Arizona judge puts part of Proposition 209, which gives medical debt relief, on hold

Corrections & Clarifications: A previous version of the article and its headline incorrectly described the status of the law. Only part of the law is on hold.

Arizonans overwhelmingly approved ballot Proposition 209, which reduces the maximum interest rate on medical debt, but a judge has halted the measure from taking full effect, at least for now.

Maricopa County Superior Court Judge John Blanchard on Wednesday afternoon signed a temporary restraining order preventing enforcement of all Proposition 209's provisions after several plaintiff groups, including the Arizona Creditors Bar Association, filed a civil action against the state.

The lawsuit contends the ballot initiative is unenforceable because of too much vagueness and ambiguity. The plaintiffs say Proposition 209 violates both the U.S. and Arizona constitutions.

Plaintiffs say the initiative is unclear about whether its provisions apply to old debts, or only to debts incurred after Proposition 209 takes effect. The temporary restraining order prevents cases from an action incurred before Dec. 5 that have not gone to collections yet from receiving protections under the act. But debts incurred after Dec. 5 would be protected by Proposition 209's provisions, the order says. An evidentiary hearing is scheduled Dec. 16.

Rodd McLeod, a spokesperson for Proposition 209 supporters from the group Healthcare Rising, said the plaintiffs "need to give it a rest and accept the will of the people."

Voters supported the measure by a wide margin, 72% to 28%, in the Nov. 8 election.

Proposition 209 — the Predatory Debt Collection Act — was supposed to take effect Dec. 5 after the statewide canvass and proclamation adopting the Nov. 8 general election results.

The ballot initiative was to make several changes to state law, including reducing the maximum interest rate on medical debt from 10% to 3%.

Proposition 209 also calls for increasing the value of assets protected from certain debt collectors and reducing the portion of a debtor’s weekly disposable earnings that is subject to debt collection actions (other than support payments) to 10% from 25% of disposable earnings.

Supporters from Healthcare Rising have said the interest rate cap reduction on medical debts in Proposition 209 would apply only to medical debts incurred after the measure takes effect. In other words, old medical debts wouldn't be protected with the 3% maximum interest rate cap.

Arizonans with old debts would be protected in other ways, though, including the reduction in wage garnishment and the increased value on assets protected from certain creditors, Healthcare Rising has maintained.

Attorney: Proposition 209 hold could affect Arizonans filing for bankruptcy

On Dec. 5, the day Proposition 209 was supposed to take effect, several groups representing debt collectors sued the state in Maricopa County Superior Court, arguing that the ballot initiative should not be implemented because without court intervention, Proposition 209 would subject the plaintiffs to "immediate and irreparable injury and loss of rights."

The complaint says the initiative is not clear about whether the ballot measure's provisions apply to old debts or only to new ones. The plaintiffs cite a "savings clause" in the Predatory Debt Collection Act that says "this act applies prospectively only," which backers of the initiative have said is a clear way of saying that only medical debt incurred from the effective date of the act has the maximum 3% interest rate cap. But the plaintiffs say the savings clause is inconsistent in terms of how it applies to various debt scenarios.

In addition to the Arizona Creditors Bar Association, a group of lawyers involved in consumer debt collection, plaintiffs in the case include Cash Time Title Loans, Proposition 209 opponents from Protect Our Arizona, two homeowners associations and several debt collectors, including Absolute Resolution Investments, an Arizona company that purchases and manages debt from creditors.

Until the legal issues over Proposition 209 are resolved, Arizonans should consider holding off filing for bankruptcy if they need to use and rely on the increased exemption amounts provided for under Prop. 209, Phoenix bankruptcy attorney Scott Hyder said. That's important to know since quite a few Arizonans file for bankruptcy without an attorney representing them, Hyder said.

Consumers seeking bankruptcy protection might think their home is protected up to $400,000 of equity, which is the value allowed in Proposition 209. But the old equity cap, prior to Proposition 209, was $250,000.

"I'm really worried about those people who don't have lawyers and decide to file for bankruptcy not understanding that these increased exemption amounts are in flux for the time being," Hyder said.

"There's uncertainty right now. It really is something that if people are thinking of filing for bankruptcy they should probably at the very minimum see if they can wait until this gets straightened out, so that we know which exemption amounts are applicable. And even better, they should consult with an attorney before doing anything," he said.

Proposition 209 could spur similar debt-relief initiatives

At a time when inflation and the economy are of concern to U.S. voters, Proposition 209 attracted national attention as a test case for other states, according to the Fairness Project, a national nonprofit that funds, organizes and advocates for ballot measures and supported Proposition 209.

“Before now, voters had never taken up medical debt on a statewide ballot measure, but Arizonans have charted a path forward to take on predatory lenders through direct democracy," Fairness Project executive director Kelly Hall said in a statement after Proposition 209 passed.

"We’re looking forward to working with citizens in other states who want to pass more ballot measures to protect working families from exploitative lending practices."

While supporters touted the measure as a way to protect Arizonans with medical debt from bankruptcy and poverty, opponents from the business community have argued that it was too broad and would have the unintended consequence of making it more difficult for working Arizonans to get loans.

Critics also said the measure was misleading because it was billed as offering relief for medical debt but included other measures that apply to general consumer debt, not just medical debt.

The most recent data from the Urban Institute, a Washington, D.C., think tank, says slightly more than one-quarter of state residents — 27% — have any kind of debt in collections, and the median level of overall debt in collections is $1,903. The number is based on credit data from February 2022.

People of color, who are also more likely to be without health insurance, are disproportionately affected by debt, the Urban Institute research says.

Backers of Proposition 209 say medical debt sometimes shows up in general debt categories because people use credit cards to pay their health care bills.

Reach healthcare reporter Stephanie Innes at Stephanie.Innes@gannett.com or at 602-444-8369. Follow her on Twitter @stephanieinnes

This article originally appeared on Arizona Republic: Arizona judge halts debt-relief measure Prop. 209 from taking full effect