New report finds states are weak on protecting families from financial ruin

It’s a tough time for consumers. Debt is at an all-time high. As of the third quarter of 2023, the average American consumer had $6,501 in credit card debts, $19,402 in personal loan debts, and $23,792 in auto loan debts, according to Experian, a credit reporting company. For Americans with student loan debts, the average was $37,853.

For medical debt, a KFF report found that nearly 9 percent of U.S. adults had medical debt. Out of these 23 million people, 11 million had balances greater than $2,000, and 3 million owed more than $10,000. KFF is a health policy research organization.

As working families continue to struggle with debts, inflation, record-high credit card interest rates, and junk fees, a new report finds that no states adequately protect its residents’ homes, vehicles, belongings, and family finances.

“State exemption laws provide critical protections for cars, work tools, gas money, and other basic essentials consumers need to remain in the workforce,” Michael Best, senior attorney at the National Consumer Law Center and co-author of the report, said in a statement. “Exemption laws must be strong enough to protect families from poverty and allow families to recover financially after the collection of a debt.”

The center report grades each state on its exemption laws, safeguards that protect family income and property from seizure by creditors, debt buyers, and debt collectors. These laws are designed to protect consumers and their families from poverty and to preserve their ability to rehabilitate their finances and be productive members of society.

The center’s annual survey of exemption laws in the 50 states, District of Columbia, Puerto Rico, and the Virgin Islands finds that no states meet five basic standards:

• Preventing creditors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage for a family of four. 
• Allowing the debtor to keep a used car of at least close to average value.
• Preserving at least a median-value home.
• Preserving a basic amount in a bank account so that the debtor’s funds to pay essential costs such as rent, utilities, and commuting expenses aren’t eliminated. 
• Preventing seizure and sale of the debtor’s necessary household goods. 

The report details how states protect families in these five areas. It grades the states on each protection and determines its overall average. 

This year’s report updated the rating scale to reflect inflation, Best said.  It also introduced new rating criterion for protection of a basic amount in a bank account – whether it takes effect immediately or needs further action.  If a debtor has to file paperwork in court, take time off from work to appear at court hearings, or hire a lawyer to claim the protection, it’s unlikely to be of much help to a struggling family, he said.

Best states: While no states achieve an “A” grade for 2024, Arizona, California, Massachusetts, New Mexico, Puerto Rico, and Texas achieve “B” grades. 

Under the updated grading criteria, Connecticut, the District of Columbia, Maine, Nevada, New York, North Dakota, Oklahoma, South Carolina, and Washington moved to a “C” in 2024 from a “B” in 2023.

Worst states: Several states’ exemption laws severely hinder families’ ability to recover from indebtedness. These states allow creditors – or the debt collectors they hire – to seize nearly everything a debtor owns, even the minimal items necessary for the debtor to continue working and providing for a family. Georgia, Kentucky, Michigan, New Jersey, and Utah have long been the worst states, receiving “F” grades. Indiana, Missouri, and Wyoming have now joined the worse states group.

The report also looked at how the historic racial wealth gap creates a more significant debt burden for Black and Latino/Hispanic families. When hit with challenging financial times, Black and Latino/Hispanic households have less of a financial safety net to draw on. Black and Latino households are also more likely to experience unemployment and are disproportionally represented in the poverty population.

Strong exemption laws protect families from destitution and can also act as an economic stimulus tool that steers money into state and local communities, said Carolyn Carter, deputy director at the center and co-author of the report. In addition, strong state exemption laws can deter predatory lending, protect residents from impoverishment, and save taxpayers money, Carter said.