For tax debt, you may be able to negotiate an agreement to pay less than your full bill if you are truly strapped. But be aware that the IRS has strict eligibility rules for this arrangement, called an Offer in Compromise, and charges a $150 nonrefundable fee to apply.
In the case of a tax debt, your notice of liability may not pinpoint the specific reason you owe the tax, Harman says. Finding the root of the problem may require some investigation on your part, starting with a request for a review of your files.
"There could be a situation where, for example, a homeowner had been foreclosed on in a previous year," he says. "Most individuals don't understand that this can be considered income when the mortgage company writes off that liability. So the individual who had their home foreclosed on can actually end up with a tax debt that they're not aware of."
While tax law in effect through 2012 protects some homeowners from foreclosure taxes, affected homeowners must file a special IRS form to avoid the tax.
Closing a loophole
While the garnishment of Social Security benefits by nongovernment creditors is against the law, a troublesome loophole has been the ability of banks to automatically freeze customers’ accounts and use the funds to pay creditors. Often there was little effort to prevent Social Security funds from being included in that freeze, and the burden was on the debtor to prove that some of the funds paid out should have been exempt.
A federal regulation that took effect in May 2011 aims to remedy the problem by requiring financial institutions to determine whether a debtor’s account contains Social Security benefits and other exempt funds. The federal government now applies an electronic tag to these funds when they are deposited directly. The bank must protect all tagged deposits made during the two months preceding the receipt of a creditor’s garnishment order.
Harman says people need to be proactive to avoid the threat of garnishment.
"They need to be aware of any potential debts that they have and be thorough when they're sorting through their mail," he says. "Don't throw away any notices from any federal agencies, particularly the IRS."
For student loan debt, Carter says you'll have a wider range of options if you haven't already defaulted. The National Consumer Law Center operates a website that offers information and advice for those having trouble repaying student loans. Find more information at NCLC.org.
"There are all sorts of programs for them to do what you might call workouts of their student loans -- reducing the interest rates, changing the payment schedules," Carter says. "In some circumstances, deferments are available. If the student is totally and permanently disabled or if the school closed while the student was there, and in some other circumstances, the student can get the loan discharged."