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.


GARNISHMENT
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.


SECURED TRANSACTIONS
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.


CREDIT CHECKS
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.

LOPSIDED LAWS
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.



BANKRUPTCY
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.

Great Day for Debtors' Rights

Today is a great day for judgment debtors in the CNMI.

The CNMI Supreme Court issued a decision in the case of PFC vs. Muna, 2008 MP 21, holding that the Superior Court must honor due process rights in civil contempt proceedings.

Specifically, the Superior Court must do the following in all future civil contempt hearings:
1. Advise the alleged contemnor that he has a right to be represented by counsel.
2. Advise the alleged contemnor that the Court will appoint counsel for him if he is too poor to afford counsel on his own.
3. Continue the matter to allow the non-indigent contemnor the opportunity to get counsel.

4. If a person brought into court on alleged contempt says s/he is too poor to afford counsel and s/he wants court-appointed counsel, the Superior Court is to undertake a quick examination of the contemnor's situation to determine if s/he is presumptively eligible for court-appointed counsel. If s/he is, then the Court appoints counsel before proceeding to the contempt matter.

5. Alternatively, the Superior Court can say before the contempt proceeding begins that it will NOT consider loss of liberty as a possible sanction in the matter. Then there is no court-appointed counsel, but there is also no jail sentence that can be imposed and then left hanging over the head of the judgment debtor as a means to compel payments.

Stay tuned for more information on this matter.

Decision is now available on-line at the Law Revision website: PFC vs. Muna

Supreme Court Decides Against Debtors

Last week, the CNMI Supreme Court issued its decision in Triple J Saipan v. Mateo V. Norita et al. The court ruled that federal law limiting how much can be garnished from your wages does not apply in the CNMI. We unsuccessfully argued that the federal law not only applies here, but that it also 1) offers more protections to debtors and 2) more fairly spreads out the risks of credit extension between creditors and debtors.

What the Supreme Court decision means is that the status quo is maintained. Our courts turn to local law when figuring out a debtor’s schedule to pay back a debt. In practice, as I discussed in my previous post of 11/1/07, there is an uneven playing field. Low-income debtors who can’t afford an attorney end up paying something back on a regular basis, even though their income is considerably below poverty level. This will continue to happen despite the fact that debtors have the right to keep everything they need for their basic needs.

Our clients’ household income was SSI and the minimum wage (then $3.05/hour). SSI (or Supplemental Security Income), is a federal benefit entitled to those who are poor and disabled. They have already been deemed poor enough to receive SSI. Those benefits were not an issue in the case, because they cannot be taken to pay back a debt. That’s a federal law that unquestionably applies in the CNMI. On the other hand, the court endorsed a payment order against the minimum wage earner.

Today, the minimum wage in the CNMI is $3.55/hour. This comes to a gross annual income of $7,384. Under the 2007 federal poverty guidelines, the threshold amount for a household of one is $10,210 per year. Those of us living in poverty here are less protected from creditors than elsewhere in the States. This is the court's implicit opinion.

In reaching its decision, the court made a difference between a garnishment and an “order in aid of judgment,” which is the typical CNMI court order that requires a debtor to regularly surrender money to the creditor as each paycheck is received. As the court argues, a garnishment is when you take money from a third party who owes the debtor, such as the debtor’s employer. Technically then, taking money directly from the debtor is not a garnishment. Since the federal law governs garnishments, it has no bearing on our orders in aid of judgment.

What the court completely fails to take into account is that a garnishment and an order in aid of judgment have the same effect: you risk being deprived of future paychecks needed to support yourself and your family. What good is a paycheck when you have to surrender it the second you receive it?

Federal Law on Debtor Relief in the CNMI

In our previous post on 9/13/07, we provided an introduction to debt collection and your rights as a debtor. One of our pending Commonwealth Supreme Court cases is dealing with what it means to be “judgment proof.” The case turns on the question of whether federal law on garnishment restrictions applies here. We say it does.

First of all, the CNMI, like every US state, has laws that shield your income from creditors so that you can provide for your basic needs. Even if you lost in court and a judgment was issued against you for a consumer debt, you can still keep what you need for the essentials. For low-income people, this exemption can end up protecting all of the income. This is called being “judgment proof.”

In the CNMI, not many know of this right. In court, they end up agreeing to pay something back on a regular basis, even if they can’t afford it. If the debtor agrees, the court swiftly issues an order to pay. Oftentimes, the debtor feels compelled to agree to something. Anything, actually.

The federal government also established a minimum amount of what can be garnished from your paycheck. This was done in 1968 with the passing of of the Consumer Credit Protection Act, another one of LBJ's Great Society initiatives. States can’t dip below the minimum protection, but are free to add more to it.

Keep in mind that the federal garnishment restrictions were not only meant to safeguard the poor. Congress considered it a way to prevent imprudent extensions of credit. The act was designed to encourage good industry practice.

One crucial difference between CNMI law and federal law is that the federal law provides a formula to determine the garnishment ceiling. The formula is based on the federal minimum wage, which is currently set at $5.85/hr. (with 70 cent increases annually until 2009, when the $7.25/hr. mark is reached). The limit of what can be garnished is the lesser of ) 25% of disposable weekly earnings or 2) any amount over 30 times the federal minimum hourly wage. Yes, I can’t visualize that too, so here’s another way to look at what can be taken when your biweekly or monthly paycheck is in the following ranges:



(taken from US DoL fact sheet)

The CNMI does not have a formula. Here, a court is required to decide on a case-by-case basis what income is needed for the reasonable living requirements of the debtor and the dependents. As I mentioned, with the Superior Court dealing with so many cases and the need for judicial efficiency, what happens (when the debtor doesn't have an attorney) is that some haggling is done, and a debtor agrees to something. What is lost in the shuffle is that the debtor is never given a chance to exercise the right to not pay.

Our appeal currently before the CNMI Supreme Court on this issue is Triple J v. Mateo Norita, et al., CV-06-0031-GA. There are several legal arguments Triple J lays out on why the federal law should not apply in the CNMI. For example, the Consumer Credit Protection Act requires state and federal courts to abide by the wage garnishment limit. However, “state” isn’t defined at all for these purposes. And, as the argument goes, the CNMI isn't a state. This may end the question, but every persuasive source out there is inclined to include the CNMI, such as the US Dept. of Labor and the Northern Marianas Commission on Federal Laws. Despite the difference between the minimum wage here and in the US, The Commission believed the formula should apply here for the following reason: “...the obvious intent [of the federal limit] is to allow the employee to retain enough earnings to purchase the necessities of life: food, shelter, and so forth. While earnings in the Northern Mariana Islands are generally less than in other parts of the United States, there is no evidence that the costs of necessities are also less.”

Instead of bogging down this post on all the other legal issues, I thought I’d at least bring the topic out of the courthouse and let others get a feel on where they stand. (Judges have been known to make up their mind first based on social, moral and practical grounds, then figure out the legal basis next.)

Our position is with the findings of the NMI Commission. The CNMI should be no different when it comes to protecting its people. The risks of extending credit should be fairly spread out. Creditors shouldn't have more advantages in the CNMI than anywhere else in the US.