When a consumer borrows money from a bank or another financial institution and falls behind on payments, their account is considered delinquent. A delinquent account can result in several consequences for the consumer, including a damaged credit score, wage garnishments, and bank levies.
Late-stage collection tactics
Bad debt can be reported to the credit bureaus, and when this happens, it lowers the consumer’s credit score. Having bad debt on a credit report can make it difficult to borrow money again, which is particularly important if the consumer might require a mortgage or an auto loan in the future. Bad debt remains on a credit report for up to seven years.
Wage garnishment occurs when creditors or debt collectors bring legal action against a consumer in an attempt to collect money from their wages. If a creditor wins a judgement against a consumer in court, the creditor can instruct the consumer’s employer to redirect a portion of the consumer’s wages to the creditor to reduce the amount of money owed. In most cases, this will continue until the debt is repaid in full. There are some stipulations to wage garnishment that vary by state. All states have a wage garnishment cap, and most adhere to the federal guideline—up to 25% of a consumer’s wages can be garnished. In some cases, a higher percentage of wages can be garnished; for example, up to 60% can be garnished for child support.
Similar to wage garnishment, bank levies allow the creditor to withdraw money from the consumer’s bank account if they win a collection lawsuit in court. In a bank levy, the creditor contacts the consumer’s bank for the funds, and the bank then reviews the account to see if the money is exempt (usually due to Social Security or Veteran benefits). Any unprotected money is frozen, seized, and sent to the creditor. Unlike wage garnishment, a bank levy allows the creditor to potentially seize a large sum of money all at once, rather than in small payments each pay period.
Contending with wage garnishments and bank levies
If a creditor wins a judgement against you in court, there are some steps you can take (in addition to reviewing your situation with a lawyer). If your wages may be garnished, find out whether you qualify for any state-specific exemptions, such as being the head of household and falling below a specific earning threshold. If you think an exemption applies to you, petition the court or formally contest the garnishment. Even if the creditor wins a judgement against you, reducing the amount of the wage garnishment can still be beneficial.
You can also try working with your creditor to settle the delinquent account. They may be willing to accept a lump-sum settlement or a monthly payment plan, though this is best negotiated before a garnishment is won. If they already have a garnishment against you, they are guaranteed to receive their money plus interest for as long as you remain employed, which makes them less likely to negotiate a deal. If you do reach an agreement with your creditor, be sure to get the new terms in writing.
There are also ways to minimize the effects of a judgement against you. For example, you can look into alternative banking methods, like a prepaid debit card or paying bills with cash only. If you have a joint bank account with a spouse or partner, you can remove your name from the account so that money is not associated with you. Once you reach an agreement with the debt collector and resolve your account, you can add your name back to any joint accounts.
Some sources of money are considered exempt from wage garnishment, like payments from the government. These exempt sources are protected and can remain in the bank—but be careful, because if you mix this money with money from other, non-exempt sources, the bank may not distinguish between them. In this case, it would be wise to keep exempt money in a separate bank account from any other money you receive. If too many exempt payments build up over time, this could also cause them to become non-exempt.
Staying proactive with your finances
Having your wages garnished makes it even more difficult to manage your money, and in addition to receiving less pay, your employer is also now aware that you have financial difficulties. The only way for wage garnishment to end is for the debt to be paid in full, either through the garnishment process or with a lump-sum payment from the consumer.
Being proactive is the best way to avoid financial repercussions like wage garnishment and bank levies. By working with your creditors or debt collectors, you can agree to a repayment plan or reduced payoff amount before the debt reaches late-stage collections.
If you need assistance connecting with a collection agency, Kredit can help.