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By MIKE BAKER, Associated Press Writer Mike Baker, Associated Press Writer
Mon Jul 6, 12:02 am ET
States that allow debt collectors to seize consumers' wages have sharply higher
bankruptcy rates than neighboring states that prohibit or strictly limit the
practice, an Associated Press analysis has found.
This link highlights a dilemma for credit-card companies and other debt
chasers: By going after wages an increasingly popular maneuver since the
recession began, lawyers say they risk pushing consumers into bankruptcy
court, where judges can reduce or wipe away all sorts of financial obligations.
The apparent relationship between so-called garnishment laws and states'
bankruptcy rates also bolsters the arguments of consumer advocates, who have
long said that intercepting someone's wages to pay their debts only increases
their financial vulnerability.
After gathering millions of bankruptcy records from 2006 until now, the AP
plotted the number of filings for each U.S. county in its Economic Stress Map
a geographic, chronological and visual depiction of economic misery based on
unemployment, foreclosure and bankruptcy data.
While bankruptcy rates vary for many reasons, the five states that prohibit or
strongly limit wage seizures North Carolina, Pennsylvania, South Carolina,
Florida and Texas all have drastically lower rates than their neighbors, with
particularly striking differences along borders, where economic conditions are
similar but bankruptcy rates are not.
South Carolina's bankruptcy rate is almost one-quarter that of Georgia's;
Pennsylvania has half the rate of Ohio; North Carolina has about one-third the
rate of Tennessee; Texas has a smaller rate than all its neighbors; and Florida
has just about half the rates of Georgia and Alabama.
The Carolinas, Pennsylvania and Texas prohibit wage garnishment, except in
special circumstances such as unpaid taxes or child support. Florida prohibits
garnishing wages from the head of a household.
The nationwide bankruptcy rate is 42 percent higher than the rate in those five
states.
Bankruptcy filings have been steadily rising since the end of 2005, when a
change in federal law sent filing rates plummeting. The number of filings in
May were 35 percent higher than a year earlier, and more than 1.2 million cases
have been filed in the past 12 months.
Debts are usually delinquent for several months before companies target
consumers for recovery. Creditors must get court approval to seize a person's
wages or other assets. Federal law and state laws restrict how much can be
taken typically 25 percent of "disposable" income, or income after taxes and
other legally required deductions.
If a person files for protection under Chapter 7 or Chapter 13 of the federal
bankruptcy code, it automatically overrides a court order to seize somebody's
wages.
While counties do not maintain statistics on wage seizures, attorneys say the
recession and credit crisis have made lenders more aggressive about seeking
court orders to grab borrowers' wages. The reason is simple: with the
competition for collecting unpaid debts on the rise, a creditor that gets the
authority to garnish wages gets the first grab at a person's finances, leaving
others to fight over what's left.
The mere threat of a wage seizure is enough to cause some people to seek
bankruptcy-court protection, attorneys say.
Still, credit collection companies view wage seizures as a tool of last resort,
according to David Cherner, the director of state government affairs at ACA
International, a trade group that has hundreds of debt collection members
around the country.
"The debt collection industry isn't necessarily enjoying a lot of success at
this point," in part because personal bankruptcies are on the rise, Cherner
said. "While volume (of credit collection activity) is up, consumers are
hurting."
In South Carolina, limits on wage seizures have given people leverage in their
negotiations with creditors and have helped keep them out of bankruptcy court,
said Carri Grube Lybarker, a staff attorney with the state's department of
consumer affairs. Lybarker said those who are behind on their debts because of
an emergency medical expenditure, divorce or job loss are sometimes able to
regain their financial footing and make good on what they owe.
Professor Rich Hynes, who teaches and researches bankruptcy and finance issues
at the University of Virginia School of Law, said he sees signs that
garnishment is playing a role in bankruptcy rates, but he added that plenty of
other factors are at play.
Bankruptcy rates may be influenced by a variety of state laws that protect
consumers, including rules on how foreclosures can proceed, regulations on
attorney advertising or debt-to-income ratios. Hynes also said issues such as
the culture of local courts can play a role in those differences.
In Tennessee, which has the highest concentration of bankruptcies,
Nashville-based attorney Edgar Rothschild said wage seizures frequently tip his
clients over the edge, and into a Chapter 7 or Chapter 13 filing. He also said
the rates may be influenced by the differences of local judges, trustees and
lawyers.
Cheryl Greer of Vinemont, Ala., sought protection from creditors under Chapter
7 of the federal bankruptcy code in May.
Before filing for bankruptcy, Greer, who mainly lives off Social Security
checks but also works part-time as a clerk at Wal-Mart, managed to pay off
thousands in credit-card debt and keep up with other bills, including the
monthly mortgage on an $80,000 home.
But she couldn't escape the unpaid debts of a former roommate she had tried to
help out.
Greer agreed a few years ago to help her roommate consolidate debt. That left
Greer on the hook for several thousand dollars her roommate owed to a debt
collection company, which in February 2008 was granted the authority to begin
seizing up to a quarter of Greer's monthly income.
When she eventually filed for bankruptcy, Greer reported $7,112 in non-mortgage
debt, most of it stemming from her former housemate.
In Greer's county of Cullman, bankruptcy rates are moderate by Alabama's
standards. But over the past year there have been 16 bankruptcy filings for
every 10,000 individual tax returns a higher rate than any county in the five
states with stiffest anti-wage garnishment laws.
For people in dire situations, filing for bankruptcy may be the only way to
prevent themselves from digging an ever-deeper financial hole.
For her part, Greer said she might have one day been able to pay off her debt
if it wasn't for the court order allowing her wages to be taken away. Although
disappointed by her financial failures and somewhat stung by the stigma that
comes with a bankruptcy filing, she's also feeling a sense of relief now that
she's filed for bankruptcy.
"I don't have (creditors) hounding me," she said.