COVID-19 and Creditors’ Rights: The Effects of the Pandemic on Private Debt CollectionMay 11, 2020 – Article
As we navigate the ever-changing economic landscape created by the COVID-19 pandemic, one thing has become increasingly clear: we are in uncharted waters. Each day we attempt to work through the impact of COVID-19 on our personal and business dealings, and yet, not one of us knows what might happen or how long the effects of the pandemic might last. Of course, we know that COVID-19 has already affected the ability of both individuals who have lost their jobs and businesses who have had to temporarily close to pay their debts, but how does this affect the companies to whom the money is owed? With distressed debt on the rise, companies and their advisors will need a working knowledge of their rights to deal with the defaults that are surely to occur throughout a company’s value and supply chain.
A Brief Overview of Creditors’ Rights
When a business' customer fails to pay its debts, the business (or creditor) has several available remedies to help collect the money from the customer (or debtor). These methods typically include traditional “self-help” remedies, such as contacting the debtor directly to demand payment or, if that fails, transferring the debtor's account to an outside debt collector or agency to attempt to collect the debt. If the debt is secured by collateral, the creditor may also have a claim to take that collateral in order to ensure payment of the debt. A secured creditor takes priority over an unsecured creditor if there are competing claims to the collateral or to any expected proceeds from its sale. Most consumer transactions are unsecured, but home and motor-vehicle financing is usually secured by the property being purchased. If a car loan is secured and the debtor fails to make the payments, the lender can take back the car to cover at least part of the remaining debt. This can also be true for equipment rentals or goods purchased on contract.
But, sometimes, these self-help remedies fail. In those instances, a creditor may initiate court proceedings to collect an outstanding debt. In some emergency situations, the creditor may even be able to seize the debtor's property before the court decides the matter. However, these are typically extraordinary measures and should be employed only when other methods would be futile or useless, such as when perishable goods are involved, or when the collateral, if left in the debtor's control, would rapidly decline in value such that it would be worth much less after months or years of litigation.
The Present Impact of COVID-19
The COVID-19 pandemic has caused many regulatory agencies and other interested parties to issue public statements requesting that creditors and debt collectors work with consumers during the COVID-19 pandemic. For example, on March 22, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisors issued a joint press release encouraging financial institutions to work with borrowers affected by COVID-19.
Many states have also passed or adopted more stringent statutory or policy regulations designed to protect those experiencing economic hardship. These statutory or policy amendments vary from state to state, but some recent examples include:
- District of Columbia: D.C. Act 23-286 Section 207, enacted on April 13, 2020, states that, during the COVID-19 emergency, and for sixty days thereafter, no creditor or collector can (1) initiate or threaten a collection lawsuit; (2) initiate, threaten, or act upon a garnishment, seizure, attachment, or repossession; or (3) visit, threaten to visit, or confront the consumer in person. In addition, this regulation provides that, absent certain exceptions, no debt collector shall communicate with a consumer during this period.
- Georgia: On March 14, 2020, the Supreme Court of Georgia issued an Order declaring a Statewide Judicial Emergency. On March 16, 2020, all hearings and services related to personal property foreclosures, garnishment, and post-judgment hearings were suspended in the Magistrate Court of Fulton County. Similarly, in Macon-Bibb County, dispossessory court cases in the Magistrate Court have been postponed, and the Sheriff’s Office of Civil & Magistrate Court will not serve complaints, dispossessories or new garnishments until the emergency order is lifted. On May 4, 2020, the Georgia Supreme Court announced that the Statewide Judicial Emergency will be extended through June 12, 2020.
- Illinois: On March 28, 2020, Governor JB Pritzker prohibited self-help repossession of vehicles from March 27, 2020, through the end of the declared emergency, and on April 14, 2020, he issued an executive order suspending the sections of the Illinois Code of Civil Procedure that permit the service of a garnishment summons, wage deduction summons, or a citation to discover assets on a consumer debtor or consumer garnishee. On April 30, 2020, these Executive Orders were extended through May 29, 2020.
- Massachusetts: On March 27, 2020, the Massachusetts Attorney General issued an emergency regulation designed to protect consumers from unfair debt collection practices during the COVID-19 crisis. The regulation provides, among other things, that it is unfair or deceptive for any creditor or debt collector to (1) initiate, file or threaten to file any new collection lawsuit; (2) initiate, threaten to initiate, or act upon any garnishment, seizure, attachment, or withholding of wages, earnings, property, or funds for the payment of a debt to a creditor; (3) initiate, threaten to initiate, or act upon any repossession of any vehicle; (4) visit or threaten to visit the household of a debtor at any time; (5) visit or threaten to visit the place of employment of a debtor at any time; and (6) confront or communicate in person with a debtor regarding the collection of a debt in any public place at any time. The regulation also prohibits debt collectors from initiating a communication with any debtor via telephone (unless that communication is requested by the customer). Both of these provisions apply for 90 days following the effective date of the regulation (until June 25, 2020) or until the State of Emergency Period expires, whichever comes first.
On April 20, 2020, ACA International filed a complaint in the United State District Court for the District of Massachusetts challenging this emergency regulation. The complaint challenges the constitutionality of the regulation under the First and Fourteenth Amendments of the U.S. Constitution and Articles 10 and 30 of the Massachusetts Constitution. The complaint further alleges that the regulation violates the Massachusetts anti-Slapp statute, is barred by Massachusetts’ litigation privilege and exceeds the scope of the Massachusetts Attorney General’s authority.
- New York: On March 17, 2020, New York Governor Andrew M. Cuomo and Attorney General Letitia James announced that the state will temporarily halt the collection of medical and student debt owed to the state for at least a 30-day period in response to the growing financial impairments resulting from the spread of COVID-19. On April 17, 2020, Governor Cuomo and Attorney General James announced that the suspension of state debt collection was renewed for an additional 30-day period, until May 17, 2020. At that time, the Attorney General will reassess the needs of state residents for another possible extension. This temporary collection freeze does not apply to debt owed to the federal government or to private lenders, but based on the response in other states, its umbrella could be extended at any time.
Because these regulations are constantly changing as the situation progresses, creditors should check their local laws and regulations for more information before attempting to collect on any outstanding accounts during this time.
What Can Businesses Do to Prepare for the Future?
The truth is that no one can accurately predict how long these “temporary” restrictions will remain in effect or even if they will ever be completely lifted. In the meantime, businesses are left asking themselves what they can do to protect their financial interests while states are protecting their customers. At this stage, creditors should give thought to the following:
First, collect as much information about your debtors as you can. Consider capturing information that you may not have chosen to capture in the past. When the pandemic ends and things begin to return to normal, there will be outstanding debts that need to be collected. If possible, obtain the borrower’s current financial and operational information now to review the borrower’s overall financial condition and to ascertain the extent of any material changes caused by the pandemic. Also consider issuing appropriate default notices (where allowed by law) to trigger applicable cure periods and provide your business an opportunity to exercise remedies, if necessary, to protect and preserve any collateral or other rights.
Second, it is important to remember that you will want to retain good customers when the pandemic is over. In other words, if customers are currently in default or approaching default, consider whether that default would occur under different circumstances, i.e. if the COVID-19 pandemic were not a factor. When the dust settles and borrower’s finances return to normal (or near-normal), good customers who have not previously defaulted will revert to paying their debts once again. Of course, there will likely be at least some customers who don’t recover, and so it is also important to determine the likelihood of “return to financial good” of each individual customer. To that end, some factors to think about include: What circumstances drove the customer’s reduction of income? Was it a furlough? A sickness? Were they forced to close their business temporarily due to a government mandate? Are they in a protected industry?
In this uncertain time, it natural for businesses who are owed money to want it repaid. However, sometimes it’s best to take a step back to wait for the dust to settle. At the same time, customers will certainly be expecting tolerance from creditors during this time, and creditors should ask for the same in return. It is better to take additional time and ensure the right outcome for both parties rather than make demands that neither party can fulfill at this juncture. Although time will tell, it’s our prediction that those that have never been delinquent will be the first to want to bring their accounts current.
Hawkins Parnell & Young's national litigation team is helping businesses across the United States navigate unprecedented legal challenges arising from the COVID-19 pandemic. Visit our COVID-19 Resource Center for the latest insights and guidance.
 Agencies provide additional information to encourage financial institutions to work with borrowers affected by COVID-19, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200322a.htm
 D.C. Act 23-286 Section 207, http://lims.dccouncil.us/Download/44543/B23-0733-SignedAct.pdf
 Chief Justice Announces Statewide Judicial Emergency, https://www.gasupreme.us/judicial-emergency/
 Effect of Judicial Emergency on Magistrate Court, https://www.magistratefulton.org/DocumentCenter/View/2765/Court-letter-to-Fulton-County-031620
 Slowing the Spread of COVID-19, https://www.maconbibb.us/covid19/
 Chief Justice Will Extend Statewide Judicial Emergency, https://www.gasupreme.us/extend-judicial-emergency/
 Executive Order in Response to COVID-19 (COVID-19 Executive Order No. 14), https://www2.illinois.gov/Pages/Executive-Orders/ExecutiveOrder2020-16.aspx
 Executive Order in Response to COVID-19 (COVID-19 Executive Order No. 23), https://www2.illinois.gov/Pages/Executive-Orders/ExecutiveOrder2020-25.aspx
 Gubernatorial Disaster Proclamation, https://www2.illinois.gov/sites/gov/Documents/CoronavirusDisasterProc-4-30-2020.pdf
 Addendum to Massachusetts Secretary of State Regulation Filing Form, 940 CMR 35:00, Unfair and Deceptive Debt Collection Practices During the State of Emergency Caused by COVID-19, https://www.mass.gov/doc/ma-reg/download
 ACA Int’l v. Maura Healey, Civil Action No. 1:20-cv-10767-RGS (D. Mass.), [link to PDF of complaint]
 Attorney General James and Governor Cuomo Temporarily Suspend State Debt Collection in Response to Coronavirus, https://ag.ny.gov/press-release/2020/attorney-general-james-and-governor-cuomo-temporarily-suspend-state-debt
 Attorney General James and Governor Cuomo Renew Suspension of State Debt Collection in Response to Coronavirus, Protecting New Yorkers’ Wallets, https://ag.ny.gov/press-release/2020/attorney-general-james-and-governor-cuomo-renew-suspension-state-debt-collection