A big change is coming to judgments for consumer debt in New York. On December 31, 2021, New York Governor Kathy Hochul signed the Fair Consumer Judgment Interest Act and it changes the interest rate on judgments for consumer debt to 2% (from the current rate of 9%). This is the first rate change since 1981 and is aimed to assist people who have been impacted by the pandemic and the rising amount owed on their debts due to the current interest rate of 9%. The change will impact both sides of the debt collection relationship and if you are running a business that serves consumers in New York, this could have a large effect on how you collect judgments if those customers aren't paying their bills.
Why Did They Change the Law?
The new law aims to help out consumers who have had judgment balances balloon during the pandemic. The "justification" from the bill explains further,
This legislation intends to remedy the hardship placed on a significant
number of New Yorkers by a statutory judgment interest rate that has
long been incommensurate with market interest rates, and which has been
intensified by the COVID-10 pandemic.
Beginning in the early 2000s, due in part to the proliferation of the
debt-buying industry, plaintiffs began to file debt collection lawsuits
en masse against New Yorkers in unprecedented numbers. Over the past 20
years, millions of consumer debt actions have inundated New York State
courts. These lawsuits are notoriously lacking basic information and are
sometimes filed against the wrong people. Compounding the issue, New
York has experienced widespread and well-documented fraud in service of
process, especially in debt collection cases. Thus, significant numbers
of judgments entered not only were obtained without defendants' know-
ledge, but also were otherwise legally faulty. The legislature finds
that the confluence of these systemic failures disproportionately harm
communities of color, increasing and entrenching racial inequity.
The nine per centum per annum statutory judgment interest rate for judg-
ments against consumers has for too long been incongruent with market
interest rates. The rate has not been amended since 1981 when the aver-
age rate for the one-year United States Treasury bill (i.e., One Year
Treasury Constant Maturity Yield) was over 14 percent. From 2000 to
2020, the average rate was under 2 percent. The nine percent rate
contributes to the growing unpaid judgment amounts entered during the
height of the mass filings of debt collection lawsuits and has resulted
in default judgments throughout the 2000s. It would be unjust and
contrary to public policy to allow interest at this inflated and harsh
rate on unpaid amounts for judgments entered in the past. Moreover, the
nine percent rate is significantly out of step with current interest
rates. The legislature finds that it is in the public interest for judg-
ments in consumer debt collection lawsuits to accrue interest at a flat
rate of two percent, which is consistent with the average interest rates
for the one-year United States Treasury bill over the last twenty years
and which represents a fairer rate for New Yorkers, for unpaid amounts
of judgments entered in the past, and for judgments going forward.
The long-standing need for this change in law has been exacerbated by
the COVID19 pandemic, which has imposed unprecedented financial pressure
on consumers and disproportionately impacted lower- and middle-income
New Yorkers. In March 2020, a record was set for the largest monthly
increase in unemployment in New York state. With little or no income,
many consumers are already unable to pay their bills, including rent,
medical bills, and car loans, or to continue paying consumer debt judg-
ments. Many of the debts stemming from the COVID-19 pandemic will even-
tually be bought by debt collectors who will use extraordinary means to
seek legal judgments. The long-lasting economic effects of these meas-
ures are deeply concerning and it is in the interest of the State to
protect vulnerable New Yorkers from bank levies and wage garnishments to
pay unjustly high interest amounts that originate in State law on judg-
ments for consumer debts. New York state has an opportunity to protect
New Yorkers from further financial hardship - with no financial outlay
by the state - by lowering the interest rate that defendants pay on
consumer judgments and accrued claims.
This legislation intends that the rate of two per centum per annum shall
apply prospectively to consumer debt judgments as of the bill's effec-
tive date; and shall apply retrospectively to consumer debt judgments
entered prior to this bill's effective date that are not yet fully paid
and satisfied as of the effective date. This is a responsive reform to
the aforementioned findings, including the mass filings resulting in
default judgments and the effects of the COVID-19 crisis and its
disproportionate impact on lower- and middle-income communities.
The law goes into effect on April 30, 2022, and one of the most important provisions applies this new interest rate to new judgments on consumer debts, but also to consumer debt judgments entered before that date that have not been fully paid off by April 30, 2022.
This retroactive application could be a huge boon to consumers who have been long-suffering from the 9% interest rate. And if you are currently paying off an old judgment, you may start hearing from the debt collectors who will try to get you to pay off the judgment before April 30.
If you are a business owner who is collecting a balance under a judgment, you should be prepared for the interest rate change at the end of April and should also consider if the contracts you use for your business need to be changed. Many businesses have provisions regarding collection of fees and interest due on those fees. This legislation may mean it's time to update your contract provisions.
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If it looks like this rate change is going to impact you and you aren't sure of the next best steps, let's set up a Legal Strategy Session to plan out the best way to approach the upcoming changes.