor, in practice, the debtor often only gets the notice after the levy has occurred and the money has been released to the creditor. At that point, even if the debtor files a claim of exemption, the funds are out of the levying officer’s hands and cannot be returned to the debtor, no matter how legally legitimate or morally compelling the debtor’s need to retain the funds.

For its proponents, this bill’s brief extension of the time that debtors have to file their exemption would help to alleviate this problem. Moreover, by clarifying how the deadline interacts with mailing, the bill reduces confusion.

In contrast, the opposition to this bill contend that they deal regularly with claims of exemption and that, in their experience, debtors do not seem to have a problem getting their claims of exemption filed within the current 10-day period.

1. Discouraging lending? Arguably, any time it becomes more difficult to recover money loaned, creditors will become more reticent to lend in the first place. That could mean reduced access to credit or higher interest rates, perhaps particularly for low-income individuals and households. The opposition to this bill points to four government and academic studies that back up this conclusion.^[1]

Yet, unless the amount of the judgment is low enough that it can be satisfied with a single levy on an account, the concern that creditors will be unable to recover their money may be short-sighted. Arguably, it is just as likely that wiping out everything in a debtor’s bank account will push the debtor into the alternative financial services sector, into bankruptcy, or into the sort of abject poverty from which they cannot recover sufficiently to pay off their debts in full ever. Any of those scenarios leaves the creditor holding the bag. Thus, having and using the power to drain a debtor’s bank account completely may be penny wise but pound-foolish. As the Rutter Group California Practice Guide on Enforcing Judgments and Debts states: “Perhaps the most serious drawback to execution is that it is a highly intrusive procedure that may prompt the debtor to file for bankruptcy.”^[2]

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 5/28/19)

California Low Income Consumer Coalition (co-source)
Western Center on Law and Poverty (co-source)

Bet Tzedek Legal Services

Centro Legal de La Raza

Consumer Action

Disability Rights California

East Bay Community Law Center

Elder Law & Advocacy

Jose Cisneros, Treasurer, City and County of San Francisco

Law Foundation of Silicon Valley

Legal Aid Society of San Bernardino

Public Counsel

Public Law Center of Orange County

Riverside Legal Aid

Santa Clara University, Alexander Community Law Center

The Justice & Diversity Center

University of California, Irvine Consumer Law Clinic

Watsonville Law Center

OPPOSITION: (Verified 5/28/19)

California Association of Collectors

California Community Banking Network

California Financial Services Association

Encore Capital Group

Receivables Management Association International

USCB America

ARGUMENTS IN SUPPORT: According to the author:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065 / month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector – ending the “Debt Collector Takes All” status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

In support, Consumer Action writes:

[I]n California there is no limit to how much a collector can seize from someone’s bank account. Drawing down accounts to $0 can happen with little or no warning, imperiling those with incomes garnished because of court judgments won (often unfairly) by debt collectors. These consumers may be left without the ability to pay for rent, food and other necessities. This unconscionable practice can multiply a struggling household’s financial difficulties.

Although California does have a mechanism by which debtors can attempt to convince the court to exempt necessary funds, the process is too slow and cumbersome to adequately assist Californians struggling to pay for immediate needs.

ARGUMENTS IN OPPOSITION: In opposition to the bill, a coalition of debt collection and banking trade industry associations writes:

This bill creates a broad and automatic exemption that benefits any debtor regardless of income or assets and in the long run will make less credit available to those who need it. […]

[SB 616] ignores the current laundry list of literally hundreds of exemptions available for low-income consumers and creates a blanket exemption that would protect higher-income consumers who cannot claim an exemption under current law. […] This automatic exemption amount [$2,000] is so high that it would eclipse (and thus prohibit) almost all bank levies. […]

[T]he practical effect of the bill is that the state of California stands to lose tax revenue as creditors, including banks, retailers, and small businesses are unable to collect valid debts.

Prepared by: Timothy Griffiths / JUD. / (916) 651-4113

5/29/19 9:20:19

**** END ****

1. See Julia Fonseca, Katherine Strair, and Basit Zafar, Federal Reserve Bank of New York Staff Reports, no. 814 (May 2017); Debt Collection Agencies and the Supply of Consumer Credit, Philadelphia Federal Reserve Working Paper 15-23 (June 2015); Todd J. Zywicki, The Law and Economics of Consumer Debt Collection and its Regulation. Mercatus Center at George Mason University (September 2015); and Marshall Lux and Robert Green, Out of Reach: Regressive Trends in Credit Card Access, Harvard Kennedy School of Government (April 2016). ↑

2. The Rutter Group, California Practice Guide: Enforcing Judgments and Debts, § 6:310 (2016). ↑

 THIRD READING  

Bill No: SB 616

Author: Wieckowski (D), et al.

Amended: 3/28/19

Vote: 21

SENATE JUDICIARY COMMITTEE: 7-0, 4/9/19

AYES: Jackson, Allen, Caballero, Monning, Stern, Umberg, Wieckowski

NO VOTE RECORDED: Borgeas

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Enforcement of money judgments: exemptions

SOURCE: California Low Income Consumer Coalition

Western Center on Law and Poverty

DIGEST:

This bill extends and clarifies a deposit account holder’s timeline for filing a claim of exemption when a judgment creditor seeks to extract money from the account through a levy. This bill also establishes an automatic exemption from bank account levies, with specified exceptions, of no more than two thousand dollars ($2,000) per debtor.

ANALYSIS:

Existing law:

1. Authorizes a judgment creditor to levy upon the property of a judgment debtor to satisfy a judgment. (Code Civ. Proc. § 695.010.)
2. Permits a judgment creditor who wants to use a bank levy as a means to satisfy a judgment to fill out a writ of execution, file it with the court, and then bring the writ to the sheriff for execution. The bank freezes the debtor’s account and as much as all of the money in the account can be seized by the sheriff and passed on to the creditor to pay the debt. (Code Civ. Proc. § 700.140.)
3. Allows an account holder to claim that certain property is exempt from levy by filing a claim of exemption with the levying officer within 10 days after the date the notice of levy is served on the account holder. (Code Civ. Proc. § 703.520.)
4. Provides an additional five days to file the claim of exemption, if notice of the levy is served on the account holder by mail. (Code Civ. Proc. § 684.120(b).)
5. Provides that, if a claim of exemption is filed, the judgment creditor shall be notified and has 10 days from that time to file an objection. (Code Civ. Proc. §§ 703.540 and 703.550.)
6. Provides for a hearing within 30 days in the event that a judgment creditor objects to an account holder’s claim of exemption. (Code Civ. Proc. § 703.570.)

This bill:

1. Gives an account holder subject to levy the following deadlines to file a claim of exemption:
   1. 15 days from personal service of the notice of levy; or
   2. 20 days from the date the notice of levy was deposited in the mail, if service of the notice is accomplished by mail.
2. Declares that a claim of exemption is filed on the date mailed if it is assigned a tracking number; and otherwise, on the date received by the levying officer.
3. Establishes an automatic exemption for all funds in an account under two thousand dollars ($2,000). An account holder would not receive this automatic exemption when the judgment is based on wages, spousal, or child support owed.
4. Limits the automatic exemption to one bank account per debtor.
5. Takes effect on September 1, 2020.

Comments

1. Overview. When someone fails to make payments on a debt, the person or company to whom the money is owed (known in legalese as “the creditor”) may seek a judgment from the courts for the amount unpaid plus fees and interest. This judgment, by itself, is just a piece of paper. With a judgment in hand, however, the creditor can proceed with a number of different tools for collecting the money owed: placing a lien on real property, seizing personal property for sale, or garnishing wages, for example. Another tool is to levy on a bank account.

When a court approves a levy on someone’s bank account, it instructs the bank to freeze the money in that account and notifies the account holder that the creditor is about to remove money from the account to satisfy some or all of a debt owed. In theory at least, the bank account holder then has time to respond to the court, asking for some or all of the money to be unfrozen and left in the account based on certain legal justifications. A request like this is known as a “claim of exemption.” Under current law, the person who is about to have their money taken from their account has 10 days to file such a claim of exemption. Current law does not specify how the time of filing is calculated.

This bill makes two changes to this system. First, this bill extends and clarifies the timelines regarding filing a claim of exemption. Bank account holders under threat of levy would have 15 days to file a claim of exemption if they are notified of the impending levy in person, and 20 days if the notice is mailed to them. A claim of exemption would be deemed filed on the date it is mailed if it is assigned a tracking number; and otherwise, on the date the claim of exemption is received by the levying officer.

Second, this bill creates an automatic exemption of two thousand dollars ($2,000). In essence, this ensures a minimum balance that people can keep in their accounts, if they have it, in order to pay for necessities of life.

1. The significance of making the exemption automatic. There are, as both the proponents and opponents of this bill agree, a number of existing exemptions from bank levy that, if claimed successfully, do eventually provide the same protection against financial calamity that this bill’s minimum balance exemption aims to achieve.

The proponents of this bill do not dispute that these exemptions are theoretically available to protect debtors and that some debtors are able to claim them successfully. The real crux and point of contention is, therefore, the fact that this bill makes its standard minimum exemption of two thousand dollars ($2,000) apply automatically, without the need for the debtor to be notified of the levy and without the need for the debtor to file a claim of exemption. That minimum balance is simply protected against bank levy.

From the proponents’ point of view, the automatic nature of the exemption is essential for two reasons. First, as a practical matter, account holders frequently do not have the ability, through no fault of their own, to file a claim of exemption. Sometimes the account holder does not have notice of the levy; sometimes they do not have sufficient time to file claims of exemption; and sometimes the process is just too complicated to navigate. The scarce availability of legal aid services only exacerbates this problem. Second, even if the account holder does manage to file the claim of exemption successfully, the account holder’s account balance is frozen for the time it takes the courts to process the exemption, which can be weeks. By making a certain minimum balance automatically exempt from bank levy, SB 616 would eliminate these problems.

This bill’s proponents also assert that making the minimum balance exemption automatic might alleviate pressure on the courts as an additional benefit. As it stands, most California debtors would easily qualify for the existing exemptions, but they still have to go through the lengthy court process to do so. By making a minimum exemption available automatically, without the necessity for the court process, fewer debtors would need to file in court for exemptions, reducing the associated burden on the courts.

The opponents of this bill agree that the court will no longer be as involved in determining basic exemptions, but they argue that this eliminates some of the creditors’ due process rights. According to the California Association of Collectors:

Under existing law, a consumer needs to claim an exemption and demonstrate that the funds are exempt. When an exemption claim is made, the court determines the amount, if any, that may be levied. This bill makes the exemption automatic. No claim of exemption is needed. The court is no longer involved and the consumer has no burden of proof.

More generally, the opponents of this bill assert that permitting a minimum automatic exemption from bank levies will effectively eliminate the use of bank levies, since “[t]he vast majority of successful bank levies are for far less than $2,000.”

1. Establishing consistency with wage garnishment law. Wage garnishment is another avenue through which a judgment creditor can force a judgment debtor to pay the money owed. When a court orders someone’s wages garnished, it instructs the employer of the person who owes the money to withhold a portion of the debtor’s pay and to redirect those funds to payment of the debt. So that the debtor can still pay for at least the basic necessities of life, however, state and federal laws impose certain limits on the amount of pay that can be garnished.

Under current law, no more than 25 percent of a person’s wages can be garnished for the purpose of collecting on a debt. The percentage is even lower for low-wage workers. (Code Civ. Proc. § 706.050(a).) The idea is to protect enough of a worker’s wages to allow that person to pay for the basic necessities of life even as the worker pays off the debt.

As a practical matter, however, while a creditor who wants to use a wage garnishment to satisfy a debt cannot take more than 25 percent of a worker’s paycheck, there is nothing under current law that automatically protects that same worker from having the worker’s entire paycheck seized from the worker’s bank account with a bank levy. A worker can seek an exemption for account deposits corresponding to up to 75 percent of the worker’s wages, but to do so, the worker must know about and successfully navigate the legal process for asserting such an exemption. For this bill’s proponents, one of its virtues would be to close this loophole, since at least a minimal amount of the worker’s wages, once deposited into a bank account, would be safe from levy, thus ensuring the continued availability of those funds to pay for basic necessities.

1. Rationale for extending and clarifying the claim of exemption filing timeline.

According to the proponents of this bill, the current lack of clarity about when and how someone can file for a claim of exemption prevents the law from serving its purpose. They assert that while a notice of levy must be served on the debtor, in practice, the debtor often only gets the notice after the levy has occurred and the money has been released to the creditor. At that point, even if the debtor files a claim of exemption, the funds are out of the levying officer’s hands and cannot be returned to the debtor, no matter how legally legitimate or morally compelling the debtor’s need to retain the funds.

For its proponents, this bill’s brief extension of the time that debtors have to file their exemption would help to alleviate this problem. Moreover, by clarifying how the deadline interacts with mailing, the bill reduces confusion.

In contrast, the opposition to this bill contend that they deal regularly with claims of exemption and that, in their experience, debtors do not seem to have a problem getting their claims of exemption filed within the current 10-day period.

1. Discouraging lending? Arguably, any time it becomes more difficult to recover money loaned, creditors will become more reticent to lend in the first place. That could mean reduced access to credit or higher interest rates, perhaps particularly for low-income individuals and households. The opposition to this bill points to four government and academic studies that back up this conclusion.^[1]

Yet, unless the amount of the judgment is low enough that it can be satisfied with a single levy on an account, the concern that creditors will be unable to recover their money may be short-sighted. Arguably, it is just as likely that wiping out everything in a debtor’s bank account will push the debtor into the alternative financial services sector, into bankruptcy, or into the sort of abject poverty from which they cannot recover sufficiently to pay off their debts in full ever. Any of those scenarios leaves the creditor holding the bag. Thus, having and using the power to drain a debtor’s bank account completely may be penny wise but pound-foolish. As the Rutter Group California Practice Guide on Enforcing Judgments and Debts states: “Perhaps the most serious drawback to execution is that it is a highly intrusive procedure that may prompt the debtor to file for bankruptcy.”^[2]

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 5/6/19)

California Low Income Consumer Coalition (co-source)
Western Center on Law and Poverty (co-source)

Bet Tzedek Legal Services

Centro Legal de La Raza

Consumer Action

Disability Rights California

East Bay Community Law Center

Elder Law & Advocacy

Jose Cisneros, Treasurer, City and County of San Francisco

Law Foundation of Silicon Valley

Legal Aid Society of San Bernardino

Public Counsel

Public Law Center of Orange County

Riverside Legal Aid

Santa Clara University, Alexander Community Law Center

The Justice & Diversity Center

University of California, Irvine Consumer Law Clinic

Watsonville Law Center

OPPOSITION: (Verified 5/6/19)

California Association of Collectors

California Bankers Association

California Community Banking Network

California Financial Services Association

Encore Capital Group

Receivables Management Association International

USCB America

ARGUMENTS IN SUPPORT: According to the author:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065 / month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector – ending the “Debt Collector Takes All” status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

In support, Consumer Action writes:

[I]n California there is no limit to how much a collector can seize from someone’s bank account. Drawing down accounts to $0 can happen with little or no warning, imperiling those with incomes garnished because of court judgments won (often unfairly) by debt collectors. These consumers may be left without the ability to pay for rent, food and other necessities. This unconscionable practice can multiply a struggling household’s financial difficulties.

Although California does have a mechanism by which debtors can attempt to convince the court to exempt necessary funds, the process is too slow and cumbersome to adequately assist Californians struggling to pay for immediate needs.

ARGUMENTS IN OPPOSITION: In opposition to the bill, a coalition of debt collection and banking trade industry associations writes:

This bill creates a broad and automatic exemption that benefits any debtor regardless of income or assets and in the long run will make less credit available to those who need it. […]

[SB 616] ignores the current laundry list of literally hundreds of exemptions available for low-income consumers and creates a blanket exemption that would protect higher-income consumers who cannot claim an exemption under current law. […] This automatic exemption amount [$2,000] is so high that it would eclipse (and thus prohibit) almost all bank levies. […]

[T]he practical effect of the bill is that the state of California stands to lose tax revenue as creditors, including banks, retailers, and small businesses are unable to collect valid debts.

Prepared by: Timothy Griffiths / JUD. / (916) 651-4113

5/8/19 11:06:38

**** END ****

1. See Julia Fonseca, Katherine Strair, and Basit Zafar, Federal Reserve Bank of New York Staff Reports, no. 814 (May 2017); Debt Collection Agencies and the Supply of Consumer Credit, Philadelphia Federal Reserve Working Paper 15-23 (June 2015); Todd J. Zywicki, The Law and Economics of Consumer Debt Collection and its Regulation. Mercatus Center at George Mason University (September 2015); and Marshall Lux and Robert Green, Out of Reach: Regressive Trends in Credit Card Access, Harvard Kennedy School of Government (April 2016). ↑

2. The Rutter Group, California Practice Guide: Enforcing Judgments and Debts, § 6:310 (2016). ↑

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2019-2020 Regular Session

Bill No: SB 616 (Author:Wieckowski)

Version: March 28, 2019

Hearing Date: April 9, 2019

Fiscal: Yes

Urgency: No

Consultant: TSG

SUBJECT

Enforcement of money judgments: exemptions

DIGEST

This bill extends and clarifies a deposit account holder’s timeline for filing a claim of exemption when a judgment creditor seeks to extract money from the account through a levy. The bill also establishes an automatic exemption from bank account levies, with specified exceptions, of no more than two thousand dollars ($2,000) per debtor.

EXECUTIVE SUMMARY

Creditors have a number of legal tools at their disposal to extract the money they are owed from a debtor. However, existing state law places limitations on the reach of those tools in order to protect a debtor’s ability to continue paying for the basic necessities of life. This dynamic is true of bank levies, the subject of this bill. A creditor can try to seize money from a debtor’s bank accounts to recover a debt owed, but existing law allows the debtor to apply to the courts for an exemption. If granted, the exemption ensures that some minimal amount will be left in the debtor’s account to pay for basic necessities. In practice, however, the timing and complexity of the procedure for requesting an exemption means that debtor’s accounts are often frozen or completely wiped out before the debtor can do anything about it, leaving debtors – and anyone dependent on them – destitute. This bill would address the problem in two ways: first, by making minor adjustments to the timeline for requesting an exemption, and second, by creating an automatic exemption from levy for the first two thousand dollars ($2,000) in a debtor’s bank accounts.

The bill is sponsored by the California Low Income Consumer Coalition and Western Center on Law and Poverty. Support is from consumer advocates and anti-poverty groups. Opposition is from debt collectors and bankers who contend that the existing exemptions and the associated procedures are sufficient to protect debtors from becoming completely destitute.

PROPOSED CHANGES TO THE LAW

Existing state law:

1. Authorizes a judgment creditor to levy upon the property of a judgment debtor to satisfy a judgment. (Code Civ. Proc. § 695.010.)
2. Permits a judgment creditor who wants to use a bank levy as a means to satisfy a judgment to fill out a writ of execution, file it with the court, and then bring the writ to the sheriff for execution. The bank freezes the debtor’s account and as much as all of the money in the account can be seized by the sheriff and passed on to the creditor to pay the debt. (Code Civ. Proc. § 700.140.)
3. Allows an account holder to claim that certain property is exempt from levy by filing a claim of exemption with the levying officer within 10 days after the date the notice of levy is served on the account holder. (Code Civ. Proc. § 703.520.)
4. Provides an additional five days to file the claim of exemption, if notice of the levy is served on the account holder by mail. (Code Civ. Proc. § 684.120(b).)
5. Provides that, if a claim of exemption is filed, the judgment creditor shall be notified and has 10 days from that time to file an objection. (Code Civ. Proc. §§ 703.540 and 703.550.)
6. Provides for a hearing within 30 days in the event that a judgment creditor objects to an account holder’s claim of exemption. (Code Civ. Proc. § 703.570.)

This bill:

1. Gives an account holder subject to levy the following deadlines to file a claim of exemption:
2. 15 days from personal service of the notice of levy; or
3. 20 days from the date the notice of levy was deposited in the mail, if service of the notice is accomplished by mail.
4. Declares that a claim of exemption is filed on the date mailed if it is assigned a tracking number; and otherwise, on the date received by the levying officer.
5. Establishes an automatic exemption for all funds in an account under two thousand dollars ($2,000). An account holder would not receive this automatic exemption when the judgment is based on wages, spousal, or child support owed.
6. Limits the automatic exemption to one bank account per debtor.
7. Takes effect on September 1, 2020.

COMMENTS

1. Background on bank account levies

When someone fails to make payments on a debt, the person or company to whom the money is owed (known in legalese as “the creditor”) may seek a judgment from the courts for the amount unpaid plus fees and interest. This judgment, by itself, is just a piece of paper. With a judgment in hand, however, the creditor can proceed with a number of different tools for collecting the money owed: placing a lien on real property, seizing personal property for sale, or garnishing wages, for example. Another tool is to levy on a bank account.

When a court approves a levy on someone’s bank account, it^[1] instructs the bank to freeze the money in that account and notifies the account holder that the creditor is about to remove money from the account to satisfy some or all of a debt owed. In theory at least, the bank account holder then has time to respond to the court, asking for some or all of the money to be unfrozen and left in the account based on certain legal justifications. A request like this is known as a “claim of exemption.” Under current law, the person who is about to have their money taken from their account has 10 days to file such a claim of exemption. Current law does not specify how the time of filing is calculated.

This bill would make two changes to this system. First, this bill would extend and clarify the timelines regarding filing a claim of exemption. Bank account holders under threat of levy would have 15 days to file a claim of exemption if they are notified of the impending levy in person, and 20 days if the notice is mailed to them. A claim of exemption would be deemed filed on the date it is mailed if it is assigned a tracking number; and otherwise, on the date the claim of exemption is received by the levying officer.

Second, this bill would create an automatic exemption of two thousand dollars ($2,000). In essence, this ensures a minimum balance that people can keep in their accounts, if they have it, in order to pay for necessities of life.

2. Examples of the problem the bill is intended to address

SB 298 (Wieckowski, 2017) was quite similar to this bill. During consideration of SB 298, two California legal aid agencies provided client stories that they believe illustrate the need for legislation in this area:

Public Counsel is currently working with an unemployed client subject to a levy that cleared out the entire balance of $9,100 from his bank account. The money was taken three days after the client suffered an injury so severe that he was unable to work or look for work. The money levied was all he had to pay for the basic necessities of life. The client did not understand the exemption process but luckily contacted Public Counsel on the last possible day to file a claim. After a hearing some weeks later, the court ordered the bulk of the money be restored to his account; the client is still awaiting the return of these funds. In the period between the levy and the date of this letter, now almost 10 weeks, the client has fallen into an increasingly dire financial situation: he is three months behind on his rent, has a negative balance on his bank account compounded by associated charges, and has had to borrow what little money he can from friends just so he can eat. SB 298 would prevent this type of financially crippling situation.

---------

The [Public Law Center] client is a survivor of domestic violence. She is a single mom of three children, ages 10, 8 and 2. She has a restraining order against her ex-husband and has no contact with him. The original lawsuit was served on her previous address, which is where her ex-husband still lives. The first time she heard of the lawsuit was when her bank account was levied.

The creditor took all of the money in her bank account, $1,175. That money came from her wages as a Lyft driver and her tax refund. The money in her bank account was the only money she had. She was planning to use it to buy food, diapers and gas, and to pay for childcare. Her youngest child ran out of diapers while her account was frozen, and she had to buy the cheapest brand she could find, which gave her child a rash. The client did file a claim of exemption with the sheriff, but she had to go to Los Angeles to do so. She only had $10 to her name, and parking cost more than that. Luckily the parking attendant took pity on her and allowed her to park for $10. Over the next few days, she was lucky again, by receiving a big tip from a passenger, a gift card from a member of her church and a loan through her social worker. A hearing is now set to determine whether or not the client is credible, as the creditor has argued she is not.

If the client’s claim of exemption is denied, she will be unable to pay her rent. She and her children will have to move to a shelter. Seizing this client’s $1,175 will cause four people, including three children, to become homeless.

3. The significance of making the exemption automatic

There are, as both the proponents and opponents of this bill agree, a number of existing exemptions from bank levy that, if claimed successfully, do eventually provide the same protection against financial calamity that this bill’s minimum balance exemption aims to achieve. The California Association of Collectors points to nine of them:

• 75 percent of a consumer’s paid earnings;
• necessaries of life;
• Social Security benefits;
• public retirement benefits;
• private retirement benefits;
• unemployment compensation and disability benefits;
• workers’ compensation benefits;
• public assistance and welfare; and
• personal injury damages.

The proponents of this bill do not dispute that these exemptions are theoretically available to protect debtors and that some debtors are able to claim them successfully. The real crux and point of contention is, therefore, the fact that this bill makes its standard minimum exemption of two thousand dollars ($2,000) apply automatically, without the need for the debtor to be notified of the levy and without the need for the debtor to file a claim of exemption. That minimum balance is simply protected against bank levy.

From the proponents’ point of view, the automatic nature of the exemption is essential for two reasons. First, as a practical matter, account holders frequently do not have the ability, through no fault of their own, to file a claim of exemption. Sometimes the account holder does not have notice of the levy; sometimes they do not have sufficient time to file claims of exemption; and sometimes the process is just too complicated to navigate. The scarce availability of legal aid services only exacerbates this problem. Second, even if the account holder does manage to file the claim of exemption successfully, the account holder’s account balance is frozen for the time it takes the courts to process the exemption, which can be weeks. In their letter supporting SB 298, the Western Center on Law and Poverty and the California Low-Income Consumer Coalition explained this problem in detail:

Under current law, a judgment creditor seeking to levy a bank account must provide a writ of execution to a levying officer. Code Civ. Proc. § 699.530. The levying officer is required to provide notice of the levy, along with the document to file a claim of exemption, to the judgment debtor, either in person or by mail [a]t the time of levy… or promptly thereafter.” Code Civ. Proc. § 700.010(a). (Mail is always used. Advocates for low income consumers who support this bill are unaware of any instance in which a judgment debtor has been personally served with a notice of levy.) In the meantime, levied funds are seized from the judgment debtor’s bank account and held by the levying officer. Delays in mailed notice mean that debtors only receive notice of a levy days after it has occurred, sometimes after the deadline to file a claim of exemption. In cases where the judgment creditor does not have a current address for the judgment debtor, she may never receive notice of the levy or the forms to file a claim of exemption. In either case, whether notice is delayed or received, the judgment debtor generally finds out about the levy only when she tries to withdraw funds or bounces a check […]. For low-income debtors, who likely need the levied funds immediately to pay rent, grocery, or pharmacy bills, or bus fares, the harm of delayed or non-existent notice is immediate.

Even for a judgment debtor lucky enough to receive timely notice of a bank levy, the current process for obtaining a claim of exemption is fraught with problems:

1. A lack of clarity in statutory timelines often results in consumers receiving notices of levy too late to timely file claims[…].

2. Debtors able to file timely claims of exemption still regularly find themselves without access to frozen funds for months while their claims and any resulting court orders are processed[…].

3. The exemption process can be daunting for the average person, particularly those with disabilities or limited English proficiency […] [a]nd most judgment debtors have little time (because of statutory notice deadlines and no legal counsel to help them fill out the forms).

By making a certain minimum balance automatically exempt from bank levy, SB 616 would eliminate these problems.

The bill’s proponents also assert that making the minimum balance exemption automatic might alleviate pressure on the courts as an additional benefit. As it stands, most California debtors would easily qualify for the existing exemptions, but they still have to go through the lengthy court process to do so. By making a minimum exemption available automatically, without the necessity for the court process, fewer debtors would need to file in court for exemptions, reducing the associated burden on the courts. As East Bay Community Law Center puts in in their letter of support:

The bill will also conserve courts’ resources by reducing the number of necessary claim of exemption hearings. Because, should the bill pass, a certain amount of funds per consumer would be automatically protected, the bill would eliminate the need for many low-income people to file a claim of exemption for their protected wages or other income. Therefore, S.B. 616 reduces inconvenience to and expenditures by the courts and by consumers without substantially decreasing the amount available to creditors. By giving consumers more time to file any necessary claims, furthermore, S.B. 616 improves the courts’ efficiency by avoiding the need for remedial action, which arises when assets are seized erroneously.

The opponents of the bill agree that the court will no longer be as involved in determining basic exemptions, but they argue that this eliminates some of the creditors’ due process rights.^[2] According to the California Association of Collectors:

Under existing law, a consumer needs to claim an exemption and demonstrate that the funds are exempt. When an exemption claim is made, the court determines the amount, if any, that may be levied. This bill makes the exemption automatic. No claim of exemption is needed. The court is no longer involved and the consumer has no burden of proof.

More generally, the opponents of the bill assert that permitting a minimum automatic exemption from bank levies will effectively eliminate the use of bank levies, since “[t]he vast majority of successful bank levies are for far less than $2,000.”

4. Comparison to bank levy law in other states

According to a review conducted by the proponents of the bill in 2017, unlike California, sixteen other states currently provide exemptions from levy for household funds in bank accounts. On the high end, Mississippi and Tennessee protect $10,000. On the low end, Arizona and Pennsylvania protect just $300. In Massachusetts and Nevada, the exemption applies automatically, as it would under this bill. In the remaining 14 states, the account holder must affirmatively apply for the exemption.

5. Establishing consistency with wage garnishment law

Wage garnishment is another avenue through which a judgment creditor can force a judgment debtor to pay the money owed. When a court orders someone’s wages garnished, it instructs the employer of the person who owes the money to withhold a portion of the debtor’s pay and to redirect those funds to payment of the debt. So that the debtor can still pay for at least the basic necessities of life, however, state and federal laws impose certain limits on the amount of pay that can be garnished.

Under current law, no more than 25 percent of a person’s wages can be garnished for the purpose of collecting on a debt. The percentage is even lower for low-wage workers. (Code Civ. Proc. § 706.050(a).) The idea is to protect enough of a worker’s wages to allow that person to pay for the basic necessities of life even as the worker pays off the debt.

As a practical matter, however, while a creditor who wants to use a wage garnishment to satisfy a debt cannot take more than 25 percent of a worker’s paycheck, there is nothing under current law that automatically protects that same worker from having the worker’s entire paycheck seized from the worker’s bank account with a bank levy. A worker can seek an exemption for account deposits corresponding to up to 75 percent of the worker’s wages, but to do so, the worker must know about and successfully navigate the legal process for asserting such an exemption. For this bill’s proponents, one of its virtues would be to close this loophole, since at least a minimal amount of the worker’s wages, once deposited into a bank account, would be safe from levy, thus ensuring the continued availability of those funds to pay for basic necessities.

6. Rationale for extending and clarifying the timeline for filing claims of exemption

According to the proponents of this bill, the current lack of clarity about when and how someone can file for a claim of exemption prevents the law from serving its purpose. They assert that while a notice of levy must be served on the debtor, in practice, the debtor often only gets the notice after the levy has occurred and the money has been released to the creditor. At that point, even if the debtor files a claim of exemption, the funds are out of the levying officer’s hands and cannot be returned to the debtor, no matter how legally legitimate or morally compelling the debtor’s need to retain the funds.

As the Western Center on Law & Poverty and the California Low-Income Consumer Coalition explained in regard to SB 298:

Under current law, “The claim [must] be made within 10 days after the date the notice of levy on the property claimed to be exempt was served on the judgment debtor.” Code Civ. Proc. § 703.520(a). The claim is deemed filed when actually received by the levying officer. Code Civ. Proc. § 681.040. If the levying officer does not receive the claim by the 10-day mark, the officer releases the levied funds to the judgment creditor and the funds can no longer be retrieved through the claim of exemption process. Service of notice on the judgment debtor by mail takes time. Filling out an accurate claim of exemption takes time. Mailing the claim of exemption back to the levying officer takes time. (Personal service of a claim of exemption on the levying officer, while theoretically possible, is too expensive for most low-income debtors located in a different county from where the levy took place or who live in geographically-large counties.)

For its proponents, this bill’s brief extension of the time that debtors have to file their exemption would help to alleviate this problem. Moreover, by clarifying how the deadline interacts with mailing, the bill would reduce confusion.

In contrast, the opposition to this bill contend that they deal regularly with claims of exemption and that, in their experience, debtors do not seem to have a problem getting their claims of exemption filed within the current 10-day period.

7. Discouraging lending?

Arguably, any time it becomes more difficult to recover money loaned, creditors will become more reticent to lend in the first place. That could mean reduced access to credit or higher interest rates, perhaps particularly for low-income individuals and households. The opposition to this bill points to four government and academic studies that back up this conclusion.^[3]

Yet, unless the amount of the judgment is low enough that it can be satisfied with a single levy on an account, the concern that creditors will be unable to recover their money may be short-sighted. Arguably, it is just as likely that wiping out everything in a debtor’s bank account will push the debtor into the alternative financial services sector, into bankruptcy, or into the sort of abject poverty from which they cannot recover sufficiently to pay off their debts in full ever. Any of those scenarios leaves the creditor holding the bag. Thus, having and using the power to drain a debtor’s bank account completely may be penny wise but pound-foolish. As the Rutter Group California Practice Guide on Enforcing Judgments and Debts states: “Perhaps the most serious drawback to execution is that it is a highly intrusive procedure that may prompt the debtor to file for bankruptcy.”^[4]

8. Data on the size and demographics of the “unbanked” or “underbanked” population

The proponents of this bill assert that one of the virtues of enacting it would be to reduce the number of households that are “unbanked” or “underbanked.”

An “underbanked household,” as defined by a 2015 Federal Deposit Insurance Corporation (FDIC) study of the issue, is a household that has an account at an insured institution but also obtains financial services and products outside of the banking system. In an “unbanked” household, no one has a checking or savings account.^[5]

The FDIC survey found that approximately nine million U.S. households are unbanked, representing 15.6 million adults and 7.6 million children, while another 51.1 million adults and 16.3 million children are underbanked. The impact is disproportionate, as well: unbanked and underbanked rates were higher among lower-income households, less-educated households, younger households, Black and Latino households, and households of working-age people with disabilities.

The proponents of this bill assert that, under existing law, people with judgments outstanding against them are afraid to keep money – even minimal amounts of money – in traditional bank accounts, for fear it will all disappear in a levy. People in this position are driven to alternative financial institutions that many consumer advocates describe as predatory at worst and insufficient at best.

If this theory is correct, then this bill would allow at least some of California’s unbanked and underbanked households to migrate back to traditional banks. Those with outstanding judgments would be able to rely on keeping at least a minimal amount in their accounts on which to survive.

9. Delayed implementation

Implementation of this bill would require the Judicial Council to modify the forms associated with bank levies. Levying officers and banks would also need to make some adjustments in their procedures. These modifications would take time to implement. To facilitate a smooth transition, the author has included a delayed implementation timeline. Whereas a bill of this nature would ordinarily come into force on January 1 of the year after enactment, this bill would not take effect until September 1, 2020.

10. Arguments in support of the bill

According to the author:

The average Californian owes $15,100 in non-mortgage debt, including medical, student, auto, and credit card debt. The average Californian also needs to pay rent, which, on average, is $2,065 / month for a two-bedroom apartment. With SB 616, California will set a minimal amount that must be left in a bank account when it is levied by a debt collector – ending the “Debt Collector Takes All” status quo that leaves low-income people without money they were counting on to pay their rent and other basic living expenses.

In support, Consumer Action writes:

[I]n California there is no limit to how much a collector can seize from someone’s bank account. Drawing down accounts to $0 can happen with little or no warning, imperiling those with incomes garnished because of court judgments won (often unfairly) by debt collectors. These consumers may be left without the ability to pay for rent, food and other necessities. This unconscionable practice can multiply a struggling household’s financial difficulties.

Although California does have a mechanism by which debtors can attempt to convince the court to exempt necessary funds, the process is too slow and cumbersome to adequately assist Californians struggling to pay for immediate needs.

Additional supporting arguments are addressed in the Comments, above, in relation to the specific topic they address.

11. Arguments in opposition to the bill

In opposition to the bill, a coalition of debt collection and banking trade industry associations writes:

This bill creates a broad and automatic exemption that benefits any debtor regardless of income or assets and in the long run will make less credit available to those who need it. […]

[SB 616] ignores the current laundry list of literally hundreds of exemptions available for low-income consumers and creates a blanket exemption that would protect higher-income consumers who cannot claim an exemption under current law. […] This automatic exemption amount [$2,000] is so high that it would eclipse (and thus prohibit) almost all bank levies. […]

[T]he practical effect of the bill is that the state of California stands to lose tax revenue as creditors, including banks, retailers, and small businesses are unable to collect valid debts.

Additional opposition arguments are discussed in the Comments, above, in relation to the topic they address.

SUPPORT

California Low Income Consumer Coalition (sponsor)
Western Center on Law and Poverty (sponsor)

Bet Tzedek Legal Services

Centro Legal de La Raza

Consumer Action

East Bay Community Law Center

Elder Law & Advocacy

The Justice & Diversity Center

Law Foundation of Silicon Valley

Legal Aid Society of San Bernardino

Public Counsel

Public Law Center of Orange County

Riverside Legal Aid

Santa Clara University, Alexander Community Law Center

University of California, Irvine Consumer Law Clinic

Watsonville Law Center

OPPOSITION

California Association of Collectors

California Bankers Association

California Community Banking Network

California Financial Services Association

Encore Capital Group

Receivables Management Association International

USCB America

RELATED LEGISLATION

Pending Legislation:

SB 374 (Glazer, 2019) provides that a CalWORKs eligible individual participating in an educational activity full-time and making satisfactory progress shall receive a standard allowance of five hundred dollars ($500) and makes this allowance a “public benefit” for purposes of calculating automatic exemptions from bank levy. SB 374 is currently pending consideration before the Senate Human Services Committee.

SB 750 (Wieckowski, 2019) authorizes the Commissioner of Business Oversight to license and regulate collection agencies, including conducting investigations and examinations. SB 750 is currently pending consideration before the Senate Banking and Financial Institutions Committee.

Prior Legislation:

SB 16 (Wieckowski, 2017) would have limited to 15 percent the maximum wage garnishment that could be taken from a worker’s paycheck to collect on a judgment arising from a private student loan. SB 16 failed passage on the Assembly Floor.

SB 298 (Wieckowksi, 2017), in its final form, was substantially similar to this bill. SB 298 failed passage on the Assembly Floor.

SB 501 (Wieckowski, Ch. 800, Stats. of 2015) established for low-income workers a sliding scale formula that gradually increases the percentage of a judgment debtor’s paycheck that can be garnished, up to the 25 percent cap.

AB 1775 (Wieckowski, Ch. 474, Stats. of 2012) prohibited wage garnishment on anyone earning less than 40 times the minimum wage per week.

AB 1388 (Wieckowski, Ch. 694, Stats. of 2011) permitted judgment debtors to obtain exemptions from wage garnishments for basic support of themselves or their families even when the underlying debt arose from obtaining “necessaries of life,” including medical services. Previously, such exemptions had not been available.

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1. In practice, it is the levying officer, usually the corresponding county sheriff, who handles these procedures, rather than the court itself. ↑

2. Due process rights generally protect the party being deprived of property, not the party seeking to take the property away. ↑

3. See Julia Fonseca, Katherine Strair, and Basit Zafar, Federal Reserve Bank of New York Staff Reports, no. 814 (May 2017); Debt Collection Agencies and the Supply of Consumer Credit, Philadelphia Federal Reserve Working Paper 15-23 (June 2015); Todd J. Zywicki, The Law and Economics of Consumer Debt Collection and its Regulation. Mercatus Center at George Mason University (September 2015); and Marshall Lux and Robert Green, Out of Reach: Regressive Trends in Credit Card Access, Harvard Kennedy School of Government (April 2016). ↑

4. The Rutter Group, California Practice Guide: Enforcing Judgments and Debts, § 6:310 (2016). ↑

5. FDIC National Survey of Unbanked and Underbanked Households (2015) Federal Deposit Insurance Corporation, p. 1 https://www.fdic.gov/householdsurvey/2015/2015report.pdf (as of Apr. 3, 2019). ↑