Debt-collection fix aimed at new target: Local government
Consumer advocates are urging local governments and courts to improve their debt-collection systems to take into the account the ability of low-income households to pay fines or court costs related to traffic violations or other infractions.
In a report released late last month, advocates argued that government debt-collection practices are contributing to “downward spirals for low-income communities and communities of color.” The report, the culmination of research conducted in four states, concluded that civil and court fines and fees disproportionately hit nonwhite and low-income consumers who are more likely than others to accumulate unpaid debts, such as vehicle-related tickets and video tolls.
“Getting tickets is part of city living for most drivers, but our research shows that ticketing and fines and fees hit lower-income and minority communities harder than upper-income and nonminority communities,” said Brent Adams, senior vice president of policymaking and communication at the Woodstock Institute in Chicago. “This disparate impact traps too many lower-income Chicagoans and Chicagoans of color in a cycle of debt, making it even more difficult for them to overcome obstacles to achieving and maintaining economic security.”
The report was jointly authored by the Woodstock Institute, the California Reinvestment Coalition, the Maryland Consumer Rights Coalition, and Reinvestment Partners in Durham, N.C.
The study found that, in Chicago, drivers from minority and low- and moderate-income ZIP codes were 40% more likely than those from white and high-income ZIP codes to get traffic tickets. It also said that, in Maryland, racial demographics are a better predictor than income on where the government filed civic debt collection cases.
The authors outlined a number of steps state and local governments could take to help low-income consumers avoid bankruptcy — and perhaps even make them more bankable.
They suggested, for example, that courts in California and Chicago’s city government should develop ability-to-pay programs that evaluate an individual’s financial situation to determine the proper amount of fine or fee.
The report also recommends that the state of Maryland increase debt exemption for wage garnishment to a level that protects a family of four from poverty, and urges government officials in Illinois and North Carolina to stop punishing those who fail to pay tickets or court costs by revoking or suspending of driver licenses, which are usually essential for keeping their jobs.
Adam Rust, the director of research at Reinvestment Partners, said many that vulnerable consumers often do not have bank accounts and therefore are forced to pay fines and fees in person during business hours. That can be a challenge for those whose licenses have been revoked or work during those hours and are reluctant to take time off.
Still, the alleviation of civic and court debts the authors propose is not likely to move many of these vulnerable consumers into the banking mainstream unless banks themselves create products that cater to their needs, Rust said. These include accounts that don’t carry overdraft fees and don’t require depositors to maintain minimum balances.
“The only way to make low-income consumers who don't have bank accounts become a part of a local bank [is] twofold: create an account that's suitable for those individuals and then make it available for them,” Rust said. “Part of that is through marketing. [It’s] not enough to just have a product; you also have to let people know about it.”