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How wage garnishment works -- and how to avoid it

Ignoring credit card debt can lead to garnished wages, frozen bank accounts

By Cynthia Diaz and Julie Sherrier

Ignoring outstanding credit card debt can take a bite out of your paycheck or bank account. Garnishment, a last-ditch effort at debt collection, hits debtors where it hurts: their ability to pay the bills, fill the gas tank and feed their families.

When facing credit card debt that can't readily be paid, the best plan of action is to act early, speak to creditors, reach some sort of payment arrangement and stick to a repayment plan. Otherwise, if debt goes unpaid and ignored, the courts may intervene by issuing a judgment requiring your employer to "garnish" or withhold a portion of your wages or bank accounts to pay back the debt.

A collection tool of last resort

"Garnishment is a legal remedy authorized by a court and should be considered a collection tool of last resort. In most states, the garnishment process can only be initiated by a court order and only if a judgment for monies owed has been entered," says David Cherner, the former legal and legislative director of state government affairs for ACA International, The Association of Credit and Collection Professionals.

"Clients are often embarrassed when faced with garnishment because now their paycheck is involved, which means their employer is aware of their financial situation," says Gail Cunningham, senior director of public relations at the National Foundation for Credit Counseling (NFCC). Employers are typically required to tell workers about the withheld amount. While it is against the law for an employer to fire an employee whose wages are garnished, that protection goes away after a second and third such judgment, according to the Consumer Credit Protection Act.

Creditors are required, per state laws, to provide lead time to debtors of any pending legal action, and generally prefer to avoid the hassle of filing a lawsuit. But once the judgment has been rendered, "the consumer's options are very limited," says Cunningham. (Story continues below.)

Credit card debt judgments and garnished wages

Once a credit card account (or any debt) goes into default, and the creditor decides it cannot collect, it may sell the debt to a debt collection company. If the credit card or debt collection company is unsuccessful in recovering the debt, then a lawsuit may be filed against the consumer in an attempt to recover its losses. If the ruling in the lawsuit goes against the consumer, a judgment may be issued to garnish property, bank accounts or wages.

"When faced with notices threatening legal action, consumers should contact an

attorney immediately to, at least, discuss options before the situation escalates and the consumer is faced with lawsuits and garnishment," says Joseph Rosenthal, a lawyer with Rosenthal and Mintz, a general practice law firm in Hauppauge, N.Y. "Once the situation reaches this point, if it is a legitimate debt, the consumer's only recourse is to either make a deal with the credit card company or to declare bankruptcy. Otherwise, a judgment may result, followed by collection procedures," he says.

The only recourse for a consumer after a judgment has been rendered is to ask the court to adjust the amount of the garnishment if the reduction in pay severely impacts the consumer's ability to support himself and any dependents. Also, if a judgment is rendered in a state where the garnishment law differs from federal law, the law requires the court to adjust the garnishment to the lesser amount.

Don't bury your head in the sand

When wages are garnished, or "attached," money is deducted from the debtor's paycheck and sent to the creditor. This form of debt collection is most often seen in delinquent tax situations and back-owed child support, but credit card debt is not immune. When other assets, such as property, are attached, a lien is associated to the property for the judgment amount -- or for as much of the judgment amount as can be secured -- so that when a property is sold, the money obtained from the sale would be distributed first to the creditors.

"Unfortunately, many consumers bury their heads in the sand when the notices start coming in," says Rosenthal. "They are usually overwhelmed with creditors, and by ignoring the situation, the lawsuit goes through and the consumer is faced with garnishment and minimal alternatives," he says.

According to the NFCC's Cunningham, "The smart consumer will reach out for help before he digs too deep of a financial hole. Judgments and garnishments can often be avoided if the problem is addressed early on."

Some funds exempt from garnishment

When an employer is notified of a judgment requesting wage garnishment, only a certain percentage of wages can be withheld -- according to the total of disposable earnings of the employee -- allowing the employee some income to live on, according to Title III of Consumer Credit Protection Act. Also protected from garnishment are deductions that are legally required to be paid by the employee, such as federal, state and local taxes, unemployment insurance, state employee retirement system payments and Social Security payments. However, deductions not required by law (health insurance, union dues) are not protected from garnishment.

Category: Bank

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