Is Pay Garnishment More Immoral Than Debt?

"We are confident we are treating our customers fairly and with integrity," says an HSBC North America spokesman in today's New York Times article (by John Collins Rudolf) about garnishing the pay of consumers who owe the bank for credit-card or other personal loan debt.

The spokesman's definition of "fairly and with integrity" appears to be slightly different from mine.

In the specific case reported, a 45-year-old Virginia maintenance worker took out a $4097 personal loan in 2001 from a subprime lender now owned by HSBC. He fell behind on the payments, and was taken to court. Since he failed to appear ("I just thought they were going to take what I owed," he is quoted as saying), the lender was awarded a judgment of more than $5500 (including lawyers' fees), with debt to accrue at 27.55% until paid in full. By 2003, the bank was garnishing his wages, and continued to do so over the next six years, deducting more than $10,000 from his earnings ... and the end of which he still owed the company nearly $4,000, "a sum," Rudolf notes in the article, "nearly equal to the original loan amount."

"Dale Pittman, a consumer law lawyer in Petersburg, Va., took ... [this] case without charge, and found that all but $134 of his [client's] payments had gone toward interest, fees and court costs. 'It's a perfectly legal result under Virginia law,' Mr. Pittman said."

Does this really sound like treating a customer "fairly and with integrity"? To me, it sounds more like "usury" or even "loan-sharking".

I'm not suggesting that Mr. Pittman's client's debt should have been forgiven as soon as he fell behind. Fiscal responsibility is important; most of us struggle, but manage, to owe no more than we can afford to pay. But it's also important to recognize, and allow for, the power differential in the lender / borrower relationship, and especially to recognize that circumstances can change fast.

In the current Great Recession, there are millions of people falling behind on credit-card bills, mortgage payments, home-equity loans, and other bills, not because of some terrible moral failing on their part, but because it had never occurred to them that they could be out of work for so long, or that their homes' values could have fallen so far. The bank's first step should have been to find out why Mr. Pittman's client had fallen behind on his payments -- did he have an accident that kept him from working for a week or a month? did a child become severely ill? did he underestimate the size of his income-tax refund? did he play the ponies with money that was supposed to have gone to bank payments?

Any of those events could have affected his ability to pay; not all of them are morally questionable.

To add insult to injury for the working poor, a former last resort -- declaring personal bankruptcy -- has become increasingly difficult, and expensive. Rudolf notes that "sweeping changes to federal law in 2005 -- pushed by the banking lobby -- complicated the process and more than doubled the average cost of filing, to more than $2000. Many low-income debtors must save for months before they can afford to go broke."

Despite the tightening, the recession has had its expected effect: "More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, ...a result of high unemployment and the housing crash," with federal courts reporting nearly 7000 filings a day, up 35% from February, according to Duff Wilson's article in today's New York Times.

So which is the more immoral: the consumer falling behind through no fault of his own, or the banker garnishing his wages to the tune of 27.55%?