A colleague recently brought to my attention an Indiana Code provision that might be a pitfall for creditors who are sent payments on behalf of debtors by credit counseling services and the like. IC 28-1-29-8 deals with the rights and duties of “Budget Service Companies.” A “budget service company” is a person doing business as a budget counseling, credit counseling, debt management, or debt pooling service. The code provision details what must be in a budget service company’s contract with the debtor, how much of a fee it can charge, and under what circumstances.
Subdivision (2) of the section states that:
A [budget service company] . . . may take no fee unless a debt program, or finance program, or both agreed upon by the licensee and the contract debtor has been arranged. All creditors must be notified of the debtor’s and licensee’s relationship. Acceptance of a program payment constitutes agreement by the creditor.
My experience with these debt management services has been where I represent creditors who hold judgments against the debtor. A letter from the debt management service will show up with a check and a contract for me to sign on behalf of my client agreeing to take payments at this level and perhaps requesting that my client agree to allow the debt management service to keep a portion of future payments as a “fair share fee.” (On that last part, not only “no” but “Hell No.”)
My practice has been to not sign any such agreement, to apply the check to the account, and to send a letter responding that my client agreed to accept payments at the proposed rate for a period of time but reserved the right to conduct proceedings supplemental to the judgment and drag the debtor back to court to determine whether higher payments were possible.
I have been informed that at least one small claims judge has interpreted that code section as prohibiting creditors from seeking higher payments on the debt if they have accepted payment from the debt management service. So, if a guy owes me $5,000 but I get $25 on the guy’s behalf from a debt management service proposing to pay me $25/month until hell freezes over, accompanied by a sob story and a listing of $1 million in other debts, my natural inclination would be to take the money for awhile and give the guy some time making small payments until his situation got better. With jurisprudence suggesting I would thereby be stuck with $25/month payments even if the guy hit the lottery, I’m going to simply send the payment back and keep dragging the guy to court.
As a policy matter, that is not a good result. You do not want to tie the hands of creditors who would otherwise be inclined to be reasonable. And, as a legal matter, I am not sure that is a correct reading of the statute. The context of the statute is determining under what conditions it is acceptable for the debt manager to take a fee from the debtor. I can see deeming the creditor’s action in taking the check as “acceptance” for the purposes of letting the manager take his fee. But that seems like an awfully odd and casual way for the legislature to go about locking a creditor into small payments for the foreseeable future.
And it would seem to me, as a non-lawyer type, that this would bad for debtors as well.
Think of it this way: If creditors started refusing these payments because of the way this statute is interpreted, a debtor who wants to pay back what he owes can’t because the creditor, who rightly doesn’t want to agree to accepting the plan for eternity, keeps dragging him back into court to pay in full that which he cannot and just piles on the legal fees and interest.
I think that’s exactly right. As a general rule, I am willing to work with a debtor. But I’m not going to compromise the rights of my client to do it.
For example, in most courts, I am permitted to accept a payment arrangement but withhold a garnishment so long as the debtors are making payments. No further court hearings are necessary. If they miss a payment, I just submit an affidavit to that effect along with a proposed garnishment order and the court enters the garnishment. However, there is one court in which I practice where a new judge required a new hearing be held before the court would enter a garnishment. That is certainly the judge’s right, but if that is the practice in that court, I’m simply going to ask for the garnishment from the beginning.