Debtor’s prison 2.0: Jail for delinquent homeowners?by Gina Pogol
Readers of Victorian novels know what debtor’s prison is–a scabrous place where distressed maidens, handsome heroes and pitiable children who owe as little as 60 cents are locked up until their debts are paid. The U.S. abolished federal imprisonment for unpaid debts in 1833, and today, most of us are pretty sure that we can’t be sent to the pokey for blowing off a creditor.
We’d be wrong.
Creditors work the system to jail debtors
While we can’t be sent to a federal prison for ignoring bills, many states allow citizens to be popped into state or local lockups for unpaid debt. Savvy collection agencies use this process to do an end run around the Fair Debt Collection Practices Act. Here’s how it works:
- The collection agency sues the debtor, often in small claims court, with perhaps only a mailed summons (legal in some states, Illinois for example) or, worse, an imaginary notice referred to as “sewer service”
- The debtor tosses the paper threat unread or misunderstands its implications. The debtor automatically loses the case because he doesn’t show up in court. He’s ordered to pay the collection agency, and the judge issues a arrest warrant for failing to appear and/or make the court-ordered payments
- Mr. Debtor is dragged out of a PTA meeting on the outstanding warrant and goes to jail
- He makes bail, which is (amazingly!) set at the exact amount owed
- The bail is turned over to the creditor. Taxpayers foot the bill for arresting and jailing the “evildoer”
- If unable to come up with the money owed, Mr. Debtor rots in jail. According to a Minnesota Star Tribune article, an Illinois man was sentenced “to indefinite incarceration” until he paid his $300 lumber yard debt
What about mortgage lenders?
OK, so if you can be jailed over an old emergency room visit or credit card debt, can you be imprisoned for missing mortgage payments?
Today, nearly 40 percent of homeowners in default have not made a payment in at least two years, according to LPS Applied Analytics. So, if there was a way to put mortgage defaulters in prison, would mortgage lenders try it? The laws in one particular state make it possible.
Minnesota: Do not pass go, do not collect $200
According to the Star Tribune, Minnesota bill collectors can initiate a lawsuit without filing any court documents. If the debtor doesn’t respond, collectors can seize bank accounts or garnish paychecks without ever proving in court that the debt is owed.
The statutes reveal some good news and some bad news. First, secured debts like car loans and mortgages fall under different laws than unsecured medical bills or credit card balances. Missing a mortgage payment doesn’t trigger a bench warrant. But what if you end up in foreclosure?
Be afraid, be very afraid
If your lender initiates foreclosure by posting a notice in the newspaper (foreclosure by publication), the worst it can do is take your house. The majority of Minnesota foreclosures are of this non-judicial variety. However, if you get a summons related to your default, you’re going through the court system. If you lose your home in a judicial, court-ordered foreclosure, the lender can take a lot more than your house when your balance exceeds the foreclosure sale price.
Laws vary from state to state and even from county to county. In Florida, for example, lenders have five years to sue you and then 20 years after that to collect on it.
Every state allows some form of deficiency judgment under certain circumstances, and most provide some way for bill collectors to shoehorn you into jail. Massachusetts, for example, allows deficiency judgments, and doesn’t imprison people for not paying them, except when it does: you can be jailed in Massachusetts for “contempt of court.” And not paying a judgment is, you guessed it, “contempt of court.”