The Wall Street Journal has an excellent story today reporting on the country’s modern-day debtors’ prisons, which I’d thought were done away with here two centuries ago.

Jessica Silver-Greenberg does some superb enterprise reporting, working with what little data is out there to find this:

More than a third of all U.S. states allow borrowers who can’t or won’t pay to be jailed. Judges have signed off on more than 5,000 such warrants since the start of 2010 in nine counties with a total population of 13.6 million people, according to a tally by The Wall Street Journal of filings in those counties. Nationwide figures aren’t known because many courts don’t keep track of warrants by alleged offense.

She finds a payday lender in Illinois who got a customer jailed for five days for failure to pay a $275 loan. And Capital One got a 26 year old woman arrested for failing to pay a $1,160 debt. But the third anecote is the killer. Your hundreds of billions of dollars of bailouts at work:

In September 2009, Jeffrey Stearns, a concrete-company owner, answered a knock at the door from a Hancock County, Ind., deputy sheriff. The deputy was holding a warrant to arrest Mr. Stearns for not paying $4,024.88 owed to a unit of American International Group Inc. on a loan for his pickup truck.

After being handcuffed in front of his four children, Mr. Stearns, 29 years old, spent two nights in jail, where he said he was strip-searched and sprayed for lice. Court records show he was released after agreeing to pay $1,500 to the loan company. “I didn’t even know I was being sued,” he said, though he doesn’t dispute owing the money. “It’s the scariest thing that ever happened to me.”

AIG, of course, got hundreds of billions of dollars in bailouts from taxpayers. Now it’s having those taxpayers thrown in jail. Nice.

Basically we have the finance industry using very expensive public resources to do their dirty work for them. Thing is, if you make a loan to someone, you take on the risk that they won’t pay it back. If they don’t, then you take the loss and the person ruins his or her credit. Why does the taxpayer have to spend thousands of dollars to help your bottom line? It costs a lot of money to send a cop out, jail somebody, even for a short time, and tie up the courts with this stuff, which the WSJ is good to point out:

Some judges elsewhere are issuing fewer debt-related arrest warrants because law-enforcement officials complained those cases gobble up resources needed to pursue violent offenders.

And speaking of tying up the courts, check out this debt collection company:

Encore Capital Group Inc., the largest publicly traded debt-buying firm by revenue, last year began requiring law firms handling its cases to follow a “code of conduct” that includes this sentence: “Under no circumstances should a firm cause a consumer to be taken into custody involuntarily.”

J. Brandon Black, Encore’s president and chief executive, said the San Diego company decided to stop threatening borrowers with jail because the practice made Encore look bad. The company filed 425,000 lawsuits against borrowers last year, up 27% from 334,000 in 2009.

The particularly dangerous thing here, as Silver-Greenberg reports, is that these companies are far from infallible (emphasis mine)

The backlash is a reaction to sloppy, incomplete or even false documentation that can result in borrowers having no idea before being locked up that they were sued to collect an outstanding debt…

Earlier this month, Washington state’s House of Representatives passed by a 98-0 vote a bill that would require companies to provide proof a borrower has been notified about lawsuits against them before a judge could issue an arrest warrant.

Again, more than a third of states allow borrowers to be arrested for failure to pay creditors.

Great work by the Journal to shine a light on this issue. Let’s hope there’s more to come on this.


Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.