This multi-part series on ways to deal with your debt takes up with some of the different means by which a debtor can deal with debts. In my prior post, I listed five ways in which a debtor can deal with debts. In this post, we will take up the last option, or what I call: the “do nothing” option.
To understand the “do nothing” option and to consider whether it is a viable option, the debtor must understand a little bit of collections law—that is, how does a judgment creditor go about getting money of the debtor’s pocket and putting it in the creditor’s pocket.
Typically, once a creditor obtains a judgment against the debtor, a judgment lien attaches automatically to any real estate that the debtor owns in the county in which the judgment is docketed. In addition, a creditor can have a sheriff’s deputy “execute” or “levy” on certain personal property in which the property is sold and the proceeds of the sale submitted to the creditor.
In most states, a debtor is allowed to exempt a certain amount of property or stuff. For example, in North Carolina, a debtor is allowed to exempt up to $35,000.00 in equity (value minus any liens against the property) in real estate used as his residence. A debtor may also exempt up to $3,500.00 in value in one motor vehicle; $5,000.00 in household goods and there are other exemptions. Most states allow retaining certain exempt property but the extent and amount varies. Most states have a procedure where the debtors must affirmatively take the exemption or else the exemption is lost.
So, what does this mean? If the debtor does not own property over and above what can be exempt, then there is not anything that a creditor can take. The debtor’s property, as long as the appropriate exemptions are claimed, is not subject to be being seized by a sheriff and sold to pay the judgment creditor.
Also, if the debtor’s only source of income is from government benefits such as Social Security payments or other types of governmental benefits, these benefits are generally not subject to garnishment or execution. So, if the debtor does not own property over and above what may be exempt and/or the debtor’s income is from sources not subject to execution or garnishment, the “do nothing” option can be a feasible way of dealing with debt.
So far that sounds good!
Unfortunately, most states also allow for wage garnishment. Wage garnishment allows a judgment creditor to require that a debtor’s employer withhold a certain amount of money from his paycheck each pay period and remit that money to the judgment creditor. Understandably, this is very disconcerting to judgment debtors and potential judgment debtors. It appears that almost all states have some form of wage garnishment with the exception of four states: North Carolina (my state), South Carolina, Texas and Pennsylvania (I have not definitively researched this). Other states may allow for modifications of garnishment. For instance, Florida will prohibit wage garnishment if you can convince a judge that all of your wages are needed for support. It should be noted that all states allow for garnishment of certain debts such as child support.
If the debtor lives in a wage garnishment state, the “do nothing” option may prove problematic. While there are federal protections on wage garnishments set forth under the Consumer Credit Protection Act, establishing a maximum rate of garnishment, if the debtor is subject to a garnishment, even that amount garnished can be the difference between making ends meet or not. Therefore, in wage garnishment states, “doing nothing” can be very problematic—that is, unless the debtor doesn’t mind a wage garnishment.
For lower income folks who may not be employed or whose only source of income is not subject to garnishment or levy, if you have unsecured debts or judgments against you, the “do nothing” option may prove feasible. However, creditors can still be aggravating and dealing with the stress of not fully understanding what creditors can and cannot do may be more than you wish to undertake. Often, the price of a bankruptcy filing pales in comparison with dealing with creditors even though there really isn’t much a creditor can do to get its money it claims is owed.
If you can handle the aggravation of creditors’ collection activities or know enough about what creditors can and cannot do such as through the Fair Debt Collections Practices Act, then, the “do nothing” may be a means of dealing (or not dealing) with your debts. In my experience though, most people do not feel comfortable with this means of dealing with their debts.
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