An AP analysis indicates that states which allow debt collectors to go after a person's wages in their collection efforts actually have higher bankruptcy rates than states which prohibit or set limits on that collection tool. As a result, the AP report suggests, the creditors may actually be shooting themselves in the foot by seizing wages because the practice can just push already cash-strapped consumers into bankruptcy, where the debts owed may be severely curtailed or even wiped out. Here's a short run-down on what garnishment is, how it works, and how it may be limited by law and the filing of bankruptcy.
So what is a garnishment? A garnishment is basically a legal collections tool. It's a procedure that allows a creditor to go to court and get an order requiring an employer to withhold a portion of an employee's wages. Now, before anyone panics about an unpaid debt, it should be noted that wage garnishment isn't remotely a first option for creditors. Usually a debt has to be delinquent for at least a few months, and other collection efforts exhausted, before the option of garnishing someone's wages is explored by a collector.
Another couple of things to note about garnishment. Having your wages garnished can be embarassing, but employees should be aware that federal law prohibits an employer from terminating an employee based on the garnishment for one debt (but if there's more than one debt involved, that law offers no protection). Also, federal and state laws usually limit the amount that can be taken from a person's wages to 25 percent. This rule goes for multiple debts, too, which means that the 25% maximum has to be split up amongst multiple creditors.
States do, however, have their own rules and procedures for wage garnishment, some of which actually offer more protection than the baseline federal law. The states of North Carolina, Pennsylvania, South Carolina, Florida and Texas go further than federal law and prohibit or severely limit the seizure of a person's wages, as noted by the AP.
Unfortunately, the report does suggest that the 25% ceiling might not really be enough protection from overwhelming debt for consumers. The current economic climate probably doesn't help either of the collections/debtor sides, too. As a result, bankruptcy may be seen to offer an "escape" from wage garnishment, although there are some debts bankruptcy will not touch (examples include unpaid taxes and child support). Filing bankruptcy immediately puts a freeze on collections, including garnishments. It generally offers debtors the opportunity to "wipe the slate clean" of many types of debts if Chapter 7 bankruptcy is an option, or alternatively, to create a court-approved plan to repay their debts over time in a Chapter 13 bankruptcy. The latter bankruptcy plan can sometimes result in drastically reduced payments to creditors.
Below are some more helpful links dealing both with ways out of debt via reputable credit counseling agencies (look out for scams!), as well as more information on the last-resort options of the different types of bankruptcies.
- AP: Bankruptcies low in states that don't seize wages (Yahoo! News)
- Department of Labor: Wage Garnishment: Employee Rights (www.dol.gov)
- Garnishment (FindLaw)
- Bankruptcy & Debt: Get Help Now (FindLaw)
- What is Chapter 7 Bankruptcy? (provided by Bryan P. Keenan & Associates, PC)
- Chapter 13 Bankruptcy Overview (provided by The Westerfield Law Firm, LLC)
- Credit Counseling and Counseling Organizations (FindLaw)
- Debt Negotiation Programs (FindLaw)
- Dealing with Creditors (FindLaw)