By Kevin T. White
Associate Attorney
Recently, Governor Scott Walker signed into law a bill modifying the way interest accrues on civil money judgments in Wisconsin. Specifically, all judgments used to accrue interest at 12% per annum. However, Wis. Stat. §815.05(8) now states:
Every…judgment for the recovery of money shall direct the collection of interest at an annual rate equal to 1 percent plus the prime rate in effect on the day judgment is entered, as reported by the federal reserve board in federal reserve statistical release H.15.
Because the prime rate changes, the rate of interest on January 1st of a given year applies to judgments entered on or before June 30th, and the rate of interest on July 1st applies to judgments entered after June 30th. As the prime rate is currently 3.25%, all judgments entered from December 2nd, 2011 to January 1st, 2012 will now accrue interest at 4.25%.
It is important to note that once the rate for a given judgment is set, it will not change. If a judgment is entered today, the interest will be 4.25% until it is satisfied, discharged or expires—even if the prime rate later increases.
Ostensibly, the laws primary effect, at least in the short-term, is that creditors will lose a substantial amount of annual interest on money judgments.[1] Of course, it is possible under the new law for an interest rate to be higher than the previous 12%. However, the prime rate has not reached 11% since February 24th, 1989[2]; given the current economic and inflationary pressures around the globe, it is unlikely it will return to 11% for quite some time.
The concern of creditor’s rights attorneys is this law will create a disincentive for debtors to pay judgments quickly. Timothy Fenner, a partner at Axley Brynelson LLP’s business and litigation practice group, says “at 12 percent, people were pretty motivated to pay the judgment. Now, you may have to do some chasing given the lower rate of interest.”[3] Thus, in addition to losing the interest itself, creditors may expend more costs on supplemental examinations, garnishments and other forms of execution.
As well as higher expenses to collect the judgment, debtors may be less likely to settle while suit is ending. Specifically, Wis. Stat. §807.01(4) allows creditors to make an offer of settlement before trial. Previously, if the debtor declined and the judgment was higher than the amount offered to settle, the creditor would be entitled to the 12% interest rate from the date of the settlement offer instead of the date of judgment. However, with the lower interest rate, there is less incentive for a debtor to settle and he or she may just continue with the litigation.
In addition to the monetary loss, the law creates administrative burdens. Specifically, creditors will now be required to track interest rates for debtors at multiple rates, sometimes even for the same case. For example:
Judgment is entered against the debtor and begins accruing interest at 4.25%. The following year, the creditor files a wage garnishment in an attempt to satisfy the judgment, but the employer fails to respond and judgment is entered against the employer as provided for in Wis. Stat. § 812.41. If the prime rate has changed, the creditor will now be forced to track judgment interest at two different rates.
Finally, it appears that consumer attorneys also have concerns with the new law. Leonard Leverson, co-chair of the Bankruptcy, Insolvency & Creditors Rights Section of the Wisconsin Bar has said that “a flat, lower rate, perhaps 6%-8%, would be sufficient to compensate judgment creditors for the delay in payment, while still providing an incentive for judgment debtors to pay up.”[4]
Because it will be several years before the full results of this law are known, creditors should be vigilant in monitoring their collection rates and expenditures.
[1] Because the current rate is 4.25%, creditors are losing 7.75% interest on all judgments entered from December 2nd, 2011 to January 1st, 2012.
[2]http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm
[3]Quoting, Judgment Interest: Bill reducing interest rates on court judgments awaits final signature, http://www.wisbar.org/AM/Template.cfm?Section=Search&CONTENTID=107078&TEMPLATE=/cm/contentdisplay.cfm
[4] Ibid.