Why you can't afford to ignore unpaid debts

The following is presented for informational purposes only. Please consult with an attorney for legal advice.

Sometimes the money just isn’t there. We talk about it all the time. Things happen, circumstances change, and you’re not able to keep up on your bills.

If it’s happened to you, you know what happens next:

  • Your account goes delinquent
  • You start getting letters asking for the money
  • You start getting phone calls asking for the money

On and on it goes. Except debt collectors can go beyond simply calling and writing you for the money. They can take you to court. If you’ve got old delinquent debts you need to beware, because creditors are more willing than ever to use wage garnishments to get their money.

Not just for delinquent child support any more

In 2014, ProPublica published a detailed report on wage garnishment trends. Among the findings:

  • Garnishments have shifted from primarily child support cases to more general consumer debts. As little as a decade ago, the vast majority of employee wage garnishments were related to child support payments. Now at least half of all such garnishments are in repayment of some form of consumer debt, from hospital bills to defaulted credit cards.
  • An estimated 4 million workers had wages garnished due to consumer debts in 2013. That represents about 3 percent of all employees.
  • These lawsuits are most often brought by major credit card companies, medical debt collectors, payday lenders, and companies that specialize in purchasing delinquent debts. In the majority of these cases, the debtor does not show up to court and the plaintiff wins the suit by default.
  • A wage garnishment lasts for the life of the debt. Once a creditor has won a judgment they have the authority to continue collecting on the debt via wage garnishment until the debt is paid in full – no matter how long that takes.

When will they sue?

If you’re not able to do much about it, there’s often a temptation to simply ignore delinquent debts. Ignore the calls. Throw away the letters. Just wait for it to all blow over.

But will it blow over? On certain debts, yes, the collector may never move beyond calls and letters. Your credit would be damaged, but eventually the unpaid debt would fall off your credit report and outside the statute of limitations established by your state.

"Litigation is a very high-cost mechanism for trying to collect a debt," said Rob Foehl, general counsel at the Association of Credit and Collection Professionals. "It's really only a small percentage of outstanding debts that go through the process."

So when are creditors willing to sue? While researching debt collection trends in and around Newark, NJ, writers for ProPublica found that in Essex County, NJ debt buyers took consumers to court when their outstanding balance hit an average of $2,367. With major banks in the same location, the average balance for debts that went to court was $3,433.

Does that mean you need to owe thousands of dollars before you should start worrying about a collector taking legal action? Not necessarily. Every creditor has their own standards.

For example, the Metropolitan St. Louis Sewer District (MSD), which services millions of residents every month, had a problem with delinquent accounts. As you can’t just turn off sewer service, even on a deeply delinquent account, MSD began to lean on the courts for help. In 2010, they had brought lawsuits against 3,000 customers in pursuit of unpaid account balances. In 2011, that number nearly quadrupled to 11,000.

MSD is willing to file suit over debts as small as $350. The average balance on MSD accounts where garnishment has been sought is $1,300.

What they can take

Wage garnishment restrictions are set by each individual state. There are currently four states (Texas, Pennsylvania, North Carolina, and South Carolina) that generally prohibit wage garnishments for consumer debts. Most of the rest allow up to 25 percent (which is the federally mandated limit) of an employee’s disposable income to be garnished for the purposes of repaying consumer debts.

Disposable income, unfortunately, doesn’t mean “extra money left over after you’ve paid your other bills.” It’s just your gross income after taxes. Which means, depending on where you live, a creditor may be able to seize a full quarter of every paycheck before those funds ever hit your bank account.

Additionally, it’s important to know that in many states creditors can continue to add interest charges to an account even after the judgment. That means even as your paycheck is being garnished to pay an old debt, the balance on that debt can continue to rise, making it even more difficult to repay.

How to protect yourself

If you receive a summons, it’s very important that you go to court at the appointed time. Prior to that, verify that the debt is accurate by requesting that the creditor provide you with written proof of your debt obligation.

If you’re able to do so, speak with a qualified attorney. Many states have special consumer protections that may apply to you and an attorney can help you understand your rights.

If you can’t afford an attorney and you can’t afford to arrange a repayment plan directly with the creditor, you still need to go to court. The judge has the ability to provide some level of leniency, but if you don’t show up to plead your case, the creditor will almost definitely win by default and get the maximum garnishment allowed.

When you’ve got no money to spare, it’s natural to want to ignore your debts until they all go away. Unfortunately, that rarely works out very well. And with creditors more willing than ever to take you to court and take a chunk of your paycheck, you really can’t afford to ignore your debts. Because if things are tough now, imagine how much tougher they’ll be when you’ve got 25 percent less income than you had before.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

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  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.