How Creditors Collect Debts: Property Repossession, Wage Garnishment, Bank Attachment, and More

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Creditors and debt collectors have various ways to try to collect on loans or debts you may owe them. Of course, there's the traditional phone calls and collection letters. But some creditors can record a lien against your property, levy your bank account, garnish your wages, or repossess your car or other personal property.

It's important to know when creditors can use these  collection measures, whether the law places restrictions on their activities, and what you can do to avoid losing your property.

How Do Judgment Creditors Find Your Property?

If you have a money judgment against you, the creditor has various ways to find your assets and then collect against them.

If a creditor successfully sues you in court and gets a money judgment against you, it will likely look for your assets and property. Once it finds your property, it can take steps to try to collect its judgment from that property. For example, it could record a lien against your home, levy funds in your bank account, or force the sale of an expensive boat. (Learn more about the ways that judgment creditors can collect.) You may think your property is safe because the creditor doesn’t know you own it. But the reality is this: Creditors have good (and perfectly legal) ways to find out what property you own. Below are some of the methods judgment creditors use to find your assets.

(Note that in most cases, a creditor cannot take your property or garnish your wages until it has sued you and obtained a money judgment. That’s why this article uses the term “judgment creditor,” meaning a creditor that has a judgment against you. There are some exceptions to this general rule, such as for debts secured by property, child support, federal student loans, and tax debt.)

Information You Previously Provided to the Creditor

One of the best sources of asset information available to the creditor is you.  In the course of applying for or dealing with the creditor, you probably gave the creditor information about your assets.

Credit and loan applications. When you apply for credit cards, car loans, bank loans, or other types of loans or credit, you have to fill out an application. On that application, you often must provide bank account information, the name and address of your employer, and information about your assets. If that information hasn’t changed, the creditor will know where to send a wage garnishment order, what bank to contact to attach funds in your bank account, and whether you own a home.

Your last payment to the creditor. Smart judgment creditors will keep information from your last payment. If you paid by check, the creditor will know what bank you use and what your account number is.

Information About Your Real Estate

It is fairly easy for judgment creditors to find information about real estate you own, especially if it is in a county near where you live. Real estate records are available to the public, and more and more are searchable online.

Information About Cars and Boats

In many states, if the creditor has a judgment against you, the Department of Motor Vehicles will provide it with information about your registered vehicles (although the creditor may have to pay a fee). Also if there are liens filed against your personal property (such as a boat), those are often recorded with the Secretary of State or sometimes with the county, and are usually public record.

The Debtor’s Examination

Once it has a judgment, a creditor may serve you with notice of a debtor’s examination.  The notice will order you to appear at a certain place at a certain time and testify, under oath, about your assets. If you don’t show up, the court could hold you in contempt of court and issue a warrant for your arrest. (Learn more about the debtor examination and consequences of not appearing.) A creditor that is serious about collecting from you can hold a debtor’s examination and question you about all sorts of assets and income that you may have.

Typical questions. The creditor will likely ask you about real estate, bank accounts, vehicles, stocks and bonds, personal property, employment information, residence information, and more.

Required documents. The creditor can also require that you bring certain types of documents to the examination, such as tax returns, bank statements, business records, deed, and leases.

by: Kathleen Michon, J.D.

How Creditors Enforce Judgments

Learn about the many ways creditors can collect on judgments.

Once a judgment is entered against you, the creditor is now called a judgment creditor, and you are called a judgment debtor. Judgment creditors have many more collection techniques available to them than do creditors trying to collect debts before getting a court judgment.

Read on to learn how much of your income and property judgment creditors can take, and what methods they can employ to get your money. (To find out how judgment creditors know about your property, see How Judgment Creditors Get Information About Your Income and Property.)

Limits on What Property Judgment Creditors Can Take

What property the creditor can take varies from state to state. Usually, the creditor can go after a portion of your net wages (up to 25%, more if the judgment is for child support), bank and other deposit accounts, and valuable personal property, such as cars and antiques.

Not all of your property can be taken, however. Every state has certain property it declares “exempt.” This means it is off limits to your creditors, even judgment creditors. Just because you owe money, you shouldn’t have to lose everything. You still need to eat, keep a roof over your head, clothe yourself, and provide for your family. If you have very few possessions, you may find that most of what you own is exempt.

Methods of Collecting Judgments

Here are the most common ways judgment creditors collect their judgments from debtors.

Wage Attachments

The first item of your property most judgment creditors will go after is your paycheck, through a wage attachment (or wage garnishment). A wage attachment is a very effective technique for a judgment creditor if you receive a regular paycheck. Your employer takes a portion of your wages each pay period and sends that money to your creditor before you ever see it.

Federal law allows the judgment creditor to take up to 25% of your net earnings or the amount by which your weekly net earnings exceed 30 times the federal minimum wage (currently $7.25 an hour times 30, equals $217.50), whichever is less. Net earnings are your gross earnings less all legally mandated deductions, such as withheld income taxes and unemployment insurance.

A few states offer greater protections for judgment debtors about to lose their wages.

Higher Wage Attachment Limits for Certain Types of Debts

For certain debts, you have to pay more. The wage attachment laws and limitations described in this section do not apply to:

Child support. Up to 50% of your wages may be taken to pay support (more if you don’t currently support another dependent or are behind in your payments). Your child’s other parent usually does not have to first sue you.

Income taxes. If you ignore all attempts by the IRS to collect taxes you owe, the government can grab virtually all of your wages. The weekly garnishment amount (called a levy) is based on the standard income tax deduction, plus the amount for each personal exemption you are entitled to on the income tax form, divided by 52 weeks. If you don’t verify the standard deduction and how many dependents you would be entitled to claim on your tax return, the IRS bases the levy on the standard deduction for a married person filing separately, with only one personal deduction -- a very low amount. For 2010, that could have left you with as little as $179 a week. (26 U.S.C. § 6334(d).)

How a Judgment Creditor Attaches Your Wages

To attach your wages, a judgment creditor obtains authorization from the court in a document usually called a writ. Under this authorization, the judgment creditor directs the sheriff to seize a portion of your wages. The sheriff in turn notifies your employer of the attachment, and your employer notifies you. Unless you object, your employer sends the amount withheld each pay period to the sheriff, who deducts his or her expenses and sends the balance to the judgment creditor.

Objecting to a Wage Attachment

You can object to the wage attachment by requesting a court hearing. In some states, the attachment can’t begin until after the hearing, unless you give up your right to a hearing. In most states, however, as long as you have the opportunity to have your objection promptly considered, the attachment can take effect immediately.

Property Liens

One collection device commonly used by judgment creditors is the property lien. In about half the states, a judgment entered against you automatically creates a lien on the real property you own in the county where the judgment was obtained. In the rest of the states, the creditor must record the judgment with the county, and then the recorded judgment creates a lien on your real property. In a few states, the lien is on your real and personal property. Liens have a lifespan of a few to several years. (To learn about the particular requirements in your state, see Judgment Liens on Property in Your State.)

If a judgment creditor does not get a lien on personal property after the judgment is entered or recorded, the judgment creditor may be able to get a lien on your personal property by recording the judgment with the secretary of state. This usually applies only to property with title papers, such as a car or a business’s assets. If, for example, you tried to sell your car, the lien would appear, and you’d have to pay off the judgment creditor before selling.

Once the judgment creditor has a lien on your property, especially your real property, the creditor can safely anticipate payment. When you sell or refinance your property, title must be cleared -- that is, all liens must be removed by paying the lienholder --before the deal can close.

Executing on the Lien

Instead of waiting for you to sell your property, the creditor can “execute” on the lien. That means having the sheriff seize your property -- typically a house -- and arrange for a public sale from which the creditor is paid out of the proceeds. However, if your property is exempt, the creditor cannot do this.

Even if your property is not exempt, many creditors don’t want to go through the expense and hassle of a public sale. This is especially true if the creditor won’t get much money through the sale. Any mortgage holder, government taxing authority, or other creditor who placed a lien on your property before the judgment creditor will be paid first. Then you get any homestead exemption to which you are entitled. Only then does the judgment creditor get his or her share.

Example. Lin lives in Wisconsin and owns a house worth $200,000. Child-Aid Medical Clinic obtained a judgment against Lin for emergency treatment of his daughter for $2,500 and, consequently, got a lien on Lin’s house. Child-Aid considers seizing his house to sell it and be paid but realizes that it won’t get any money because:

Lin owes $125,000 on his first mortgage.

Lin owes $23,000 on a home equity loan.

Lin owes the IRS $17,000 on a tax lien.

Lin’s homestead exemption is $40,000.

These items total $205,000, more than the value of Lin’s house.

Make Sure the Creditor Followed State Rules When Recording the Lien

A creditor who places a judgment lien on your property must do so according to the rules in your state for judgment liens. It’s not unusual for creditors to make mistakes, which may make the lien unenforceable. You might have a defense against a creditor’s attempt to execute on a lien because the lien is too old or because it was not properly handled. You’ll need to consult with an experienced consumer attorney if you suspect that the lien was placed inappropriately or too long ago.

To learn about other ways to stop the creditor from enforcing the lien, see Ways to Stop a Creditor From Collecting a Judgment.

Property Levies

A judgment creditor can get a “writ of execution” from the court and go after your personal property by instructing the sheriff or marshal to “levy” on it. “Levy” basically means that the officer takes the property (your baseball card collection, for example) or instructs the holder of the property (your bank, for example) to turn it over to the officer.

After taking your property, the sheriff or marshal sells it at public auction and applies the proceeds to your debt. In the case of a bank account, the amount taken from your account is applied to your debt.

To learn how the levying process works and how you can object, see Property Levies.

Assignment Orders

An assignment order lets creditors go after property you own that can’t be subjected to a levy, such as an anticipated tax refund, the loan value of unmatured life insurance, or an annuity policy. To learn more, see When Judgment Creditors Collect With an Assignment Order.

Contempt Proceedings

Sometimes, a judgment issued by the court will include a schedule for installments or periodic payments. In a few states, if a judgment doesn’t include such a schedule, the judgment creditor can go back to the court and ask the judge to make an order requiring periodic payments on a debt.

If you violate a court order, the creditor can seek a contempt order. In a handful of states, if a judge issues an order requiring periodic payments on a debt and you miss any payments, the judge can hold you in contempt. You could be fined, sentenced to community service, or, in theory, at least, the judge could issue a warrant for your arrest and you could be jailed.

As you might hope, arresting a debtor on this kind of warrant is usually a very low priority for law enforcement agencies, and in most situations, the warrants become old and moldy without anyone being arrested. But the threat of arrest and jail can be a serious incentive for many judgment debtors to send a check ASAP.

(For articles on creditor lawsuits, including how creditors get judgments, see Creditor Lawsuits.)

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

by: Margaret Reiter, Attorney