Dear Opening Credits,
I just found out a collection agency got a $9,000 lien on my checking account, which had only $500 in it. Now my checking account is $8,500 overdrawn. Can they do that? What can I do? I have other old debts -- probably more than $20,000 worth -- and I'm afraid of what may happen next. -- G in New York
Yes, they can do that. You can't stop or reverse the seizure of your bank account, but you can take steps to protect your other assets and rebuild your credit.
This is no way to live. You shouldn't live in fear that your old debts will come to haunt you. But the reality is that, yes, your old debts will come back, and as is the case with your current situation, it won't be pretty.
When a lender gets a judgment against someone, there are several steps the lender can take, says Gary Thurber of the Consumer Credit Counseling Service of Central New York. The lender can:
Seize personal property or assets. This generally means they subpoena local banks and credit unions in the area where you live to try to find bank accounts you own, Thurber says. Once they find the accounts, the creditor can execute the judgment and take the assets."This can cause a problem for people as, most often, the money is in a checking account, and this will cause checks to bounce, and thus they'll incur additional bank fees for the returned checks," says Thurber. In some cases, the creditor may also try to take other personal property, such as a vehicle or boat. Thurber says this is less common because it can be difficult to identify assets to meet the guidelines for a sheriff's sale.
File a lien against real property. This means if you own real estate, the creditor can place a lien against the property. Before you can sell your home and take the profits, the lien must be paid off. "The judgment would be good for 10 years and would be renewable for another 10 years if not paid," he says.
Garnish your wages. Typically, the creditor can take 10 percent of your gross income to pay toward the debt, Thurber says. There are some guidelines for a minimum income before a garnishment can take place, and your paycheck can't be garnished more than 25 percent at any time from all creditors. So, for example, Thurber says, if someone is paying child support or alimony debts and is already at the 25 percent garnishment limit, the creditor could not get additional money from this source.
Thurber also notes the judgment itself won't be the end of your worries. Once a judgment is issued, interest is added to the balance -- at 9 percent in New York -- and other fees can be tacked on as well, including the cost of fees to the sheriff's department.
So what can you do? Plenty.
Start by protecting your income. If you had direct deposit of your paycheck going into the seized checking account, stop it immediately. Most any money that goes into that account (with some exceptions, including Social Security payments) will belong to the bank until the debt is paid off.
Next, get a free copy of your credit report from AnnualCreditReport.com. Refresh your memory about all the old, bad debts, even an overdue $50 dentist bill. It's time to face all your obligations and eliminate them once and for all.
Next, call a reputable credit counselor. Check the websites of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies to find an accredited nonprofit credit counselor in your area. The counselors will help you tackle your debt head on by contacting all your creditors and starting negotiations. The counselor also may be able to get the lender to agree to lower the overall debt you owe, stop interest charges and make other such concessions. In return, you'd agree to pay a set amount each month to the credit counseling agency, and they'd pay your creditors directly. To learn more, check out CreditCards.com's report about 8 steps to picking a credit counselor.
The key point is that once you enter into an agreement with a credit counselor, you have to stick to it. You need to make timely payments per your agreement, without fail. If you don't, you'll be right back where you started.
It will take time to pay these debts, but there's a light at the end of the tunnel. Once the process is started, there will be no more looking over your shoulder, no more fretting about more judgments against you and no more worrying about wage garnishment. Slowly, when the debts are paid, you can start to rebuild your credit.
Write again when you get there, and I'll help you on your next journey.
Karin's money makeover column "Get With The Plan" can be seen every Sunday in "The Star-Ledger" and "The Trenton Times." She also hosts and writes "Money 911," a multimedia series for MSN Money. Before writing became her main focus, Mueller was the executive producer of CNBC's The Money Club, where she led the team that won the network's first ever Cable ACE Award for Business and Consumer Programming. Mueller lives in New Jersey with her husband, three kids, one guinea pig and one leopard gecko. Whatever they don't eat goes into her retirement savings accounts. A comprehensive archive of her writings is available on her Web site, www.KarinPriceMueller.com.
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