Millions Of Americans' Wages Seized Over Credit Card And Medical Debt
by Chris Arnold, NPR and Paul Kiel, ProPublica
Millions of Americans are still grappling with debt they've accumulated since the recession hit. And new numbers out Monday show many are having a tougher time than you might think.
One in 10 working Americans between the ages of 35 and 44 are getting their wages garnished. That means their pay is being docked — often over an old credit card debt, medical bill or student loan.
That striking figure comes out of a collaboration between NPR and ProPublica. The reporting offers the first available national numbers on wage garnishment.
A 'Roundhouse' Punch
Back in 2009, Kevin Evans was one of millions of Americans blindsided by the recession. He had a 25-year career selling office furniture, but suddenly, companies stopped buying furniture. His income collapsed. He sold his three-bedroom home outside Kansas City that he could no longer afford.
For the next several years he worked a string of low-wage jobs: at a lumber yard, at a 24-hour fitness center. He rented a room from a friend. He never collected unemployment. But with a daughter in college and basic living expenses, he ended up with a $7,000 credit card debt that he says he couldn't pay. Evans, 58, had fallen from middle-class life into basic subsistence living.
Then late last year, he found a better-paying, full-time customer service job in Springfield, Mo. Things were finally getting better, until early this year, when he opened his paycheck and found a quarter of it missing. His credit card lender, Capital One, had garnished his wages.
Twice a month, whether he could afford it or not, 25 percent of his pay — the legal limit — would go to his debt, which had ballooned with interest and fees to more than $15,000. "It was a roundhouse from the right that just knocks you down and out," Evans says.
The recession and its aftermath have fueled an explosion of cases like Evans'. Creditors and collectors have pursued struggling cardholders and other debtors in court, securing judgments that allow them to seize a chunk of even meager earnings. The financial blow can be devastating — more than half of U.S. states allow creditors to take a quarter of after-tax wages. But despite the rise in garnishments, the number of Americans affected has remained unknown.
At the request of ProPublica, ADP, the nation's largest payroll services provider, undertook a study of payroll records for 13 million employees. ADP's report, released Monday, shows that among employees in the prime working ages of 35 to 44 who had their wages garnished in 2013, roughly half, unsurprisingly, owed child support. But a sizable number had their earnings docked for consumer debts, such as credit cards, medical bills and student loans.
Actually, for workers earning $25,000 to $40,000 a year, more people were garnished for consumer debt than for child support. This marks a dramatic change. In the past, the vast majority of wage garnishments went to secure child support payments or to collect on unpaid taxes. In recent years, though, debt collectors have been filing millions of lawsuits against people for just basic consumer debt: medical bills, student loans and credit card debt.
Extended to the entire population of U.S. employees, ADP's findings indicate that 4 million workers — about 3 percent of all employees — had wages taken for a consumer debt in 2013. People in some geographic regions and income groups had twice that rate of garnishment.
Carolyn Carter of the National Consumer Law Center says these findings are "alarming."
"States and the federal government should look on reforming our wage garnishment laws with some urgency," she says.
The increase in consumer debt seizures is "a big change," largely invisible to researchers because of the lack of data, says Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin, Madison. The potential financial hardship imposed by these seizures and their sheer number should grab the attention of policymakers, he says. "It is something we should care about."
High Garnishment Rates In The Midwest
ADP's study, the first large-scale look at how many employees are having their wages garnished and why, reveals what has been a hidden burden for working-class families. Wage seizures were most common among middle-aged, blue-collar workers and lower-income employees.
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 alone in 2013, ADP found. More people in that income group were garnished to pay off consumer debt than to pay child support.
Perhaps due to the struggling economy in the region, the rate was highest in the Midwest. There, more than 6 percent of employees earning between $25,000 and $40,000 — 1 in 16 — had wages seized over consumer debt. Employees in the Northeast had the lowest rate. The statistics were not broken down by race.
Currently, debtors' fates depend significantly on where they happen to live. State laws vary widely. Four states — Texas, Pennsylvania, North Carolina and South Carolina — largely prohibit wage garnishment stemming from consumer debt.
Most states, however, allow creditors to seize a quarter of a debtor's wages — the highest rate permitted under federal law. Evans had the misfortune to live in Missouri, which not only allows creditors to seize 25 percent, but also allows them to continue to charge a high interest rate even after a judgment.
By early 2010, Evans had fallen so far behind that Capital One suspended his card. For months, he made monthly $200 payments toward his $7,000 debt, according to statements reviewed by NPR and ProPublica. But by this time, the payments barely kept pace with the interest piling on at 26 percent. In 2011, when Evans could no longer keep up, Capital One filed suit. Court records show that Evans was served a summons, but he says he didn't understand that the stack of paperwork he received included a summons with a hearing date to appear in court.
If Evans had lived in neighboring Illinois, the interest rate on his debt would have dropped to below 10 percent after his creditor had won a judgment in court. But in Missouri, creditors can continue to add the contractual rate of interest for the life of the debt, so Evans' bill kept mounting. Missouri law also allowed Capital One to tack on a $1,200 attorney fee. Some other states cap such fees to no more than a few hundred dollars.
Evans has involuntarily paid over $6,000 this year on his old debt, an average of about $480 each paycheck, but he still owes more than $10,000. "It's my debt. I want to pay it," Evans says. But "I need to come up with large quantities of money so I don't just keep getting pummeled."
Capital One says in a statement that legal action is always a last resort. The company says it tried to work with Evans but that he was unable to keep up with the payments on a payment plan that he had agreed to.
The Garnishment Process
Companies can also seize funds from a borrower's bank account. There is no data on how frequently this happens, even though it is a common recourse for collectors. Among the people interviewed by NPR and ProPublica who were having their wages garnished, more often than not, debt collectors had also made attempts to seize money from their bank accounts. Some people we interviewed say they had stopped keeping money in banks as a result.
The garnishment process for most debts begins in local courts. A company can file suit as soon as a few months after a debtor falls behind. A ProPublica review of court records in eight states shows the bulk of lawsuits are filed by just a few types of creditors and companies. Besides major credit card lenders such as Capital One, medical debt is a major source of such suits. High-cost lenders who deal in payday and installment loans also file suits by the thousands. And finally, an outsized portion comes from debt buyers — companies that purchase mostly unpaid credit card bills.
When these creditors and collectors go to court, they are almost always represented by an attorney. Defendants — usually in tough financial straits or unfamiliar with the court system — almost never are.
In Clay County, Mo., where Capital One brought its suit against Evans in 2011, only 7 percent of defendants in debt collection cases have their own attorneys, according to ProPublica's review of state court data. Often the debtors don't show up to court at all: The most common outcome of a debt collection lawsuit in Missouri (and any other state) is a judgment by default.
Millions of debt collection lawsuits are filed every year in local courts. In 2011, for instance, the year Capital One went to court against Evans, more than 100,000 such suits were filed in Missouri alone.
Despite these numbers, creditors and debt collectors say they only pursue lawsuits and garnishments against consumers after other collection attempts fail. "Litigation is a very high-cost mechanism for trying to collect a debt," says Rob Foehl, general counsel at the Association of Credit and Collection Professionals. "It's really only a small percentage of outstanding debts that go through the process."
Experts in garnishment say they've seen a clear shift in the type of debts that are pursued. A decade ago, child support accounted for the overwhelming majority of pay seizures, said Amy Bryant, a consultant who advises employers on payroll issues and has written a book on garnishment laws.
"The emphasis is now on creditor garnishments," she says.
Bryant also says the rise in garnishments has become an unanticipated burden for employers.
"It becomes very complicated," she says, particularly for national employers who must navigate the differences in state laws. "It's very easy to make a mistake in the process." If an employer does not correctly handle a garnishment order, she says, it can become liable for a portion or even the entirety of the debt in some states.
The burden was enough to prompt the American Payroll Association to request in 2011 that the Uniform Law Commission draft a model state law on wage garnishment. Bryant said employers are hoping that the new law, which is still being drafted, will be adopted by a large number of states and reduce complications.