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After medical bills lead to wage garnishment, consider bankruptcy

In the meantime, food, shelter take precedence over utility payments

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
We have four children, very little in assets (one vehicle worth about $1,000) and earn about $45,000 a year. We have $10,000 in debt with one collector alone, and they just garnished my wages for the full amount allowed by law -- $800 a month. Ninety percent of that debt is medical. We have never owned a credit card, and we are in the process of a voluntary repossession of the one vehicle we have payments on. We have about $8,000 in student loans and are on a payment plan. The garnishment is going to put us out on the street. I don't know what to do. We don't live above our means; don't even pay for extras like cable or Internet. We didn't ask for this debt. Will a Chapter 7 bankruptcy work for us? And how are we supposed to pay the fees for a lawyer when we can't buy food for our kids? -- Duane

Answer for the CreditCards.com expert

Dear Duane,
Take a deep breath, and let's see what we can do to assist you with this financial emergency. The first thing I would recommend is that you prioritize the income that you have coming in after the garnishment. This is a tough thing for most people to do because they never want to be in the position of NOT paying. But you are in a financial crisis, and those decisions must be made.

At the top of your priority list should be food and shelter for your family. So, pay your mortgage or rent and then buy food and necessary household items, such as diapers, etc. I might also suggest that you apply for food stamps. If you have money left, then your next priority is your utility bills. Continue to prioritize until you no longer have funds.

Should you not have enough income to cover your utility bills, I recommend that you contact the utility company (or companies) and let them know your situation. Many companies provide temporary assistance with monthly bills until you are able to get back on your feet financially. The assistance will only be short-term, so you will need to find another solution quickly. For the short term, you or your spouse may need to consider getting a part-time job for extra income. You might also check for community outreach assistance centers in your area.

It is unfortunate that the collection process for your medical debt went so far that your wages are now being garnished. In order to place a garnishment order with your employer, your creditor would have to be granted a judgment from the courts. I can't imagine that a judge would have allowed a garnishment if he or she had heard your side of the story and known the hardship in which you would be placed. My guess is that you may not have been in court to present your side of the story. We can't change history, but moving forward, if you receive a summons to appear in court for a debt, always attend.

To qualify for Chapter 7 bankruptcy relief, your monthly income must be below the median income for your state. I don't know if your income level would qualify and you would need to contact a bankruptcy attorney. Generally, a first-time consultation with an attorney is at no charge. My recommendation is that you find a qualified bankruptcy attorney in your area and make an appointment.

Chapter 7 bankruptcy dismisses debts, Chapter 13 bankruptcy enters you into a repayment program of three to five years. Once the attorney has reviewed your situation, he or she will let you know if you qualify for Chapter 7 or Chapter 13 relief. Then you can decide if you want to move forward. You can work out how payments will be made with the attorney once you make your decision.

The one thing I don't want you to worry about right now is your credit rating. You need to concentrate on making sure you and your family have your basic needs met. You can work on improving your credit once you work out of this current financial crisis.

Take care of your credit!

See related: How wage garnishment works, and how to avoid it, Wage garnishment rules of engagement, Take these steps to avoid wage garnishment, Paying less than minimum won't ward off garnishment, When medical problems hit, bankruptcy can make sense, 14 key factors when considering bankruptcy

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: January 18, 2010



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