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Know your rights when dealing with creditors

More Information

FTC warning on debt consolidation

Advertisements for debt reduction may sound enticing. However, the Federal Trade Commission ( www.ftc.gov) offers sobering information on the realities of negotiating reduced credit card payments. Its website warns: “If you've maxed out your credit cards and don't know how you're going to pay off your debts, you may think that a company that promises to erase the debt for pennies on the dollar is the answer to your prayers. Not true! Debt negotiation can be risky, and it can have serious, long-term consequences for your credit report and your ability to get credit in the future.”

Limits on other garnishments

Unpaid student loans and tax debts both can shrink a paycheck. Federal student loan garnishments are limited to 15 percent of disposable earnings. However, the U.S. Department of Education can issue an administrative order for a garnishment without obtaining a court order.
Federal tax debts are perhaps the most serious because the Internal Revenue Service can go after both wages and bank accounts. The IRS doesn't have a maximum percentage, but only needs to leave a small amount of income based on filing status and exemptions. For a person filing singly who claims one exemption in 2012, the IRS may take all wages above $187.50 per week, no matter how much the employee earns.

They may call the office, lower ratings – even dip into paychecks

Monday, January 7, 2013 - 12:01 am

With holiday shopping a memory, credit card bills become a reality. Keeping debts manageable is important, since failing to make payments can damage credit ratings, bring collection agency calls and even lead to paycheck garnishments.

One of the first reminders that bills are going unpaid is often a phone call from a debt collector. These calls can be annoying, but there are limits to when and where collectors can contact the debtor. If collectors start calling at work, both employees and employers should be aware that such calls must stop upon request.

The Fair Debt Collection Practices Act says that debt collectors may not contact a person at a place of work if the collector knows, or has reason to believe, that the employer prohibits such communication. In other words, if company policy prohibits employees from taking such calls at work, the debt collection agency must stop calling that person at work. Also, collectors may not call at “unusual” times, which typically means before 8 a.m. or after 9 p.m.

There is a catch, however. This law applies mainly to third-party collection agencies, not to organizations attempting to collect their own debts. A credit card company attempting to collect its own debt could continue to call at work, even if asked to stop. The legal restrictions don't apply until the matter is turned over to a collection agency.

Can they take my paycheck?

If debt collection fails, the creditor may take aim at the debtor's paycheck. To do this, the creditor must obtain a court order for a wage garnishment. These orders require the company to take money directly out of a paycheck. There are limits, though. The Consumer Credit Protection Act restricts garnishments to 25 percent of disposable earnings (the amount left after legally required deductions such as taxes and Social Security). Also, the remaining income must be at least $217.50 per week, which is equal to 30 hours per week at minimum wage.

While disposable earnings don't include taxes, they do include voluntary payments for health insurance or 401(k) contributions. An employee could have 25 percent taken, then pay for health insurance and contribute to a retirement plan, and receive a paycheck below $217.50.

Multiple deductions

In some cases, more than one entity will make a claim on an employee's paycheck. If two creditors obtain court orders, the priority is normally “first come, first paid.” The second creditor may have to wait until the first order is satisfied before getting payments.

Creditors aren't the only potential collectors. Garnishment orders also can be issued for bankruptcy, federal taxes, family or child support, federal student loans, state or local taxes, and state student loans. Some garnishments take priority over others, typically in the order listed above (creditors come after state student loans).

However, it gets confusing if the person has both state and federal debts.

Most states give priority to family and child support orders, but federal debts aren't subject to state laws. A federal tax garnishment can still take priority, although the Internal Revenue Service (IRS) may allow child support payments to continue.

Although creditor garnishments are limited to 25 percent of disposable income, other debts have different limits. Child or family support can require up to 60 percent of disposable income. Since support orders have priority, the employee might not have any remaining disposable income for a creditor. The creditor may have to wait years before getting paid.

When it comes to garnishment priority, creditors are at the end of the line. Since other debts must be satisfied first, it may not be surprising that credit card companies send numerous warnings and use collection agencies. Garnishment is a last resort because credit card firms know they won't be paid until any other debts are satisfied.

Failing to pay off holiday bills can negatively affect a consumer's credit ratings for years to come. Penalties and interest can accrue until the debt is no longer manageable, potentially leaving bankruptcy as the only option.