State of Minnesota
More about
Attorney General
Lori Swanson

Minnesota Attorney General's Office

1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101

(651) 296-3353
(800) 657-3787

M - F 8 am - 5 pm

TTY:(651) 297-7206
TTY:(800) 366-4812

Chapter 5: When Credit Goes Bad

The Credit Handbook

Did You Know?

In 1997 people who sought credit counseling from nonprofit agencies associated with the National Foundation for Consumer Credit together claimed delinquent debts totaling $35 billion. Of this group, 52 percent reported that the reason for their delinquency was simply "poor money management." Another 40 percent said a "life event" propelled them into debt: about 23 percent attributed their financial problems to unemployment or reduced income, 10 percent to a change in marital status (divorce or separation), and 7 percent to medical problems. One drawback to credit is that because it is readily available, it can be easy to get in over your head. Maybe an event in your life left you short of cash for a time. Or, maybe the debts just piled up, and now you're not sure what to do about them.

When you experience a severe credit problem, the problem can compound itself. For example, if you are unable to pay your debts, debt collectors may start calling, your car may be repossessed, your wages may be garnished, and you may begin to worry about keeping your home.

This chapter will walk you through the various options you have when you need help dealing with debt. It will also help you address the specific problems of vehicle repossession, debt collectors, garnishment, and falling behind on home or student loans. However you got to the spot you're in, there is hope and there is help.

I Can't Pay My Bills

If you are having a hard time making payments to creditors, it is best to deal with the problem head-on. First, examine your situation. List all of your debts and your income. See if you can figure out a debt payment plan that will work for you. Remember, you will also need the discipline to follow through with it.

Second, talk to your creditors. Don't wait until your payments are late, call right away. Creditors may be willing to work out a revised payment plan with you. But, they cannot help you if you don't contact them. Never ignore your creditors. If you get mail from a creditor, open it and read it. Ignoring your credit problem for awhile will only make it much worse later.

Third, if you feel you're in over your head, or if you have a lot of different payments to juggle, you may want help. Nonprofit credit counseling services offer low-cost or free counseling. Many of these agencies will help you figure out a debt repayment plan, and also work with you on budgeting and other money issues. They will also talk to creditors on your behalf.

Fourth, and only as a last resort, you may need to consider bankruptcy to help settle your debts. Let's consider these options one at a time.

Debt Payment Plan

If you feel that you're losing ground and not managing your debts as well as you'd like to, set up a debt payment plan. Completing this plan will take patience. You will have to stick to the plan until your debts are repaid. But remember _ paying back a little is better than doing nothing or just worrying about the problem. Paying back a little will give you a sense of control. It will also let you begin to resolve your problem. To set up your plan, take these steps:

  • Figure out who you owe, and how much you owe.
  • Decide how much you can pay back and when you can pay it back.
  • Set up a plan for repaying your debts.
  • Discuss your plan with your creditors.
  • Implement some tough belt-tightening measures for a time. Stick to your plan to help you control your spending.
  • Occasionally revisit your plan to make sure it is keeping pace with your debts, your daily living expenses, and any pay increases or other new resources.

Can't Pay Your Taxes?

If you owe money to the government, consider putting this debt toward the top of your list. Your first choice should be to file your tax returns and pay what you owe. If you cannot pay the full amount, the second best option is to pay as much as you can. If you must take this course, treat the state Department of Revenue and the Internal Revenue Service like any other creditor. Let them know you will be making a partial payment, and tell them when you plan to make payment in full.

If you are unable to pay what you owe, the interest and penalties can really add up. If you file your tax returns but don't pay what you owe, you will be charged a late payment penalty in addition to owing interest. If you don't file at all, you will pay the late payment penalty and a late filing penalty (These penalties are in addition to the interest that will accrue on the amount you owe.) To obtain a copy of your credit report, contact one of the three national credit bureaus.

Pay secured debt first. This means your priority will be your house and car payments. You may also want to stay current on utilities and insurance payments. This is so that you will not lose these goods or services. For example, if you are even one day late in making a car payment, the lender who financed your car may repossess it. Most utility service and insurance coverage stops when you stop paying for them. House foreclosures don't move as quickly, but if you get behind in your mortgage payments you will probably pay penalties and you may lose your house.

If you want to attack your debts, there are a few options to increase the money available to repay them. First, you may want to examine your daily living expenses and find places you can cut back. Second, you may consider selling assets. Third, you may wish to get a second job, or have a family member earn additional money that can be used to repay debts. Fourth, loan consolidation, home equity loans or refinancing your home might be options to consider (though the cost of borrowing money this way is generally high, and putting your home on the line is a risky trade-off).

Talk to Your Creditors

If you don't have the money to cover other debts such as credit card bills and medical bills, inform these creditors of your current situation and your plans to repay the debts. While most creditors will try to work with you, not paying your bills on time can still result in a negative credit rating, garnishment or bankruptcy.

Contact a Credit Counseling Service

Consumer credit counseling agencies help individuals or families with financial problems. These nonprofit groups help with budgets, money management and debt repayment plans. Certified counselors will help you examine ways to solve your current financial problems. They will also help educate you so that you can prevent future difficulties. The counselor will review your financial situation and provide possible solutions. The counselor will also help you develop a spending plan that covers both your living expenses and payments to your creditors.

If you have severe debt, the counselor may help you set up a debt management plan. This is a systematic way to pay down your outstanding debt. You pay money to the consumer credit counsel ing agency and it sends the money to your creditors. Benefits to you include making just one monthly payment, possibly seeing finance charges reduced or waived, and receiving fewer collection calls. You may find credit counseling agencies listed in the phone book. Or, if your employer offers it, contact your employee assistance plan for help. These services are also available through some military bases, universities, credit unions and housing authorities.

Considering Bankruptcy

Bankruptcy is designed for people caught in severe financial circumstances. If you have excessive debt, bankruptcy may offer you a fresh start by reducing or eliminating debt. Bankruptcy is a federal court process designed to help you eliminate your debts or repay them under the protection of the bankruptcy court. Most bankruptcy petitions are voluntary. The definition of a debtor who may file bankruptcy can be found in the Bankruptcy Code. Deciding whether to file bankruptcy is a complicated question. You may need to consult with an attorney, financial advisor or credit counselor to determine if you want to file bankruptcy.

Are you in a credit crisis? If you answer yes to two or more of these questions, you may need to scale back your use of credit, and consider getting some help managing your money.

  1. Are you borrowing to pay for items you used to pay for with cash?
  2. Is an increasing percentage of your income going to pay off debts?
  3. Is your savings cushion inadequate or nonexistent?
  4. Can you make only the minimum payments on your revolving charge accounts?
  5. Are you at or near the credit limit on your cards?
  6. Have circumstances forced you to take out a loan to make payments on a previous loan?
  7. Are you unsure about how much you owe?
  8. Are your monthly bills more than 20 percent of your take-home pay? (Excluding rent or mortgage payments).
  9. If you lost your job would you be in immediate financial difficulty?

Considering bankruptcy

What is an Automatic Stay?

Keep in mind that bankruptcy can be the means to a specific end. This is because after you file for bankruptcy, you have the protection of an "automatic stay." The automatic stay can, for example, immediately stop a foreclosure, an eviction, or wage garnishment. It can also stop debt collection, harassment and disconnection of utilities. The automatic stay can also prevent you from losing your driver's license because of liability for damages, unless the suspension has already occurred.

The automatic stay may provide a powerful reason for filing for bankruptcy. In most of the situations listed above, the automatic stay can buy you a few days or weeks in which to figure out your next move. If your primary motivation in filing bankruptcy is to gain the benefits of the automatic stay, you don't need to file all of your papers at once. You just need to file the two-page petition and a listing of your creditors. You have 15 days in which to file the rest of your papers. If you don't, your case will be dismissed.

Once you file, a creditor cannot take further action against you unless the creditor has permission from the bankruptcy court. The creditor will ask the bankruptcy court to remove (or "lift") the automatic stay if it is not serving its intended purpose. For example, if you file bankruptcy to stop a foreclosure, but you have no equity in the house and no income with which to make mortgage payments, the creditor is likely to ask the court for permission to proceed with the foreclosure. In a case like this, permission will probably be granted.

Different Kinds of Bankruptcy

There are two main types of bankruptcy. Most individual debtors file for Chapter 7, which can also be described as "straight" bankruptcy or "liquidation." Under this plan all non-exempt assets are converted to cash (liquidated), and secured creditors may have the item they financed turned over to them (such as a house or car), unless the debtor reaffirms the debt with the court's approval prior to obtaining a discharge. Chapter 13, also called "reorganization," is an option for people with regular income and debts that are less than the limits allowed by law. When you complete a Chapter 13 plan, you have the satisfaction of keeping your assets, paying your creditors, and discharging your debts.

Bankruptcy is a serious step. If you choose to file Chapter 7 or Chapter 13, you will probably need to hire an attorney. Be sure to find an attorney who has experience handling the type of bankruptcy provision you plan to use. The following overview of Chapter 7 and Chapter 13 will give you some idea of what's involved.

Chapter 7

Under Chapter 7 bankruptcy, you ask the bankruptcy court to discharge the debts you owe. People with no steady income and few assets most often use Chapter 7. It eliminates most debts but also requires immediate liquidation of most assets. Co-signers to your debts can be required to make good on the contracts they have entered into with you. In most cases if you file Chapter 7 you are allowed to keep a small equity in your home, an inexpensive car, and limited personal property. A person may obtain a bankruptcy discharge no more often than every six years. Therefore, you should carefully consider your need for a bankruptcy discharge and your timing.

If you are considering filing bankruptcy, beware of fly-by-night bankruptcy filers. These people will take your money in exchange for filing a form petition, but they cannot offer sound legal advice.

What Property Will I Give Up if I File Chapter 7?

The following property will probably be considered non-exempt and subject to liquidation in order to pay your debts:

  • Cash and bank account balances.
  • Stocks, bonds, investments.
  • Equity in a house, above a certain dollar limit.
  • Luxury items such as fur coats and jewelry.
  • A second house such as a cabin or time-share, or a second motor vehicle.
  • Musical instruments (unless you are a professional musician).
  • Private pension plans.

What Property Will I Get to Keep if I File Chapter 7?

If you file Chapter 7, you can claim either state exemptions or federal exemptions. Exemptions place some property outside the reach of your creditors. But exemptions may not be applied to secured property to defeat a security interest. For example, a homestead exemption would only apply to the amount of equity you have in the home, not to the amount you still owe on your mortgage.

Both Minnesota and federal exemptions include motor vehicles, your homestead, basic personal property and tools of your trade. Minnesota law provides exemptions in more categories and provides a more generous exemption for your homestead. The federal exemptions provide a little cushion you can use if you do not need the homestead exemption. Your attorney should help you determine which exemptions are best for your situation. You must claim one or the other, you cannot mix and match. Most debtors take the state exemptions. Exemptions generally include:

  • Equity in your home. This may be capped at a certain dollar limit.
  • Personal property. You generally can keep most personal property including items such as furniture, appliances and clothing.
  • Motor vehicles. You can generally keep a motor vehicle worth a certain amount.
  • Insurance. Usually you can keep the cash value of your policies.
  • Retirement plans. Pensions which qualify under the Employee Retirement Income Security Act (ERISA) are fully protected in bankruptcy. Many other retirement benefits are also protected,
    but IRAs and Keoghs are not.
  • Public benefits. Payments from welfare, Social Security and unemployment insurance are protected.
  • Tools of the trade. You will probably be able to keep the tools you use on your job, up to a certain dollar limit.
  • Wages. You can generally protect most of your earned but unpaid wages.

How Does Chapter 7 Work?

The nuts and bolts of Chapter 7 are that it moves fairly quickly, is relatively inexpensive, and doesn't take too much of your time. Generally your debts will be discharged approximately four to six months after the date the bankruptcy petition is filed. The filing fee you will pay is currently $175 (although this does not include attorney's fees). And, usually you will just make one trip to the courthouse.

The steps in a Chapter 7 case usually go like this:

  1. First, you or your attorney will file your two-page petition and other forms with the Clerk of the United State Bankruptcy Court in your area. You must list all of your debts and creditors. You must also detail the property you own, your income, money owed you, insurance policies owned, current monthly living expenses, property you are claiming as exempt, as well as money that may be inherited within six months. You must also list property you owned, sold or gave away and money you spent during the last two years.
  2. Once your attorney files your bankruptcy petition, the automatic stay goes into effect. This stops your creditors from trying to collect what you owe them. The automatic stay stops wage garnish- ment, lawsuits and other negative action. (See Page 22 for more information on the automatic stay.) You may reaffirm certain debts with the court's approval if you desire to keep the collateral (such as a car). If you wish to keep your car, for example, you can reaffirm the debt and continue to make payments.
  3. After the bankruptcy petition is filed, a trustee will be appointed by the court. The trustee's
    primary duty is to the creditors. This means the trustee will be interested in what you own, and what exemptions you are claiming. The more the trustee recovers for creditors, the more the trustee is paid.
  4. The trustee will review your file and hold a hearing called the "creditors' meeting." At the meet- ing the trustee will ask you questions. You must attend this meeting, but creditors rarely do. These meetings generally last about five minutes.
  5. After this meeting, the court-appointed trustee takes control of your property that is to be sold and delivers property to the secured creditors, if appropriate. Once property is sold and adminis- trative costs are paid, the remaining cash is paid proportionately to all creditors.
  6. The bankruptcy court later holds a hearing to inform you whether your debts have been dis- charged or not. (Debts may not be discharged if someone objected, or if the debts are non- dischargeable.)

What if I Changed My Mind?

If you change your mind after you file bankruptcy, you can ask the court to dismiss your case. The court will usually dismiss a Chapter 7 case if the dismissal will not harm your creditors. You may also consider changing your Chapter 7 to a Chapter 13. This may be in your best interest if you have debts that cannot be discharged in Chapter 7, but can be included in a Chapter 13 repayment plan. You will still have to meet the income requirements and debt limits to file Chapter 13.

When is Chapter 7 a Bad Idea?

If you are judgment or garnishment proof (meaning you have absolutely no non-exempt assets to protect), bankruptcy may be a waste of time and attorney's fees. If this is your situation, you may want to talk to an attorney or credit counselor to use other options to stop harassing phone calls and similar practices. Other reasons Chapter 7 bankruptcy may not be the right step for you include:

  • You cannot file for Chapter 7 bankruptcy more often than every six years.
  • You have a co-signer on a loan, and you do not want to stick the co-signer with your debt.
  • You will not be able to discharge enough of your debts. For example, debts you will still owe after filing for Chapter 7 include: back child support and alimony obligations, most students loans, income taxes less than three years past due, and court judgments.
  • You will have to give up more property than you would like to. For example, if you are filing bankruptcy to help you keep your home, this will better be accomplished by filing for Chapter 13. In a Chapter 7 case you will either need to give up your property, or pay for it in full during your case.
  • You have enough income to repay some or all of your debts in a Chapter 13 case.
  • You defrauded your creditors. If you've recently taken a lavish vacation or bought luxury items, all the while intending to file bankruptcy, bankruptcy may not help you. Creditors may object to discharging these debts, and a court would probably agree.

Chapter 13

Chapter 13 reorganizes rather than liquidates your assets. When you file under Chapter 13, a debt repayment plan is designed to pay off as much of your debt as possible, usually within three or five years. When you file Chapter 13 you agree to pay approximately 25 percent of your income to the court. A bankruptcy trustee will supervise the plan, handle your money and distribute it to pay off the debts covered by your plan of reorganization.

Chapter 13 is also called personal reorganization because it is most often used by people with regular incomes and less than $269,250 in unsecured debt and less than $807,750 in secured debt. These limits are good as of March 2000, but limits change periodically. (Examples of unsecured debt include credit and charge card purchases, medical and dental bills, rent, and loans from family or friends. Secured debts are home mortgage loans and vehicle loans.)

The actual amount of money paid to creditors depends on the amount you owe, your salary, and the payback timeframe. Chapter 13 payment plans may not be proposed for longer than 36 months unless you can show a reason for extending the plan. The maximum time allowed is five years.

When Should I Consider Chapter 13?

The bottom line on Chapter 13 is that it takes longer, requires discipline, and costs you more. First, your plan may be approved in four to six months. Second, for the three or five years specified in your plan, you will pay a good portion of your income to the court to pay off your debts. In fact, only about 35 percent of the people who file Chapter 13 complete their plans. Third, Chapter 13 costs more than filing Chapter 7 because administrative costs can add up. Your filing fee is $160, but other costs include court costs, the filing fee, attorney's fees, and the trustee's fees for paying off the debts.

You may need to consider bankruptcy if most of these statements apply to you:

  • Attempts to control your spending have failed, even after visiting a credit counselor or trying to stick to a debt consolidation plan.
  • You are unable to meet debt obligations on your current income.
  • Your attempts to work with creditors to set up a debt repayment plan have not wor
  • Your ratio of debt to annual income is 40-50 percent, or more.

However, despite these drawbacks, there are some good reasons people choose Chapter 13 over Chapter 7. Reasons include:

  • You do not lose your assets.
  • It looks better on your credit report than Chapter 7. This is because it shows you tried to pay off the debt instead of simply discharging it in Chapter 7.
  • There is an expanded list of debts that may be dischargeable in Chapter 13 that are not in Chapter 7.
  • If you are behind in mortgage or car payments, Chapter 13 allows you to make up missed
  • payments, reinstate the original agreement, and keep your home or car.
  • You want to pay off your debts, but you need the protection of the bankruptcy court to do so.
  • You need help repaying your debts now, but would like to reserve the option of filing Chapter 7 later.
  • You filed for Chapter 7 within the last six years.
  • You have a co-signer on a loan and you do not want the creditor to go after the co-signer.
  • It may be easier to work with tax debts in Chapter 13 than Chapter 7.

How Does Chapter 13 Work?

To file Chapter 13, you will need to contact an attorney who has experience filing Chapter 13. You can expect the process to work like this:

  1. 1. Your attorney will file your bankruptcy petition with the federal bankruptcy court in your area. To do this properly, you will need to compile the following information:
    • a list of all of your creditors and the amounts you owe.
    • the source of your income and how often you get paid.
    • a list of your property.
    • a detailed listing of your monthly living expenses.
  2. You will either file a plan of repayment with your petition, or within 15 days of filing the petition. This plan must provide for full payment of all priority claims. If the plan classifies claims, it must provide the same treatment for each class of creditors. The plan also details the amount of your future income that you will deposit with the trustee to repay your debts.
  3. When you file for bankruptcy, the automatic stay goes into effect. This stops creditors from trying to collect the debts you owe. (See Page 22 for more information.)
  4. When you file a trustee is appointed to administer your case. The trustee will collect the money you pay in under your plan, and disburse the money to your creditors.
  5. Within 30 days of filing your plan, you must begin making payments to the trustee. This is true even if the court has not yet confirmed your plan.
  6. A "341 meeting" of creditors is held within 20 to 40 days after your petition is filed. You must attend this meeting. Creditors may attend and ask questions about your financial affairs. The trustee will attend the meeting and question you.
  7. Unsecured creditors who have claims against you must file their claims with the court within 90 days after the first date set for the meeting of creditors. If an unsecured creditor fails to file, they may not do so later.
  8. At a confirmation hearing the Bankruptcy Judge will determine if your plan is feasible and meets the standards for confirmation. Creditors do not vote on the plan, but they may object to the plan. Creditors most frequently object if they will receive less under your Chapter 13 plan than if you filed Chapter 7 and liquidated all of your assets. If your plan is not confirmed, the money you have already paid will revert to you. As the debtor you have the right to dismiss your case or convert it from Chapter 13 to Chapter 7.
  9. Once the court confirms your plan, it is your responsibility to make the plan succeed. You will continue making payments under your plan for the three or five year period specified in your plan. A confirmed plan may be modified if your financial situation changes. If you stop making payments and the Chapter 13 gets dismissed, your debts are not discharged and your creditors can resume collection.
  10. You are entitled to a discharge when you successfully complete your plan.

For More Information

The Bankruptcy Code is federal law and is found at U.S.C. Title 11. There is no such thing as state bankruptcy law. A case is venued according to the home address of the debtor. Minnesota has one bankruptcy district with divisions in Minneapolis, St. Paul, Fergus Falls and Duluth.

What Debts Cannot Be Discharged in Bankruptcy?

The following debts cannot be discharged in either a Chapter 7 or a Chapter 13 bankruptcy case. If you file Chapter 7, these debts will remain after your case is over. If you file Chapter 13, these debts will either be paid in full during your plan, or the balance will remain at the end of your case. Nondischargeable debts include:

  • Child support or alimony.
  • Unlisted debts, unless the creditor had knowledge of your bankruptcy filing.
  • Recent income tax debt and other tax debt.
  • Fines imposed for violating the law.
  • Student loans, unless you can show that it will cause a hardship for you to repay them.

In a Chapter 7 case a creditor may object, and a judge may agree, to these additional debts being discharged:

  • Money or items received by fraud or false pretenses.
  • Debts incurred by embezzlement, fraud or larceny.
  • Large credit purchases or loans made within 60 days of filing.
  • Willful or malicious injury to another person or person's property.
  • Debts you owe under a divorce decree or settlement, with some exceptions.

Vehicle Repossession

Most automobile financing agreements allow a creditor to repossess your car any time you're in default. No notice is required. You car can be repossessed when you're just one day late in making a payment.

If a creditor threatens repossession, try to negotiate with the creditor. Repossession is an expensive option, so the creditor may be willing to work out a payment plan with you. You may also want to talk to an attorney. Or, you may want to consider turning the vehicle over to the creditor. This might save you money in the long run. The creditor will have fewer costs, because less will be spent getting the car back. (Either way, the creditor will probably try to pass these costs on to you.) The creditor will also be able to re-sell the vehicle more quickly.

When you refuse to give up the vehicle, the creditor will have to take you to court to try to get it back. If you lose in court, expect the legal costs to be passed on to you.

If your car is repossessed, you will probably have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. If you can't do this, the creditor may sell the car. The creditor must conduct a sale designed to get a fair price for the car. If the creditor gets less for the car than you owe on it, you may be asked to make up the difference. The creditor may sue you to recover the difference.

Creditors who are pursuing repossession do have to follow a few rules. For example, the car may be towed from in front of your house, but the creditor may not break into your garage to get your car. Also, if a creditor loaned you money to buy a car, then the creditor can only repossess the car. The creditor cannot keep other items that might be in the car when it is repossessed.

Other property that you are paying for over time can also be repossessed if you miss payments or only make partial payments. The creditor's right to repossess an item will depend on what your contract says. If you have filed bankruptcy, the creditor cannot repossess anything without permission from the bankruptcy court.

Home Loans

If you fall behind on your mortgage payments, contact your lender right away to avoid foreclosure. Most lenders will work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. If you and your lender are unable to work out a plan, contact a housing counseling agency for help.

Warning: Think Twice About Using Your Home as Collateral

If you need a loan, think twice about using your home as collateral. What you're really doing is putting your home on the line. If you are thinking about refinancing your mortgage loan or getting a second mortgage or a home equity loan, remember that if you can't make the required payments, you could lose your house and the equity you've gained.


If you are faced with wage garnishment, it will help you to know how the process works. Garnishment can take place when someone wins a judgment against you in court and then tries to collect it by taking money out of your bank account or paycheck. Garnishment is one way a creditor may collect a debt you owe. Many creditors effectively use garnishment to collect their debts.

Garnishment can be traumatic for a debtor whose assets are taken. To avoid garnishment, try to work out a deal with the company or person that has a judgment against you. The creditor might be willing to accept a payment plan.

How Garnishment Works

What actually happens when a creditor decides to garnish your wages or other assets? First, the creditor must get a court judgment against you, or be in a position to get a default judgment against you. Next, if the creditor wants to garnish your wages, you will be served with a Garnishment Exemption Notice at least 10 days before garnishment can begin. (You are exempt from wage garnishment if, within the last six months, you received public assistance based on need or were released from prison. If you believe your wages are exempt from garnishment, fill out the notice right away and return a copy to the creditor and one to your employer. You must do this within 10 days to stop the garnishment.)

If you don't claim an exemption, the creditor can take part of your paycheck for the next 70 days. You will get to keep either 75% of your net wages, or 40 times the minimum wage, whichever is more. Remember, net wages include regular pay, sick pay and overtime, minus the withholdings required by law. There is one exception: if the judgment against you is for child support, then garnishment can be as high as 50 to 65 percent of your income, depending on the situation.

If the creditor wants to garnish your bank account, the money to satisfy the debt is frozen first, then an Exemption Notice will be sent to you. If you are entitled to an exemption, complete the form and promptly return it to the creditor and to the financial institution that holds your account.

Some types of income cannot be taken from your bank account if you claim them as exempt by promptly filling out and returning the Exemption Notice. Exemptions may include:

  • Unemployment compensation, if it is not mixed with other money in your account.
  • Disability insurance benefits.
  • Pensions up to $54,000.
  • $36,000 worth of life insurance received by a surviving spouse, plus an additional $9,000 for each dependent.
  • Social Security and SSI benefits.
  • Railroad retirement benefits except where the claim is for alimony or child support.

Public benefits.

Money received from public benefits is exempt for 60 days after deposit. Other exempt income stays exempt for 20 days after you deposit it into the account.

To claim your exemptions, you must fill out the forms you receive from your bank. The bank must send you exemption forms within two days of receiving garnishment papers for your account. If you are claiming an exemption, you will return one form to your bank and one to the creditor within 14 days from the time the forms were mailed to you. If you don't claim your exemption on time you are still entitled to it, but it will take time to get your money back.

If your creditor doesn't object to your exemptions within seven days, the money will be released to you. If the creditor objects, then you have 10 days to file court papers asking for a hearing.

If you do not claim any exemptions, your creditor will mail you a copy of a garnishment summons and garnishment disclosure form. Copies of both will be sent to the "garnishee," (your employer or the third party holding your assets). These documents effectively freeze a designated portion of your wages or assets.

If the third party garnishee is your employer, that designated amount of money will simply be withheld from your current paycheck and, if necessary, from paychecks over the next 60 days. A statement of the withheld amounts will go to your creditor. If the first garnishment is not sufficient to pay the entire debt, your creditor may later serve other garnishment summonses, and freeze money from further paychecks. (You should be aware that you must pay your employer a fee every time the employer is served.)

If the garnishee is a financial institution, and you have sufficient assets and do not qualify for an exemption, the entire amount of the judgment may be garnished from your account.

Next, your creditor will send your employer, bank or other garnishee a copy of a "writ of execution." This court order authorizes the garnishee to release the garnished wages or frozen assets to your creditor. One writ of execution can release garnished funds over a number of pay periods. However, you and your creditor may decide to skip this step. You can do this by voluntarily signing a release or a statement consenting to the release of the funds to the creditor. This may be beneficial to you since every time an order (for either garnishment or execution) is obtained or served, a fee is incurred. All such fees are charged to you.

How Much Money is Protected From Garnishment?

The amount of income you can protect from garnishment depends upon how much you earn. Generally, however, garnishment can't touch more than 25 percent of your weekly net income. Here's how the protected amount is determined:

  • First, calculate your disposable earnings. This is the portion left over after all deductions are made (including federal and state taxes, and Social Security taxes). Other allowable deductions include payments you legally owe others, such as a finance company.
  • Second, once your disposable income has been figured, you can determine what portion of your earnings will be exempted. If you earn only the federal minimum wage, all of your earnings are exempted. If you earn more than the minimum wage, your exemption will be figured in one of two ways, whichever is higher:
  • Method One: 75 percent of your weekly disposable income (calculate .75 x your weekly, after-taxes earnings).
  • Method Two: A week's wages at the federal minimum hourly wage (currently $206; figured by multiplying 40 hours x the current federal minimum wage per hour, $5.15).

Let's look at a couple of examples to see how this works.

  • Your disposable income in a week is $180. None of this may be garnished because it is less than the minimum wage ($206).
  • Your disposable income in a week is $250. This would leave $44 available to be garnished. You would have $62.50 available for garnishment using method one ($250 x .75 = $187.50 exemption, so $250 - $187.50 = $62.50 available for garnishment). Using method two you would only have $44 available for garnishment ($250 - $206 exemption = $44). Remember, you get to use the number that is in your best interest.
  • Your disposable income in a week is $350. This would leave $87.50 available for garnishment. In this example, method one would be in your favor, making $87.50 available for garnishment. Method two r esults in $144 available for garnishment, so you will be garnished for the lower amount.

What Can Be Garnished?

Most any kind of property owned by you but in the control of a third party. This often includes wages and bank accounts.

Who Can Garnish My Property?

If you owe money to a person or creditor, that person or creditor may garnish you.

Can a Creditor Just Take My Wages or Seize My Bank Accounts?

Generally a creditor must sue you in court and receive a monetary judgment before the creditor can garnish your wages or seize your assets. A creditor may garnish you before a judgment in these three cases:

  1. You have failed, within the time allowed (20 days), to answer a lawsuit seeking payment of the money you owe due to a contract. (This would probably result in the creditor getting a default judgment against you. Garnishment, however, wouldn't go into effect until another 20 days.)
  2. You are about to take property out of the state which may be used to satisfy any judgment awarded to the creditor.
  3. You have property in the state and you have either left the state intending to defraud your creditor or to avoid a lawsuit, or you are a nonresident.

To garnish in the last two situations, a creditor must have a court order. To get one, a creditor must state under oath the basis of the debt, the amount you owe, and why the creditor should be allowed to garnish before receiving a judgment.

How Many Creditors Can Garnish Me at Once?

As many creditors as can get a court judgment against you may attempt to garnish you at once. But usually a debtor's assets are only sufficient to satisfy one creditor at a time.

Can I Be Fired for Being Garnished?

State law prohibits an employer from firing a debtor because of garnishments, regardless of the number of times they occur.

How Can I Avoid Garnishment?

Obviously you can avoid garnishment completely by paying all your bills and debts as they come due. Do not ignore letters from collection agencies, even if you dispute a debt. If for some reason you are unable to pay on time, contact your creditors right away and try to work out a revised payment schedule. Creditors are not obligated to work with you, but garnishment costs the creditor both time and money, so the creditor may be willing to work with you.

Finally, because garnishment can occur only after a lawsuit is begun, you can avoid garnishment by taking the steps you would to defend any lawsuit. You will probably want to seek legal advice to do this.

Debt Collectors

No law relieves you from your debts. But knowing your rights can help you deal with collection agencies. If you owe money to a business, the business may try to collect the money itself, or the business may hire a collection agency. Either way, you have the right not to be harassed or abused. But your rights differ depending upon who is collecting the debt. You have more rights if an outside collection agency has been hired.

The federal Fair Debt Collection Practices Act and state laws govern the practices of debt collectors. These laws give you protections, and set the following rules for collectors:

  • Collectors may only call between the hours of 8 a.m. and 9 p.m.
  • Collectors may not call you at work if your employer disapproves of the calls and notifies the collector to stop calling.
  • Collectors may not make false statements, use unfair practices or harass you.
  • Collectors must stop contacting you if you ask in writing.
  • Collectors may not accept cash from you without giving you a receipt.
  • Collectors must give you the full name of their agency.
  • Collectors may not threaten you with legal action they do not intend to take.
  • Collectors cannot contact your neighbors or any other third party except to locate you. (The collector cannot reveal to the other person that the collector is trying to collect a debt.)
  • Collectors cannot use postcards or envelopes which obviously come from a collection agency.
  • Collectors cannot garnish your wages or seize your property unless they have sued you and won a judgment.

Within five days of the collector's first call or letter to you, the collector must send you written notice. This notice details the amount of your debt, the name of the company you owe, and that the agency will assume the information they have is correct unless you disagree within 30 days.

If you disagree with the collection agency, you must send the agency a letter within 30 days. If you send a letter, the agency must stop trying to collect the debt until it sends you proof that you owe the debt.

You have the right to stop all collection attempts, at home or at work. Inform the collection agency in writing that you no longer wish to be contacted. Once you do that, the agency can only contact you to tell you that it is discontinuing its collection efforts, or that it is going to take some other action, such as suing you, to recover the debt.

If you are the victim of illegal collection agency tactics, you can sue the collection agency to recover actual damages plus punitive damages. You may also recover attorney's fees if you are successful in your suit against the collection agency.

Student Loans

When you took out your student loan you agreed to be responsible to repay it. You signed a legally binding promissory note, and agreed to repay the loan according to its terms. You are responsible to repay the loan even if you quit school, can't find a job, or are dissatisfied with the education you received.

Ask for a Deferment or Forbearance

If you are having trouble paying a student loan, work with your lender before you default. Two options include deferment and forbearance. Deferment is a legal right you have to postpone payment if you meet the criteria for deferment. Examples might include going back to school, or the birth of a child. Forbearance is when you ask the lender for a temporary break in payments, or a reduction in payments. The lender may grant your request for a forbearance, but the lender is not obligated to do so. Students usually use forbearance if they don't qualify for a deferment. Either of these options buys you a little time to get back on your feet financially. However, you still owe the money you borrowed, and when the deferment or forbearance ends, you will again be making monthly student loan payments.

Work directly with your school or other lender to request a deferment or forbearance. Remember, you must continue to pay your loans until you receive notice that your request has been approved. If you stop paying when you apply for deferment or forbearance, you may end up in default, and then not qualify for the deferment or forbearance.

Defaulting on a Student Loan

If you default on your loan, the lender may take action to recover the money. The lender may garnish your wages, seize your tax refunds, and deny future requests for federal student aid. In addition, a default will probably be reported to credit bureaus, and remain on your credit report for seven years. This will hurt your chances to obtain other credit.

If you have defaulted on your student loan, consider a couple of options. First, you may try to rehabilitate your loan. If you successfully rehabilitate your loan, the default notation will be removed from your credit report. To rehabilitate a Direct Loan you will have to make 12 consecutive monthly payments. To rehabilitate a Federal Family Education Loan (FFEL) you must make 12 payments and your loan must be resold.

Second, you may consider consolidating a defaulted loan. In certain cases this is allowed. Consolidation helps you combine one or more loans into a new loan. To do this you must make a "satisfactory repayment agreement," usually consisting of three consecutive monthly payments, with the prior lender.

Consolidating a loan will result in a credit report bearing the notation that the defaulted loan was "paid in full." This notation will remain on your credit report for seven years, and may still raise a red flag with future creditors.

Look Out for These Scams

Avoid these common scams that prey on people in financial difficulty.

  • Advance fee loan scams may sound appealing, because ads promise that companies can deliver loans no matter what your credit situation. Often you are asked to make some type of up-front payment. This is illegal. Usually you'll lose your money and never see a loan.
  • Businesses that offer debt counseling and reorganization plans may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing either to explain high costs or to mention that you're signing over your home as collateral. Other businesses advertising debt reorganization may not explain that they are really pushing Chapter 13 bankruptcy, an option that may not be right for you.
  • Companies offering "credit repair" promise to clean up your credit history. These con artists can't deliver. They may charge you to do what you could do for yourself for free. Or, they may advise you to do something illegal. No matter which approach they take, they are likely to disappear with your money, leaving you worse off than you started.
  • If you have filed for bankruptcy, you may be the target of a new credit repair scheme, often called "file segregation." You are promised a chance to hide unfavorable credit information and establish a new credit identity. The scheme is illegal.

Usually when you pay money to the crooks running these offers you will be directed to apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). These numbers are typically used by businesses to report financial information to the IRS and Social Security.

After you receive your EIN, you are told to use it in place of your Social Security number when you apply for credit. If you defraud the government this way, you could face fines or even prison.

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