On May 20, Vermont Governor Phil Scott signed H.385 into law, establishing protections and remedies for victims of “coerced debt” and authorizing banks and credit unions to take protective action against suspected financial exploitation of customers. The law defines “coerced debt” as secured or unsecured debt incurred as a result of domestic abuse; human trafficking; or the abuse, neglect or exploitation of a vulnerable adult through “use of the debtor’s personal information without the debtor’s knowledge, authorization, or consent” or through “use or threat of force, intimidation, undue influence, fraud, deception, coercion, or other similar means.” The definition excludes mortgage loans and commercial loans. Under the law, a debtor cannot be held liable for “substantiated” coerced debt.

Within 10 business days of receiving a debtor’s statement of coerced debt and adequate documentation, the law requires a creditor to cease all collection activities, notify the debtor, and notify any credit reporting agency of the dispute. The creditor must then complete a “reasonable investigation” within 30 days and, if it determines the debt is coerced, cease collection and request deletion of adverse information from the debtor’s credit report; credit reporting agencies face a parallel duty to reinvestigate and remove confirmed coerced debt from the consumer’s file. The law provides that a knowing and material violation of the subchapter constitutes an unfair and deceptive act under Vermont’s Consumer Protection Act. If a creditor determines the claim is not supported, it may resume collection activities but is prohibited from selling, assigning, or otherwise transferring the disputed debt; however, if a creditor initiates a lawsuit against the debtor, the law provides certain protections for debtors. Under the law, if a court finds a debt is coerced, it must set aside any prior default judgment entered against the debtor, and both the creditor and the debtor may pursue a civil action against the perpetrator. The coerced debt provisions take effect July 1, 2028, and apply to all outstanding coerced debt, including debt incurred prior to that date.

Separately, the law authorizes banks, trust companies, savings institutions, and credit unions, as well as their subsidiaries, affiliates and agents (collectively, “covered entities”), to intervene in a customer-directed transaction — including by delaying or refusing the transaction, preventing changes in account ownership, or refusing to comply with instructions from an agent under a power of attorney — if the covered entity “reasonably believes” a customer is or has been the victim of “financial exploitation.” The law defines financial exploitation broadly to encompass the wrongful or unauthorized use of a customer’s assets or obtaining control over such assets through “deception, intimidation, coercion, or undue influence.” Covered entities may also notify an associated third party of the suspected financial exploitation. The law shields covered entities from civil, criminal and administrative liability for “good faith” actions, provided the actions do not amount to gross negligence or willful misconduct. The transaction-hold provisions are effective upon passage.