Monday, March 2, 2009

32. Creditor and Debtor Issues in the CNMI

The Marianas Office continues to handle a large number of cases for debtors who face collection efforts from creditors. The statutory law regarding debt collection in the CNMI has had little change since the inception of the Commonwealth when it carried over much of the old law from the Trust Territory of the Pacific Islands.

Unfortunately, much of this law is outmoded and archaic, and provides the thinnest of protections to debtors. While it isn't particularly helpful to creditors, it is very deleterious to poor people who owe money.

Prohibition on Imprisonment for Debt
More than 75% of the states in the US have written constitutional prohibitions on imprisonment for debt. This protection arose out of the 19th century abuses that imprisoned poor people when they couldn't pay the money they owed.

States that have this kind of provision generally do not allow civil contempt to be used as an enforcement mechanism for payment of debts. Civil contempt allows the court to jail those who willfully violate court orders; but a constitutional prohibition on imprisonment for debt has usually been read as making civil contempt an unavailable remedy to enforce debts.

The CNMI does NOT have any such constitutional prohibition. Our statutory law specifically allows the use of civil contempt for enforcement of debts.

Recently our CNMI Supreme Court recognized the right of indigents to court-appointed counsel before facing possible incarceration on civil contempt charges. (PFC vs. Muna, 2008 MP 21). This means the Superior Court will now have to use its limited resources to pay the price of attorneys when creditors try to enforce their judgments using civil contempt.

What the states use instead of civil contempt are better and more efficient creditor remedies that may in fact cost less to the state than the older remedy that involves putting poor people in jail to wring money from them (that they don't have) to pay their debts.

States allow creditors to garnish wages to pay debts. Garnishment is a method by which money is taken directly from the employer before the wages are paid to the employee and redirected to the creditor--like voluntary allotments which are seen here, but involuntarily created by court order. Federal law has established a formula for determining the maximum amounts of garnishments so that debtors still have some protection of their wages so they can support their families. If an employer fails to pay over wages that were to be garnished, the employer becomes liable for the payment. And if a debtor-employee leaves employment (because he quits, is terminated, dies, gets sick, etc.) , typically the employer must notify the creditor.

In the CNMI, we do not have any garnishment statute for ordinary creditors. We finally have a wage-withholding statute that allows garnishment for child and spousal support. However, consumer and commercial creditors have no easy way to get paid directly.

What the CNMI uses instead to enforce payment on judgment debts is an "order in aid of judgment" (OIA) where the Court orders the turn-over by the judgment debtor to the creditor of payments, usually in installments that coincide with payday. The problems with this system are multiple--creditors must rely on debtors to actually turn over the payment, which they sometimes don't do. When a debtor owes a lot of money, the cumulative amount of child support and OIA payments can get excessive, taking a bigger chunk of salary than might be allowable under federal limits--and it usually takes a debtor's attorney to figure this out. When payments are missed, the creditor loses out completely and must return to court to enforce the order by way of contempt. There is often a lag time between non-compliance and the creditor's awareness--which hurts both creditor who must wait for the payment and debtor whose judgment accrues interest at the exorbitant rate of 9% per annum.

The CNMI, like the states, has adopted the Uniform Commercial Code. Creditors can take security interests in purchase-money goods that they then repossess if payment is not made. We see this here in the automobile sales industry, and of course, in homes and land subject to mortgages, and in bank transactions like loans, but not very often elsewhere.

In the states, secured transactions are also used most often in bank transactions--car sales, home mortgage contracts, loans, also--but occasionally in other large purchases. The difference I see here is how often poor people are willingly allowed to buy cars (especially by Triple J Motors) or get loans (Wells Fargo), when the buyers are so clearly non credit worthy.

What we see here in the CNMI everywhere is the willingness of creditors to extend credit to anyone, without security, without establishing credit-worthiness.

This seems to have become something of a problem in the states as well recently, with the free and easy extension of credit through VISA and Mastercard accounts, for example, and some "creative" home-mortgage financing. But those instances often seem to be at a distance, through faceless encounters, while here, it is mom-and-pop stores extending credit to people in the neighborhood. Or local merchants taking personal checks without determining if the account is able to cover the amount.

When I last visited the states, I went into Amish country, where the people live without power in their homes. They are savvy businessmen, however--and although they often accepted my checks, they first got verification of funds on hand. This is not impossible.

And yet at the Marianas Office we continue to see people who are obviously poor, on food stamps, and unlikely to have any spare change, getting credit and bouncing checks for everything from utilities and telephone services, to food and drink, to appliances and more.

In other words, we see the improvident extension of credit all the time.

In enforcement proceedings, the Court nearly always acts as if the only person to blame for the non-payment is the debtor, and rarely takes a look at creditors who have been irresponsible in taking foolish risks in the name of business.

These cases take up a lot of court time, and a lot of MLSC's time.

Creditors get judgments that they enforce through contempt, and while that situation isn't very efficient it allows them to continue to pursue payment for decades from people who are very poor. It also allows them to add on interest at 9% per annum and fees for court costs and attorneys--all adding up against the poor debtor. In contrast to a 9% fixed post-judgment interest rate, states and federal courts often use a variable interest rate tied to the prime lending rate or some other federal consumer index, to set post-judgment interest.

Orders to seek and obtain work are another thing we see here in the CNMI as an enforcement mechanism for ordinary debt. No state uses this as a means to enforce payment on ordinary debts. It seems rather foolish that the Court would be ordering people to seek work in our current labor market--or lack thereof, and holding the threat of jail over the heads of debtors who give up in the face of our economy. But that is what is happening here. MLSC continues to argue in legal proceedings that these work orders violate the CNMI statutory law (OIA's that allow "method of payment"), the CNMI and US Constitutional protection of liberty; and the federal statutory and constitutional protection from involuntary servitude.

Debtors in the CNMI continue to have one quiver in their arsenal that helps protect them -- federal bankruptcy laws. The same laws that apply to the states apply here. The same hurdles must be met--creditor counseling, lots of schedules, detailed filings...

Bankruptcy is supposed to be a means of last resort to deal with mounting debt. People who are unemployed and have no assets or income to protect aren't the targeted audience for bankruptcy protection.

Unfortunately in the CNMI, they have little else that stands between them and a lifetime of creditor harassment and extremely punitive judgment enforcement.

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