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self-study / Consumer Law

Enforcement of money judgments: How the new debtor exemptions impact you

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Jessica Williams

Jessica is a third-year student at UC Berkeley School of Law. During her second year, she worked at the East Bay Community Law Center's Consumer Justice Clinic.

In October 2019, Gov. Gavin Newsom signed Senate Bill 616 into law, expanding protections for judgment debtors against judgment creditors. SB 616, which goes into full effect on Sept. 1, 2020, has many purposes, chief among them the creation of an automatic bank account exemption for judgment debtors. Other additions include an increase in the amount of time a judgment debtor has to file a claim of exemption and codification of a hardship exemption based on individual judgment debtor's personal financial situation.

This article will discuss the new procedures and expanded protections, new rules that judgment creditors have to follow; and how judgment debtors can exempt their bank accounts from being levied by judgment creditors.

Creditor, debtor and financial institution attorneys alike can use the information in this article to protect their respective interests without running afoul of this new law. Judgment debtors are automatically granted certain protections but must take specific steps to access other new measures. Judgment creditors, to avoid levying protected accounts and monies, must familiarize themselves with both the procedure for levying an account and the new expanded exemptions. Financial institutions have a role to play, and must take steps correctly implement automatic exemptions to the appropriate accounts. Attorneys who work with judgment debtors, judgment creditors and banks must familiarize themselves with the new requirements under SB 616 to avoid liability and to protect clients' interests.

Background

Debt collection as a practice goes back centuries, with most historical systems focusing exclusively on making the creditor whole after a debt went unpaid. When the United States was founded, however, colony founders believed "it was the debtor, rather than the creditor who needed assistance," and wrote bankruptcy laws reflective of this belief. Andrew J. Duncan, "From Dismemberment to Discharge: The Origins of Modern American Bankruptcy Law," 100 Com. L.J. 191, 216 (1995).

Over the next few centuries in the United States, lenders preyed upon those in need, indirectly encouraging Westward expansion as debtors attempted to escape debtors prisons and to find greener pastures free from debt. National Consumer Law Center, Fair Debt Collection ch. 1.2 (9th ed. 2018), updated at www.nclc.org/library. Even as recently as the mid-1970s, many states still did not have meaningful protections in place for consumers, leading to President Jimmy Carter signing the Fair Debt Collection Practices Act in 1977.

States have also taken action to protect citizens in debt since the FDCPA became law in 1978. California's SB 616 is one such effort. The law establishes protections for judgment debtors at the same time that it provides clear guidelines to creditors and banks.

Judgment debtors, people who owe an unpaid monetary debt as the result of a court ordered judgment against them, are the primary beneficiaries of SB 616. It would be shortsighted, however, to suggest that judgment creditors, entities who are owed a monetary award as a result of a court judgment against another for a debt, have nothing to gain from the bill's passage. Clear standardized guidelines make it easier for judgment creditors to enforce judgments against debtors, especially since the onus is on banks to implement the automatic exemption. Judgment creditors may also stand to gain in the long run from debtors having access to more of their money, which could render them less likely to accrue additional debt. With additional funds available to them, they may also be able to make larger payments more quickly.

Automatic Bank Account Exemption

A bank levy is a legal process by which judgment creditors are able to seize funds in a judgment debtor's bank account. When a bank levy occurs, a judgment debtor's bank freezes the funds in the account and, through the legal process, the money is eventually transmitted to the judgment creditor. The levy is only effective on the balance in the bank account at the time the levy is served on the financial institution. Civ. Proc. Code Section 700.140(b).

SB 616 establishes a novel and groundbreaking protection for judgment debtors: an automatic exemption in their account. This exemption is intended to provide judgment debtors with some economic certainty that they will be able to continue to provide for themselves and their families.

SB 616 does not stop bank levies outright but does exempt a certain amount of funds in a judgment debtor's account. The exemption rate will be set annually based on the California Department of Social Services' calculated "minimum basic standard of adequate care for a family of four for Region 1." Civ. Proc. Code Section 704.220. For 2020, this exempted amount is $1,788. Id.; Welf. & Inst. Code Section 11453.

SB 616 serves as constructive notice to financial institutions that all judgment debtors are automatically entitled to an exemption for $1,788. Id. Judgment debtors need not make a claim or take any additional action for financial institutions to put this exemption into effect. The bank's application of the automatic exemption does not reduce the judgment debtor's access to other exemptions granted through state or federal law. Civ. Proc. Code Section 704.220(b). Generally, the financial institution should implement the larger set of exemptions that apply to a debtor's account. Civ. Proc. Code Section 704.220(b)

Hardship Exemption Protections

Beyond the automatic bank account exemption, the new law also allows a judgment debtor to keep exempt from levy additional money in their bank account "to the extent necessary for the support of the judgment debtor" and their spouse and dependents. Civ. Proc. Code Section 704.225. This is a novel exemption because it allows the judgment debtor to exempt more than just the minimum annually adjusted basic standard (presently $1,788), and it mandates the court to analyze the judgment debtor's specific financial situation to determine whether the judgment debtor is entitled to an additional exemption. Given that $1,788 is likely not enough for even one person alone to pay their monthly needs, this exemption provides debtors with an another avenue for exempting money in their bank accounts.

Filing for a Claim of Exemption: Timeframe Increased

Generally, when a creditor attempts to levy a debtor's bank account, the judgment debtor receives a Notice of Levy. The debtor may file a Claim of Exemption to preserve a particular amount or type of income in the account. Civ. Proc. Code Section 703.520. A claim of exemption may be applied to a bank levy if the money is from a source or for a purpose exempted by law. Sources exempted by law include Social Security, unemployment benefits, and disability insurance benefits. See generally Jud. Council of Cal., Form EJ-155, Exemptions from the Enforcement of Judgments.

SB 616 amends the current law, which allows a judgment debtor to file a claim of exemption with the levying officer within 10 days after the judgment debtor receives the notice of levy. Civ. Proc. Code Section 703.520(a). The levying officer's contact information is located on the notice of levy. See Jud. Counsel of Cal., Form EJ-150, Notice of Levy. Under existing law, if a judgment debtor files a claim of exemption, the judgment creditor may file a motion of opposition to determine their claim within 10 days after they receive notice of the claim for exemption. Civ. Proc. Code Section 703.550(a).

Come Sept. 1, 2020, a judgment debtor claiming an exemption will have at least 15 days to file a claim of exemption with the levying officer. Civ. Proc. Code Section 703.520(a). Specifically, the judgment debtor will have 15 days to file if they were served a notice of levy in person and 20 days if served by mail. Id. Under the new law, creditors will also have 15 days after service to give notice of an opposition to exemption claims. Civ. Proc. Code Section 703.550(a).

When a Judgment Debtor Has Multiple Banks and Multiple Accounts

In enacting SB 616, Legislators have accounted for normal banking practices, including when an individual has accounts in multiple banks or when they have multiple accounts in a single bank.

When a judgment debtor has multiple bank accounts at a single financial institution (e.g. bank, credit union), either the judgment debtor or judgment creditor may file an ex parte application in the superior court where the judgment was entered for a hearing to establish how the exemption should be applied and to which account. Id. at Section 704.220(e)(2). Absent a court order, the financial institution may determine how and to which account the automatic exemption should be applied. Id.

When a judgment debtor has multiple accounts at two or more financial institutions, the judgment creditor must file an ex parte application in the superior court where the judgment was entered for a hearing to establish how and to which of the debtor's accounts the exemption should be applied. Id. at Section 704.220(e)(3). The debtor may also file an ex parte application. Id. Absent a court order, each financial institution shall apply the automatic exemption protections to the judgment debtor's bank account(s) in accordance with the law. It should be noted that the exemption applies per judgment debtor, not per account, however, so an individual with multiple accounts may still only have $1,788 total automatically exempted. Id. at Section 704.220(e)(1).

In either instance, there is no cause of action against judgment creditors who execute levies or against financial institutions that comply with levies in compliance with the court's decision. Id. at Sections 704.220(e)(2),(3)SB 616's allowing a judgment debtor to file an ex parte application makes it possible for a judgment debtor to exert some amount of agency over their financial situation by providing an avenue to declare which accounts should remain under their total control.

Conclusion

In a time when cost of living increases at a rate that outpaces wages, SB 616 brings much needed relief to consumers in debt. These protections will protect the livelihoods of low-income Californians while preserving enforcement mechanisms for creditors.

Bank levies have been a preferred method of judgment creditors for years, allowing them to passively take over the lives of individuals with outstanding judgments. Although the new law does not make every exemption from a bank levy automatic, it does make it possible for Californians in debt to reclaim some control of their financial situation by automatically setting aside a minimum of $1,788 from collection. SB 616 establishes concrete timelines and procedures for people in debt to protect their assets and continue to provide for themselves and dependents. 

#696

Ben Armistead


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