ADVERTISEMENT

Self-employed can't be garnished, but can be sued

By  |  Published: January 6, 2017

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Question Dear Sally,
If I stop paying completely on all my credit cards, how can the banks garnish my wages if I'm self-employed? Can they take my tax refund from me when I file at the end of the year? – Taylor

Answer

Dear Taylor,
The credit card company cannot garnish income from a self-employed person who operates as a sole proprietor in the same way they can take a portion of your paycheck if you work as an employee.

Neither can a bank make a grab for your tax refund for credit card debts. The Internal Revenue Service does not allow credit card companies to garnish tax refunds.

That doesn’t mean a credit card company has no recourse if you decide to stop paying. They can’t take business receipts or tax refunds before you get them, but once the money is in your bank account, that’s another story. If creditors go through the legal channels, they can seize money from your bank account – possibly doing more damage all at once than they would have been able to do with a wage garnishment. Credit card companies may also place liens on your property, such as any real estate you own.

Stop making payments altogether and things get worse. Your credit score takes a hit, and as you miss more payments it keeps on taking hits, until you no longer have access to credit at reasonable rates. This makes it even harder for you to operate your business, creating a downward spiral. Your interest rates on current accounts can go up, making your balances grow at an alarming rate. The banks will contact you by mail and by phone. Just not paying your bills is a scenario you want to avoid.

You need to take action now if you are having financial difficulty, before you get behind on your bills. Your best options will vary depending on how serious the problem is, your business outlook and other factors.

If you have a seasonal business, such as a plant nursery, or if you are expecting a large payment from one of your clients soon, a short reprieve may be all you need. Consider asking your creditors for a forbearance or hardship program. This is a program through the credit card company that gives you more time to pay your credit card bill. The credit card company may even lower your interest rate temporarily and suspend late fees. Just call the phone number on the back of your credit card and talk to a representative.

Another option may be to take out a line of credit or get a business loan. Or perhaps you can get a personal loan from a relative. Yes, you’re taking on more debt to pay debt. That’s better than letting your current credit card balances skyrocket because of late fees and punitive interest rates.

If you don’t see a positive outlook for your business in the very near future, you may need more drastic measures, such as taking a side job. Many people support their own businesses by working as employees. You actually have more freedom to take chances with your dream business if you have some other source of income. Eventually, you may be able to work your business full time again.

To review all your options, including debt negotiation or bankruptcy, you may want to talk to a credit counselor at a nonprofit agency affiliated with the  National Foundation for Credit Counseling or the Financial Counseling Association of America. The steps you take now can help you get through this rough spot, so you can reach for long-term financial and business success you deserve.

See related: Do you have what it takes for DIY debt settlement?, Save money and your score with a DIY debt management program

Meet CreditCards.com's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

ADVERTISEMENT
ADVERTISEMENT

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.




Updated: 08-18-2017

ADVERTISEMENT


Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.


ADVERTISEMENT