COVID-19 has exposed how the financial services industry can actively harm communities and increase structural inequality of our society. By design and historic structure, our system of financial access has helped many Americans to prosper, while locking others out from enjoying those benefits of safe and affordable access to capital. During the last year, this disparity has only grown. Our financial systems expose low-income residents to exploitation by problematic debt collection practices and predatory lenders.

Without proper protections and exemptions, low-income residents can suffer and their financial recovery can be delayed while debt collectors are able to take both resources needed for survival and recovery and government support designed to support recovery. Colorado has enacted a debt collection moratorium on new court actions until June, which includes a provision that exempts $4,000 in a bank account from collection, but the pandemic has exposed the existing problems with Colorado’s system and the need for reform before that moratorium ends.

The Hidden Problems Within Colorado’s Debt Collection System

A two-tiered financial system exists, a segmentation between those who have greater access to the banking system and those with less leads to predatory lending and harsh debt collection practices. Workers who earn less than $40,000 are hit the hardest by debt collection and wage garnishments, particularly communities of color. Coloradans of color are unbanked and underbanked at a rate of 49 percent in Colorado.

According to Prosperity Now, Colorado ranks 37th in the nation in racial disparities in financial security, meaning Colorado has some of the largest disparities in the country. Forty-four percent of Coloradans of color have debt in collections compared to 22 percent of white Coloradan. These disparities have emerged based upon the rising income inequalities that have led to a rise in consumer debt. Generations of discrimination in the labor market and the housing market entrenched conditions that reproduce this pattern.

A subset of the collection industry — debt buying — emerged in the wake of this growth in consumer debt. Debt buyers purchase debts from lenders and other creditors at a deep discount and then attempt to collect the debt themselves, often without underlying documentation. Debt buyers typically make use of the courts to collect debts and are frequently able to win court judgments against people, even those who do not owe the debt.

According to the National Consumer Law Center, Colorado receives a “D” grade based upon the protections we provide consumers in debt collection. For example, in a state with an average home value over $400,000, only $75,000 is preserved. Colorado also does not have permanent protections around money saved in bank accounts. If a collector is either able to take the last amount of remaining savings or force the sale of a home, very few Coloradans will be able to recover from a cycle of debt.

The legal system plays a role in worsening circumstances for people who fall behind on debt repayment. Much of the debt collection goes through courts, as consumers are pursued for default judgements. Collectors go up against defendants who are usually absent from court or lack representation because they cannot afford a lawyer and receive judgements that allow them to garnish wages.

Debt Collection During the Pandemic

Even though Colorado had a debt collection moratorium on new court actions, 2020 was a profitable year for major debt collectors, as they managed to keep collecting on old debts through the pandemic. They largely had the CARES Act to thank for their sustained profits through the downturn, as the infusion of stimulus funds often went to pay off debt rather than prepare for a recovery.

Debt collectors are also likely to profit from the fact there is a segment of the population who needed to take on debt to finance expenses like medical care and rent after experiencing income loss due to lost employment or reduced work hours.  

The lack of a social safety net also exposed those how financial systems were not designed to benefit the public. Once Coloradans began losing their jobs and their savings dwindled, many did not have options for public assistance and face higher costs to accessing credit. Therefore, they had to rely on further debt in order to stay afloat.

Building Equity Into Financial Systems

Colorado has extended the moratorium on extraordinary debt collection until June 1. However, the pains of debt collection go beyond the pandemic. The pandemic has revealed that Colorado, in order to start remedying the effects of a financial system that is stratified and worsens crises for low-income residents who lack supports to weather them, should:

• Strengthen the laws that allow families to exempt a basic level of assets that help them work, survive, and recover from economic difficulties
• Increase opportunities for asset building and credit building by creating a statewide office of financial empowerment, which would contribute toward growing individual and community financial resilience
• Providing safe and affordable alternative loan products for low-income borrowers