Wage Garnishment Contributes to Bankruptcy

States that allow debt collectors to seize consumers’ wages have markedly higher rates of bankruptcy than states that prohibit or strictly limit the practice, according to a new analysis by the Associated Press and reported by Mike Baker.

The link between wage seizures and bankruptcy underscores a dilemma facing credit-card companies and other businesses that pursue consumer debts.

Credit Companies Lose When Debtors File Bankruptcy

More and more collection agencies have been doing so since the recession began, but their actions risk forcing consumers to seek refuge in bankruptcy, where a judge can eliminate the debt entirely, as well as other financial obligations.

Chapter 7 bankruptcy is typically the type of bankruptcy that eliminates credit card debt and other types of unsecured debts (like medical and utility bills).

The Associated Press gathered millions of bankruptcy records over the past three years and plotted the number of filings in each county of the U.S.

Economic Stress Map Proves Point

The resulting Economic Stress Map reveals a portrait of economic hardship based on unemployment, foreclosure and bankruptcy data.

Many factors affect bankruptcy rates, but five states that prohibit or significantly restrain wage seizures – North Carolina, Pennsylvania, South Carolina, Florida, and Texas – all show significantly lower rates than their neighbors.

The differences are particularly remarkable along borders between protected and non-protected states.

Economic conditions in border areas are often the same on either side of the imaginary line that distinguishes Pennsylvania from Ohio, but the bankruptcy rates can be dramatically different.

South Carolina’s bankruptcy rate is just 25% that of Georgia. Pennsylvania has 50% fewer bankruptcies than Ohio.

Texas has a smaller bankruptcy rate than every state it shares a border with.

Both Carolinas, Pennsylvania and Texas prohibit wage garnishment except in certain, specific instances, including unpaid taxes or delinquent child support cases.

In Florida, wages cannot be garnished from anyone who files their income taxes as the head of a household.

Nationwide Bankruptcy Rates

Nationwide, the bankruptcy rate is 42 percent higher than it is in the above sates.

Bankruptcy rates are currently seeing a recession-era boost after diving following the passage of laws in 2005 that altered the rules surrounding a bankruptcy filing.

Filings in May are up 35% over a year ago, and 1.2 million people have gone bankrupt in the past year.

In most cases, debts must be delinquent by several months before companies begin pursuing consumers to recover them.

Wage Seizure Rules

Wage seizure requires court approval, and federal and state laws restrict the amount that can be garnished.

This amount is usually 25 percent of “disposable” income, after taxes and other deductions.

Counties do not keep statistics on the rate of wage seizures, but many attorneys feel that the credit crisis has pushed lenders to more aggressive measures, including seeking court authority to garnish wages.

There are a growing number of collection agencies working the same debtors, and the first one to obtain court authority will score a major victory over the competition.

Merely being threatened with wage seizure can be enough to seek protection in bankruptcy, and both Chapter 7 and Chapter 13 override a wage seizure order.

In South Carolina, restrictions on wage seizures have helped empower people to negotiate with creditors and avoid bankruptcy.

In nearby Tennessee, the bankruptcy rate is higher than any other state in the nation.

The data suggests that when debt collectors aggressively pursue wage garnishment, they may be hurting their bottom lines as well as the financial welfare of those they are chasing after.

Source: The Associated Press