Thursday’s article in the Wall Street Journal, “Welcome to Debtor’s Prison, 2011 Edition” addresses the frightening cases of people being thrown in jail for failure to pay their debts.
Many people’s reaction is “Wait a minute, I didn’t think we had debtors’ prisons. Can this really happen to me?”
The United States does not have true debtors’ prisons. Federal debtors’ prison was abolished in 1833. Furthermore, to throw someone in jail merely for non-payment of a debt is a violation of the Constitution’s prohibition of involuntary servitude under the Thirteenth Amendment.
So how do people end up in jail for not paying their debt?
The reason is that technically, no one is being thrown in jail for failure to pay their debts. Instead, they are being thrown in jail for contempt of court for failure to appear in court when the creditor sues them or perhaps for failure to stay on a court ordered payment plan if they lose the lawsuit. Whatever the technicalities, the result is the same as debtors’ prison: The debtor is arrested and put in jail until he pays on what he owes. With large debt collection “mills” buying thousands of old accounts and bringing suits on years old debt with questionable service of process, the first time a debtor may hear the collection effort is when the sheriff comes to arrest him on the outstanding warrant. While an attorney would probably be able to successfully fight such a judgment, most debtors in this situation do not believe that they can afford to hire one and are, in effect, at the mercy of their creditors.
The good news is that for North Carolina debtors, the law does not work that way here.
In North Carolina, failure to appear in a civil case, such as a debt lawsuit, does not lead to a contempt of court charge. Instead, it merely leads to a default judgment against the defendant who did not appear. A default judgment is like a “forfeit” in sports: The plaintiff wins simply because the defendant did not show up. (Likewise, if the plaintiff fails to appear, the case is dismissed and the defendant wins.)
Even a default judgment is not the end of the story in North Carolina. Rule 55(d) of the North Carolina Rules of Civil Procedure states that “For good cause shown the court may set aside an entry of default, and, if a judgment by default has been entered, the judge may set it aside in accordance with Rule 60(b).” Rule 60(b) gives several grounds for relief from a judgment including, fraud, mistake, excusable neglect, that the judgment was void, and the catch-all “any other reason justifying relief from the operation of the judgment”. What this means is that even if the defendant fails to appear for the lawsuit and even if the plaintiff gets a default judgment against him, in some cases, the judge can “undo” the judgment and give the debtor a chance to defend himself against the lawsuit.
In other cases in other states, the debtor is held in contempt for failure to give the court an account of her finances. This is usually so that the creditor can garnish the debtor’s wages to pay the debt. Fortunately, North Carolina does not allow for garnishment of wages, except for child support, taxes, criminal fines and court costs, and federally guaranteed student loans. Debtors rarely have to tell creditors anything about their income or their assets. (This will be covered in considerably greater detail in a future post.)
As for getting thrown in jail for failure to pay debts, generally, a person cannot be thrown in jail for failure to pay debts in North Carolina. The exceptions are for failure to pay child support (or certain other domestic debts) or in cases involving misconduct of the debtor, such as debts arising from fraud, theft, or embezzlement, or where the debtor is trying to hide assets in order to defraud the creditor. (The complete list of these cases are at N.C. Gen. Stat. § 1-410.) In these cases, the debtor is civilly arrested is held until they post bail to satisfy claims of the creditor. Even in these cases, it is very risky for a creditor to have a debtor—even a dishonest debtor—arrested. If the creditor fails to prove the debtor’s misconduct, then the creditor can be liable for abuse of process, false arrest, or false imprisonment. An honest debtor cannot be put in jail for failure to pay debts in North Carolina.
In fact, a creditor who threatens to have a debtor arrested for non-payment of debt when they have no power to do so, violates both the Federal Fair Debt Collection Practices Act and the North Carolina Unfair and Deceptive Trade Practices Act. The creditor could be liable for a minimum of $1,000 to the debtor, court costs, and the debtor’s attorney fees.