Wage seizure 2-edged sword

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 — South Carolina, North Carolina, Florida, Pennsylvania 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 the amount that 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 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.