Bankruptcy practitioners need to know about recent changes in Kentucky law affecting: (1) a creditor’s right to prejudgment interest; and (2) the statutory rate of postjudgment interest.
Prejudgment Interest: Common scenario: Debt buyer buys charged-off credit card accounts for pennies on the dollar, then sues the consumer to try to collect. The lawsuit asks for prejudgment interest at 8% per KRS 360.010.
According to a February 2017 opinion of the Kentucky Supreme Court, the creditor is not entitled to prejudgment interest after the debt has been charged off.
Under Kentucky law, when the credit card account was first opened, the original creditor got to choose between interest at 8% per the statute and interest at a different rate set out in a contract. By choosing a higher contract rate (like 27% on a credit card account), the creditor extinguished its right to ask for the 8% statutory interest rate. Under the court’s analysis, this choice appears to be an irrevocable option.
Later when the account was charged off and the creditor stopped collecting interest, the creditor waived its right to collect interest per the contract. At the time the creditor sold the charged-off account to the debt buyer, the creditor had waived its right to collect interest at either the contract rate or the statutory rate, so the debt buyer could not ask for prejudgment interest.
The case is Unifund CCR Partners v. Harrell.
Postjudgment Interest: KRS 360.040 was amended in the 2017 legislative session to reduce the rate of postjudgment interest on most judgments from 12% to 6%. The change applies to judgments entered on or after June 29, 2017. Also, it looks like postjudgment interest can now be awarded on prejudgment interest (“a judgment, including a judgment for prejudgment interest, shall bear 6% interest . . . .”).
Exceptions to the 6% postjudgment interest rate:
- A judgment for unpaid child support still bears interest at 12%.
- “A judgment rendered on a contract, promissory note, or other written obligation shall bear interest at the interest rate established in that contract, promissory note, or other written obligation.”
[Side note/stupid question: Does the contract have to be a written contract in order for the postjudgment contract interest rate to apply? In my last post, I mentioned two cases suggesting that credit card debts in Kentucky are not necessarily based on written contracts for statute of limitations purposes. If the same analysis applies, I wonder if a judgment rendered on a credit card debt bears interest at the “contract” rate or if the 6% postjudgment interest rate would apply. Then again, the Unifund case is based on the assumption that there was a contract for the credit card debt . . . .]
Why Bankruptcy Attorneys Need to Know This: Obviously creditors’ attorneys who do collection work in state court need to know about these changes in the law. But will the changes affect claims in bankruptcy court?
Not much. If a claim filed in bankruptcy court is based on a state court judgment that is wrong, there is little that can be done to challenge it in bankruptcy court because of the Rooker-Feldman doctrine. Simply put, if you don’t like the state court’s award of pre- or post-judgment interest, your remedy is to appeal in state court, not to ask the bankruptcy court to change the state court’s judgment. Bankruptcy attorneys need to know and understand Rooker-Feldman before they file an objection to a claim based on a state court judgment.
On the other hand, if a state court judgment merely says “postjudgment interest as provided in KRS 360.040,” and the creditor adds an amount in the proof of claim using the wrong interest rate, an objection to the claim would be appropriate.
Note: This post was revised to delete references to the FDCPA, some of which were incorrect.
P.S. Please volunteer your legal services by contacting the Pro Bono Coordinator at Legal Aid of the Bluegrass, Josh Fain, at firstname.lastname@example.org. Josh can direct you to the Legal Services office in your area if you are not in central Kentucky. Josh and his colleagues can do the initial screening and handle some of the client intake and document gathering, so you can spend your time more efficiently.