Adjusting Pre- and Post-judgment Interest Rates for Consumer Debt Collection Actions

59 Pages Posted: 24 Jun 2021

Date Written: 2020

Abstract

This Article discusses how states can set fair, just, and equitable statutory pre- and post-judgment interest rates in the context of consumer debt collection litigation. Where states set pre- and post-judgment interest rates applicable to state civil actions, they generally choose one of the two following methods: (1) a fixed rate of interest, in some cases set decades ago and far exceeding the current market rate; or (2) a floating rate with a fixed percentage of interest added. Federal courts in civil actions with federal question jurisdiction apply a purely floating rate of interest tracking a market benchmark to calculate post-judgment interest. This Article considers the implications of state statutory pre- and post-judgment interest rates in the specific context of consumer debt collection actions. Fixed interest rates are clearly problematic when they are set high above current market interest rates because they have the potential to provide a windfall to prevailing litigants at the expense of consumer borrowers. With respect to many state pre- and post-judgment interest statutes, the only intent of state legislatures in implementing such laws was to compensate prevailing parties for the loss of use of judgment funds. Thus, a high fixed interest rate creates a mismatch between the original intent of such state legislatures and the effect of pre- and post-judgment interest when assessed. This issue is exacerbated in today’s environment of historically low interest rates. In the context of debt collection actions, these often-excessive sums of interest may be demanded from those least able to bear their cost. These borrowers may also be those least likely to have opportunities to generate a return on the judgment funds higher than a prevailing market rate of return on debt or equity during the time the judgment funds are in their possession.

A floating interest rate with a fixed premium added may also in some instances fail to meet the purpose of those state statutes where pre- and post-judgment interest assessments are intended to be purely compensatory in nature. A fixed premium of interest will necessarily fail to maintain the same proportion to a floating market rate as that market rate varies; the relationship between the fixed and floating elements of the judgment interest rate will become further distorted in environments of very high or very low interest rates. By its nature, therefore, a rate consisting of a fixed premium added to a floating rate cannot be as flexible in a variety of interest rate settings as a floating rate alone necessarily is. This Article contends that a purely floating market rate of pre- and post-judgment interest best meets the goals of fairness and equity with respect to consumer debt collection litigation in particular. Where state legislatures have deemed an additional premium over the market rate of interest necessary to meet other goals besides that of compensation, however, this Article recommends that that premium be set as a percentage of the current market rate, rather than as a fixed premium, in order to maintain the nature of its intended effect in a variety of market conditions. Moreover, should states decide to retain fixed premiums in today’s environment of low interest rates, the premium in many instances should be reduced to a lower proportion of the market rate than such fixed premiums currently reflect in order to fulfill the same considerations of fairness and equity as are present when considering the amendment of high fixed interest rates.

Keywords: Consumer debt collection, pre-judgment interest, post-judgment interest

JEL Classification: K12, K13, K19, K20, K29, K30, K39, K40, K41, K49

Suggested Citation

Abely, Christine, Adjusting Pre- and Post-judgment Interest Rates for Consumer Debt Collection Actions (2020). 88 Tennessee Law Review 219 (2020), New England Law | Boston Research Paper No. 21-03, Available at SSRN: https://ssrn.com/abstract=3873204

Christine Abely (Contact Author)

New England Law | Boston ( email )

154 Stuart St.
Boston, MA 02116
United States

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