Debtor's lament - accounts frozen by garnishment

When an ordinary creditor garnishes a debtor's bank account, the bank responds by freezing the debtor's access to the funds until the garnishment process is complete. I suppose the bank will continue to accept deposits into the account, but withdrawals and automatic bill payments stop. The debtor's outstanding checks begin to bounce as they are presented to the bank for payment. This happens even if all of the debtor's cash in a deposit account are exempt from execution by law and are immune from seizure. Twentieth Century garnishment procedures require the debtor to affirmatively act to claim and prove the exemption and persuade a judge to release the garnishment, restraint, freeze or whatever they call it in your local jurisdiction. The process can easily take 30 days or more. From a debtor's point of view, it's like adding injury to insult. It is an very iffy proposition that every debtor has the wits and resources to take the steps necessary to protect his or her legal rights.

In the last few years the U.S. Treasury Department has developed regulations to mitigate this debtor problem, at least with respect to federal benefit payments that are immune from seizure by ordinary creditors.  Veteran benefit payments and Social Security benefits are prime examples. These federal benefits, among others, are practically impervious to the claims of ordinary creditors. The U.S. Congress and the U.S. Supreme Court have said so, repeatedly. But, prior to the age of digital banking, who knew where money came from? 

With most federal benefit payments being made by direct deposit these days, the source of the deposits are digitally encoded and the financial institution 'knows' if funds in an account are exempt. The recently finalized Treasury regulations ( 31 C. F. R. 212) require banks and other financial institutions to make two months of exempt payments available to the debtor during the garnishment process while freezing any surplus funds.

This does not change the scope of the debtor's exemption. If the debtor has more than two months worth of exempt benefit payment on deposit, the debtor must still follow ordinary garnishment procedures to claim the full exemption. In the meantime, the debtor is not frozen out of exempt cash needed for day-to-day living expenses.

Will this new system work to perfection and without error? Probably not.

But, a word of caution to debtors. It is best to leave exempt federal benefit direct deposits in the same account into which they were originally deposited. If any direct deposited benefit funds are transferred by the debtor to a different account, as for example from a checking account to a savings account, the bank's ability to easily identify the exempt funds may be forfeited. Again, this does not change the availability of the exemption, but it may result in more of the debtor's funds being frozen as application is made to the court and the debtor proves the exemption.

Grit In My Grits: A Tuesday Complaint About Kentucky Practice

In Kentucky civil procedure there is a general distinction between a default judgment on a claim for liquidated damages and on a claim for indefinite damages.

Kentucky Rules of Civil Procedure, CR 8.04 - Effect of Failure to Deny - provides, in part:

" . . . . Averments in a pleading to which a responsive pleading is required are admitted when not denied  . . . except that the following allegations must be proved:
(a) . . .
(b) . . .
(c) Those concerning value or amount of damages which are not for a sum certain or for a sum which may by computation be made certain." [emphasis added]

K. R. C. P., CR 8.01 - Claims For Relief

"(1) A pleading which sets forth a claim for relief . . . shall contain . . . a demand for judgment for the relief to which he deems himself entitled. . .
(2) In any action for unliquidated damages the prayer for damages in any pleading shall not recite any sum as alleged damages . . . . " [emphasis added]

With a complaint on a credit card debt, for example, simple logic would indicate the amount of damages claimed by the plaintiff is for, "a sum certain or for a sum which may by computation be made certain." which must be specified in the complaint. Yes?

When a defendant is in default for failure to appear and defend in such an action, the allegations in the plaintiff's complaint are not denied and the dollar amount claimed in the complaint is deemed admitted by CR 8.04.

Thus, in an action on a consumer loan transaction, it seems obvious no hearing to determine the amount of damages is required. It's just a simple "computation". But, was life and consumer lending ever really all that simple?

CR 55.01 - Judgment

". . . . If, in order to enable the court to enter [default] judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court, without a jury, shall conduct such hearings or order such references as it deems necessary and proper . . . . " [emphasis added]

With the assignment of consumer loans to junk debt collectors, possibly unwarranted claims for exorbitant prejudgment interest rates and a wide variety of added-on fees and charges, simple computations may turn out to be mind boggling complex.   Clearly a trial judge would be authorized by CR 55.01 to conduct a hearing to establish damages in a consumer loan debt collection action in default for defendant's failure to appear and defend, should he or she feel the urge. However, it is likely unreasonable to require it.

The simplest solution to this problem is probably the best solution. For a consumer debtor being sued who takes the position, "Yep, I owe them something, but not as much as they are asking," the thing to do is to appear and defend the action, and to not allow a default judgment to be entered.

OK. Now I feel better. Thanks for listening.

Kentucky Consumer Protection Act

The full statutory text of the Kentucky Consumer Protection Act (KCPA) can be found at Kentucky Revised Statutes (KRS) Chapter 367, sections 367.110 to 367.360. 

The statement of Legislative intent is contained in KRS section 367.120:

"The General Assembly finds that the public health, welfare and interest require a strong and effective consumer protection program to protect the public interest and the well-being of both the consumer public and the ethical sellers of goods and services;  toward this end, a Consumers' Advisory Council and a Division of Consumer Protection of the Department of Law are hereby created for the purpose of aiding in the development of preventive and remedial consumer protection programs and enforcing consumer protection statutes."

Kentucky's Consumer Protection Act provides that “unfair, false, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.”  KRS 367.170(1).

KRS 367.220(1) authorizes private civil actions to "recover actual damages" suffered "as a result of the use ... of a method, act or practice declared unlawful by KRS 367.170."

A significant piece of this statute is the provision in KRS 367.220(3) for attorney's fees.

"In any action brought by a person under this section, the court may award, to the prevailing party, in addition to the relief provided in this section, reasonable attorney's fees and costs."

As attorney A. Nicholas Naiser points out:

"Accordingly, while plaintiffs’ attorneys should always consider the KCPA before filing a complaint because of the potential for attorneys’ fees, it is important to research judicial interpretations of the KCPA to ensure that such a claim is viable." - Kentucky Tort Law Blog, What is the Kentucky Consumer Protection Act?

It must be pointed out that this attorney fee provision is a two-edged sword. Since there is no guarantee of ultimately being the "prevailing party," the person filing the lawsuit could end up being the one who pays the other side's legal fees.