BILL ANALYSIS Ó
AB 233
Page 1
Date of Hearing: April 2, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 233 (Wieckowski) - As Amended: March 21, 2013
As Proposed to be Amended
SUBJECT : Wage Garnishment: Exempt Earnings
KEY ISSUE : Should debts on student loans that are not made,
insured, or guaranteed by a federal loan program be exempted
from the wage garnishment law?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill would prohibit a court from issuing a wage garnishment
order to enforce a judgment for the collection of debt if the
judgment debtor proves that the source of the debt was a student
loan that was not made or guaranteed through a federal student
loan program. The bill would not relieve the student debtor of
the debt obligation nor eliminate the creditor's right to
collect; it would, however, remove an important legal tool -
wage garnishment - by which the creditor can collect that debt.
While federal loan programs typically provide the student
borrower with flexible repayment plans and deferrals, the author
contends that this is not usually the case with so-called
"private" loans that are not made or guaranteed by the federal
government. According to the author, this bill is especially
necessary at this time, as rising tuition costs (coupled with
fewer grants) are forcing students to incur more student loan
debt. While this bill will not forgive the student loan debt,
the author believes that it will provide an incentive for
private lenders to provide debtors with reasonable payment
plans. In order to clarify that the provision in this bill
requiring a court to "terminate an existing withholding order"
does not apply retroactively, the author wishes to amend the
bill in this Committee to clarify that this provision only
applies to orders issued on or after January 1, 2014. The bill
is opposed by the California Bankers Association and the
California Association of Collectors for, among other things,
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unfairly singling out private student loan debt, which
constitutes only a small portion of the student loan market.
SUMMARY : Prohibits wage garnishments for the collection of
student loan debt unless the loan was made, insured, or
guaranteed by the United States government, pursuant to
specified programs. Specifically, this bill :
1)Prohibits the issuance earnings withholding orders for
purposes of collecting a judgment for the collection of debt
that the judgment debtor proves is from a student loan that is
not made, insured, or guaranteed by the United States
Government pursuant to the Federal Family Education Loan
Program or the William D. Ford Federal Direct Loan Program.
2)Requires a court to terminate an earnings withholding order
issued on or after January 1, 2014, upon proof by the judgment
debtor that the earnings withholding order enforces a judgment
in violation of this section.
EXISTING LAW :
1)Provides that service of an earnings withholding order creates
a lien upon the earnings of the judgment debtor that are
required to be withheld pursuant to the order, and upon all
property of the employer subject to the enforcement of a money
judgment in the amount required to be withheld pursuant to
such order. Also provides that the lien continues for a
period of one year from the date the earnings of the judgment
debtor become payable unless the amount required to be
withheld pursuant to the order is paid as required by law.
(Code of Civil Procedure Section 706.029.)
2)Specifies the procedural requirements by which a judgment
debtor may claim an exemption from the earnings withholding
order, and by which a judgment creditor may contest a claim of
exemption in order to obtain a court hearing to evaluate the
merit of the claim. (Code of Civil Procedure Section 706.105,
(a) to (f).)
3)Provides that the amount of earnings of a judgment debtor
exempt from the levy of an earnings withholding order, except
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as specified, shall be that amount that may not be withheld
from the judgment debtor's earnings under federal law in
Section 1673(a) of Title 15 of the United States Code. (Code
of Civil Procedure Section 706.050.)
4)Provides that the maximum part of the aggregate disposable
earnings of an individual for any workweek which is subject to
garnishment may not exceed 25 per centum of his disposable
earnings for that week, or the amount by which his disposable
earnings for that week exceed thirty times the Federal minimum
hourly wage in effect at the time the earnings are payable,
whichever is less. (15 U.S.C. Section 1673.)
5)Exempts from levy, with certain categorical exceptions, the
portion of a judgment debtor's earnings which the judgment
debtor proves is necessary for the support of the judgment
debtor or his or her family supported in whole or in part by
the judgment debtor. (Code of Civil Procedure Section
706.051(b).)
COMMENTS : Under existing law, a judgment creditor may obtain an
earnings withholding order (also known as a wage garnishment
order) from a court in order to collect from a judgment debtor.
The order is served upon the judgment debtor's employer who, in
turn, is obligated to withhold from the employee's wages the
amount specified in the order. Federal law prohibits the amount
that the employer may withhold in any given pay period to 25% of
the employee's disposable income for that period (15 USC Section
1673). In addition to this federal limitation, state law
permits a court to reduce the amount of the garnishment if it is
necessary for the support of the debtor and his or her family.
Existing law also sets forth the procedural requirements that a
debtor must follow in order to claim an exemption for a wage
garnishment order, as well as the means by which the creditor
may contest the merits of a claim for exemption.
This bill would create a new exemption under the wage
garnishment law by prohibiting the issuance of an earnings
withholding order to collect on a student loan debt, if the
debtor can prove that the debt is from a loan not made, insured,
or guaranteed by a federal student loan program. Federal
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student loans - which constitute the majority of student loans -
would still be subject to wage garnishment. According to the
author, these federal loan programs already have mechanisms in
place to offer students deferments and forbearances, and
therefore would not be covered by this bill. It should be
stressed that this bill does not seek to absolve the student
debtor of his or her obligation, or to prevent a creditor from
recovering by means other than wage garnishment. It would only
remove the tool of wage garnishment. The author hopes that by
restricting this option, the lender will have greater incentive
to work out a reasonable payment plan with the student debtor.
Procedure for Withholding Orders and Exemption Claims: This
bill prohibits the issuing of a wage garnishment order if the
judgment debtor proves that the underlying debt is from a
student loan that was not made, insured, or guaranteed pursuant
to a federal student loan program. However, the bill does not
specify at what stage in the process the debtor would make a
claim for exemption and have the opportunity to prove that the
loan is subject to the exemption. Under existing law, an
earnings withholding order is issued by a levying officer upon
receiving an application submitted by a judgment creditor. The
levying officer then serves the withholding order upon the
debtor's employer, who is obligated to comply with the order,
and the employer in turn serves notice upon the debtor. (Code
of Civil Procedure Sections 706.100 to 706.104.) Under existing
law, a debtor may claim an exemption for any portion of the
withholding amount that the debtor proves is necessary for the
support of the debtor or the debtor's family. Code of Civil
Procedure Section 706.105 sets forth the procedure by which a
debtor may make a claim of exemption. Because these procedures
apply only under those circumstances in which existing law
recognizes an exemption, it is not entirely clear, as the bill
now reads, whether this procedure would be the mechanism by
which a student loan debtor would challenge a withholding order.
The author may wish to consider , therefore, working with the
Judicial Council and other stakeholders as the bill moves
forward in order to develop language for adapting the procedures
set forth in Section 706.105 to any factors that might be unique
to student loan debt. Alternatively, Code of Civil Procedure
Section 706.100 provides that "the Judicial Council may provide
by rule for the practice and procedure in the proceedings under
this chapter" [i.e. Chapter 5 commencing with Section 706.010 of
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the Code of Civil Procedure.] Thus the author may simply wish
to require the Judicial Council to develop procedures for
claiming a student loan debt exemption - if indeed procedures
other than those provided in Section 706.105 are necessary. If
the Judicial Council must develop procedures and corresponding
forms, then the author may wish to adopt a delayed
implementation date so that the Judicial Council could complete
this task.
ARGUMENTS IN SUPPORT : According to the author, total student
loan indebtedness is now over $1 trillion. Many recent
graduates, the author contends, postpone buying a home or
starting a family. In addition, the "sluggish job recovery has
led to increased underemployment, with debt-saddled students
taking any job available. Indeed, in the last decade, starting
salaries for college graduates fell 15 percent, [while] debt for
new graduates increased 24 percent." The author argues that
while there are many programs in place to help people with
federal student loans - such as deferments and forbearances -
this "is not the case with private loans. A creditor can, and
often does, garnish 25% of a person's disposable income, even
though student loan debt cannot be discharged in a bankruptcy -
meaning student loan debt can never go away . . . By
[prohibiting] garnishment of wages for many student loans,
creditors will be more inclined to work with the debtor and
figure out a repayment plan that the student can manage,
benefitting thousands of young underemployed Americans with
oppressive education loans."
The Consumers Union supports this bill because it will
"incentivize lenders to work with borrowers and identify
appropriate payment plans, while also providing immediate relief
to consumers crushing [sic] under the weight of private student
loan debt." Consumers Union contends that this bill is "sorely
needed" at this particular time, as "rising tuition costs have
substantially outpaced average household income in the past
debate" and as "more families have been forced to turn to
student loans in order to finance higher education." Consumers
Union concludes that "AB 233 would create a simple fix that
better aligns with the interests of lenders and borrowers. By
prohibiting lenders from garnishing wages to collect private
student loan debt, they will be encouraged to offer more
sensible repayment plans to borrowers. Because borrowers cannot
get an automatic discharge in bankruptcy, they will likewise
have an interest in working out an affordable payment plan with
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the lender."
The Legal Aid Association of California (LAAC) supports this
bill because it will "offer significant relief to the working
poor in California. This bill does not discharge any underlying
debt . . . The debtor must eventually pay back her loan. . .
Instead, AB 233 acts as an incentive for private lenders to work
out a manageable repayment plan with the debtor, rather than
garnish up to 25% of her disposable income." The California
Council on Economic Education and the Public Law Center support
this bill for substantially the same reasons as the Consumers
Union and LAAC.
ARGUMENTS IN OPPOSITION : The California Association of
Collectors (CAC) and the California Bankers Association (CBA)
oppose this bill because it "inexplicably singles out one form
of debt from wage garnishment, while similar forms of debt
create a larger burden for student loan borrowers." First, the
opponents argue that the "bill targets a loan product that
occupies only a fraction of the student loan market compared to
the federal student loan program." Federal loan programs
account for about 85 percent of the market, while the "private"
loans - i.e. those not part of a government student loan program
- constitute only about six percent of the market. While the
private student loans have a much smaller share, CAC and CBA
claim that "they include rigorous credit underwriting that
responsibly assesses a borrower's willingness and capacity to
repay the loan, which best prepares borrowers for successful
repayment. On the other hand, federal student loans provide
access to easy credit without any credit evaluation or an
ability to pay determination." CAC and CBA argue that private
student loans serve an important function by filling the gap
created by "increasing tuition rates without commensurate
financial aid," and they claim that these private loans, like
the federal loans, "also have competitive rates with flexible
repayment plans." If this bill passes, the opponents claim that
"it will effectively render delinquent private student loan debt
uncollectable." If that happens, "the availability of [private]
loans will decrease and fewer students will have an opportunity
to go to college and graduate school as a result."
PROPOSED AUTHOR'S AMENDMENT : In order to clarify that the
provisions of this bill are not retroactive and therefore will
not affect withholding orders that have already been issued, the
author wishes to take the following amendment in this Committee:
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- On page 2, line 10 immediately after "order" insert:
issued on or after January 1, 2014
REGISTERED SUPPORT / OPPOSITION :
Support
California Council on Economic Education
Consumers Union
Legal Aid Association of California
Public Law Center
Opposition
California Association of Collectors
California Bankers Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334