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Justin Harelik, the Bankrate.com Bankruptcy AdviserCreditors can garnish your bank accounts

Dear Bankruptcy Adviser,
If a creditor has a judgment against me, and is withdrawing garnishments from my bank account, is there a limit that the creditor can withdraw? Or can the creditor take everything down to $0?
-- Charles

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Dear Charles,
Here's the lay of the land. When a creditor has a judgment against you, there are a few standard ways the creditor can collect: liens filed against the property, wage garnishment and bank levy.

Most creditors immediately execute a lien against your property (i.e., your home) because eventually they will get their money. What happens is that the judgment lien will continue to accrue interest until the property is sold. At that time, the lien will be paid in full before ownership of the property can change hands.

If a lien is not possible, creditors will attempt a wage garnishment against your earnings. Technically, a wage garnishment is a legal procedure through which some portion of a person's earnings is required to be withheld by an employer for the payment of a debt. Here's what this means: After state and federal taxes are withdrawn from your paycheck, what's left is known as your "disposable earnings." In general, the creditor may then garnish up to 25 percent of these disposable earnings. The creditor doesn't garnish from your bank account, however; the amount is withheld by your employer.

The law also sets the maximum amount that may be garnished in any workweek or pay period, regardless of the number of garnishment orders received by the employer. For ordinary garnishments (i.e., those not for child support or any state or federal tax), the weekly amount may not exceed 25 percent, no matter how many creditors you have.

The loophole to a wage garnishment order is if you quit your job. Creditors believe that individuals will not quit their jobs simply because of wage garnishment orders, since they will still be making 75 percent of their paychecks (after taxes withheld). What's interesting is that while people under wage garnishment often do want to keep their jobs, and while employers are not allowed to terminate an employee because of a wage garnishment order, sometimes that's exactly what happens. I have seen employers find "another reason" to terminate an employee, which suspiciously followed receipt of the wage garnishment order. Why? Employers are people, too. Some feel that a person with bad credit is a risk in other ways, and this inclines them to find ways around the law.

Finally, the creditor may know where you bank and will issue a levying order to your financial institution. This process varies from state to state, but in general, a creditor can levy your account down to zero.

Usually a creditor will do a "skip trace" (which means they search out your location -- residence or employment) to find out where you live and then call the banks in that area. At that point, the creditor will obtain and serve a writ of execution on the bank. While a bank won't give out your personal information, once the writ has been served, the bank must withhold funds held at that bank. Your account gets drained to the limit of the levying order and, after a 21-day holding period, the creditor gets the money.

Quite often, Charles, a debtor files bankruptcy to avoid any or all of these events from occurring. Now that the creditor has your bank account information, you either must contact and negotiate with the creditor directly -- or live without a bank account.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page and select "bankruptcy" as the topic.

Bankrate.com's corrections policy-- Posted: Nov. 14, 2006
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How to strike a deal with a debt collector
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