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Opportunity: Reduce Debt-Imposed Barriers to Entry (State, Local)

In some states and cities, entrepreneurs are required to prove they do not owe debts to the government prior to starting a business. For some, this can make something as insignificant as a minor traffic ticket or parking violation an unnecessary hurdle to starting a business. Other places impose excessive fines and fees that trap residents in cycles of debt. A 2015 Department of Justice report, released in the aftermath of the killing of Michael Brown, revealed that Ferguson, Missouri, city officials raised revenue by aggressively fining residents for things as insignificant as high grass or weeds in a yard. When residents cannot pay, they are assessed late fees that quickly pile up and create artificial debt-imposed barriers to not only starting a business, but to economic self-sufficiency. A 2017 study by the U.S. Commission on Civil Rights found that these practices are widespread across U.S. municipalities and that they disproportionately target and impact the poor and communities of color. Policymakers should:

  • Reduce debt-imposed barriers to entry, or “debt traps,” that prevent prospective entrepreneurs from obtaining or renewing a business license because of unpaid fines or fees unrelated to the business.
  • Assess and eliminate the prevalence of the use of unreasonable and excessively punitive fines and fees in low- and moderate-income areas, which trap would-be entrepreneurs in those communities into cycles of debt.
Supporting Evidence
  • People of color have lower average household income and are more likely to have debt in collections or in default or be delinquent on debt payments than white Americans are. Moreover, research by the National League of Cities, based on a review of Census data from 20,000 cities, found a positive correlation between cities’ Black and Latino populations and cities’ reliance on fines and fees.
  • It can be difficult for prospective entrepreneurs to figure out whether they have outstanding debt, thereby compounding the cycle. One study found that none of eight states examined had a central state repository where information on the total amount of legal financial obligations (such as fines, fees, and costs in civil and criminal cases) owed could be found.