First the Pandemic Hit, Then the Recession – Now Debt Collectors Are Calling

Thousands of Californians are struggling to pay their bills during one of the nation’s worst health crises, which has wiped out millions of jobs and left many businesses hobbling. But despite their financial hardships, many are being asked to pay their debts or have their wages garnished in the middle of a global pandemic.

Richard Gonzales works as a mechanical engineer in San Jose. Before the pandemic hit, he was using the extra money he made to pay for continuing education classes. But since May, he’s been furloughed.

“I just went back to work a couple weeks ago,” Gonzales said. “And that’s on a day-by-day basis at this time.”

Gonzales is afraid he’ll get laid off. He wasn’t able to pay his rent while he was furloughed, but San Jose and many other cities in the Bay Area have eviction moratoriums in place, which prohibit landlords from evicting their tenants if they can’t pay rent due to financial hardships brought on by the pandemic.

San Jose’s moratorium ends on Aug. 31, and Gonzales’ landlord has already threatened to evict him if he doesn’t pay his back-rent.

“It’s become difficult to pay it. And I have every intention [of paying the rent] because I’ve never had any problems like this,” Gonzales said. “But it’s making me worried and stressed out about … am I going to be able to do it.”

Last month, the Federal Reserve released a report showing that household debt increased by almost 4% across the United States in the first quarter.

Kiran Sidhu, policy counsel for the Center for Responsible Lending, has been seeing debt collection cases from people who are already struggling financially, and particularly from borrowers of color.

“Debt collection cases disproportionately impact borrowers of color and we can expect these debt collection cases are going to increase because of the situation that existed before the pandemic even began,” Sidhu said. “We can imagine that debt collection cases are going to be on the rise.”

Back in April, Gov. Gavin Newsom signed an executive order to stop debt collectors from garnishing COVID-19 stimulus checks. He also provided relief for private student loan borrowers. But Sidhu doesn’t believe this relief is enough to save families struggling from debt, especially as the pandemic continues.

“States should really be careful about how they begin to reopen and continue business as usual,” Sidhu said. “Families still have not recovered from the 2008 financial recession and this on top of that is going to exacerbate issues for folks who are already reeling.”

Jessica Nowlan’s debt fits into that category. She lives in Oakland with her three kids and, after experiencing homelessness for several years, worked her way up to become executive director of the Young Women’s Freedom Center, a local nonprofit.

“I think that I finally felt like a grown-up. I can take care of myself. I just moved, I bought a couch,” Nowlan said.

Because of her low-income status, she was used to receiving tax credits every year. Since starting her role as executive director of her organization, she has instead owed money to the IRS when she filed taxes. But Nowlan didn’t realize that and now owes the IRS over $20,000 in back taxes. Two weeks ago, the IRS garnished $6,000 from her bank account.

“I have a history of poverty that I haven’t been able to climb out of. And so a hit from the IRS was pretty devastating to my family,” Nowlan said.

She’s now on a six-year payment plan with the IRS to pay those back taxes, but there won’t be a lot of money left in her account for extra purchases.

Sharon Djemal, director of the Consumer Justice Clinic at the East Bay Community Law Center, is getting calls from clients concerned about the debt they’re accumulating now, on top of the debt they already had pre-pandemic.

“People are getting lots of calls and are very stressed about getting calls or letters regarding some of the debt they’ve accumulated over the past few months,” Djemal said.

She says it can take a year for a case to get into the court system and she expects to see a deluge of cases next year because of debt accumulated during the pandemic. The cases she handles today are related to pre-pandemic debt.

On the legislative front, state Sen. Bob Wieckowski, D-Fremont, has been working on bills to reform the debt collection process.

His legislation, Senate Bill 616, which passed in 2019, prohibits debt collectors from cleaning out bank accounts. Starting in September, collectors will have to leave at least $1,724 in a family’s bank account — enough to provide a “minimum basic standard of adequate care for a family of four.”

Wieckowski is working on another bill, SB 908, which would expand oversight on debt collectors.

“There’s no regulation, there’s no licensing,” Wieckowski said. “It’s nothing new — it’s the crescendo now because there’s so many more people that are financially vulnerable.”

SB 908 passed the state Senate in late June and is now waiting for an Assembly vote.