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Study Finds Consumer Bankruptcies Are Lower in States Prohibiting Wage Garnishment

July 9, 2009

An analysis by the Associated Press found sharply higher bankruptcy rates in states that allow debt collectors to seize debtors' wages, the AP reported July 6. The AP compared several years of bankruptcy filings between now and 2006, and compared them with other indicators of a bad economy, including foreclosures and unemployment. Its finding: In the five states that prohibit or sharply limit creditors' ability to garnish wages, bankruptcy filings are significantly lower than in neighboring states. That was true even in counties near state borders, where the economic climate is similar on either side.

The states that outright prohibit wage seizure by creditors are North Carolina, Pennsylvania, South Carolina and Texas. Florida prohibits wage garnishment for heads of households. Certain debts, such as child support, may still lead to wage garnishments in these states. According to the AP, the national bankruptcy rate is 42% higher than the rate in the states that do not allow wage seizure. Filing for bankruptcy automatically stops a wage garnishment, and according to the AP, just the threat or garnishment is enough to convince some people to seek bankruptcy protection.

The appeal of wage garnishment to debt collectors is easy to see. By taking a percentage of the debtor's disposable income before he or she can cash a paycheck, creditors get the first and best chance to be repaid. However, consumer bankruptcy lawyers and others interviewed by the AP said wage garnishments also push some people closer to bankruptcy by limiting their financial flexibility. Carri Grube Lybarker, an attorney for the state of South Carolina, said people who are struggling because of a one-time problem like a divorce can often recover financially and pay back debts if given the chance. In fact, she said, her state's limitations on wage garnishment give South Carolina debtors leverage in negotiations with creditors, sometimes allowing them to stay out of bankruptcy.

This analysis reflects the sad truth we've learned in our own practice as Highland consumer bankruptcy lawyers: Aggressive debt collection efforts drive people into bankruptcy. In addition to limiting debtors' ability to support themselves, wage garnishments and other invasive debt collection efforts can be so frightening or harassing that consumers feel that a bankruptcy is their only escape, despite the havoc it can wreak on their finances. Ironically, this can ultimately harm debt collectors, because many debts can be erased in a Chapter 7 or Chapter 13 bankruptcy -- which means the debt collectors and creditors won't get their money. In many cases, everyone involved may be better off allowing the debtor to work out a plan to repay the debt in full, but more slowly.

Howard Law LLP is a consumer bankruptcy law firm based in Anaheim and serving clients throughout Southern California in both Chapter 13 and Chapter 7 bankruptcies. Our Paramount bankruptcy attorneys don't just file the bankruptcy paperwork -- we take the time to analyze your financial situation and decide whether bankruptcy truly is right for you. If it is, we can guide you toward the type of consumer bankruptcy that allows you to hold on to the assets you care about most. If it's not, our Santa Ana bankruptcy lawyers may still be able to help through our debt settlement and mortgage loan modification practices.

If you feel overwhelmed by your debts and you're ready to look for alternatives, call Howard Law today for a free, confidential consultation. You can reach us toll-free at 1-800-872-5925 or contact us via email.