Series: Unforgiven The Transformation of Consumer Debt

For the first time in nearly 50 years, a new federal bill seeks to lower how much lenders and collectors can seize from debtors through the courts, revisiting caps set in 1968 by the landmark Consumer Credit Protection Act.

The Wage and Garnishment Equity (WAGE) Act of 2016, sponsored by Rep. Elijah Cummings, D-Md., and Sen. Jeff Merkley, D-Ore., would substantially reform protections for debtors by exempting many lower-income workers from garnishment and reducing what collectors can take from the paychecks and bank accounts of others.

As ProPublica has reported in a series of articles over the past three years, consumer debts such as medical or credit card bills result in millions of garnishments every year. But the scale of the seizures and their consequences for the poor have largely been ignored by lawmakers, in part because no one tracks how often they happen.

In their press release announcing the legislation, Cummings and Merkley cited ProPublica and NPR’s reporting that 4 million workers had wages taken for consumer debts in 2013. The garnishments hit low-income workers most frequently: Nearly 5 percent of those earning between $25,000 and $40,000 per year had a portion of their wages diverted to pay down consumer debts in 2013.

Under current federal law, even workers below the federal poverty line can have up to a quarter of their after-tax wages taken. But there is no limit on what collectors can take from bank accounts, so if a paycheck is deposited, all of the money in the account can be grabbed to pay down the debt.

“Every day, some Americans are having every penny in their paychecks garnished,” Cummings told ProPublica. “Congress should not sit on the sidelines and watch our constituents be kept in a cycle of poverty.”

The WAGE Act is “a long-overdue first step to correct the inadequate protections for working families,” said Carolyn Carter of the National Consumer Law Center.

ProPublica asked several representatives of the debt collection industry for comment on the bill, but all declined. With no Republican sponsors as of yet, the bill’s fate is uncertain, particularly in a Congress often beset by partisan deadlock.

Old Debts, Fresh Pain: Weak Laws Offer Debtors Little Protection Critics say the 1968 federal law that allows collectors to take 25 percent of debtors’ wages, or every penny in their bank accounts, is out of date and overly harsh. Read the story.

Before 1968, there were no federal limits on how much a creditor could seize from a debtor’s paycheck. Congress capped seizures at 25 percent of after-tax pay, a limit that seems to have been arrived at haphazardly. Since bank account garnishments were not common at the time, Congress didn’t address them.

Garnishments over consumer debt can only take place after a company files a lawsuit and secures a court judgment. Some states provide protections beyond federal law, but most have simply adopted the 25 percent mark. Four states – Texas, Pennsylvania and the Carolinas – prohibit garnishment for most consumer debts.

Under the WAGE Act, lenders and collectors would only be allowed to take up to 10 percent of a debtor’s disposable income for most workers.

For some debtors, that extra money could mean they can afford the basics each month. Last year, we reported on the experience of Cori Winfield of St. Louis, a single mother dealing with a garnishment over an old subprime car loan. With a quarter of her paycheck gone, she “was not making it,” she told ProPublica.

Because Missouri has a “head of family” exemption, Winfield was able to get that reduced to 10 percent. The extra $300 each month this provided was “a lifesaver,” she told us, and meant she could “at least pay rent and pay bills.”

The WAGE Act would also limit what can be seized from debtors’ bank accounts. Most garnishments are through wage seizures, ProPublica has found, but bank account garnishments can be particularly devastating, leaving debtors with no money at all. Our analysis of Missouri court data found that most bank account garnishments hit debtors with only a few hundred dollars in their accounts.

“It really does put people into complete turmoil,” said Martha Bergmark, executive director of the nonprofit Voices for Civil Justice, which represents civil legal aid organizations across the country. “It’s a rolling disaster” with potential consequences in every aspect of a low-income debtor’s life, she said.

The bill would protect about $12,000 in a debtor’s bank account from garnishment, a level pegged to the federal poverty guideline for a single-person household.

Separately, on the state level there’s also a movement to overhaul garnishment laws. As ProPublica reported in 2014, the effort is backed by payroll professionals who are frustrated with inconsistencies among the various state laws.

Later this year, the Uniform Law Commission, a nonprofit that attempts to sculpt model state laws, will release its final version of a new wage garnishment law. While the primary purpose is to resolve employer headaches, the bill is also likely to have some consumer-friendly provisions, such as requiring that clear, plain-language notices be provided to debtors spelling out their legal protections.

“The notifications that go out to employees are just horrendously bad,” said William Henning, executive professor of law at Texas A&M University School of Law, and chair of the ULC Wage Garnishment Act committee. The push to get the model bill passed in state legislatures will likely begin early next year, he said.