Risk of lien, garnishment during debt settlement

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Dear Credit Smart,
Hi, I recently entered into a debt reduction program and I want to know if my creditors can take money from/put a lien against my checking account while the debt is being negotiated and I am making timely payments to my debt reduction program? Also, can they do the same to my wife’s solo account? Thanks! – Brooke


Dear Brooke,

The answer to your question depends on what type of program you have entered into. Because you call it a “debt reduction program” and you say you are making timely payments to the program, I believe you are referring to a third party debt settlement program. 

This type of debt reduction program seeks to reduce your total debt by offering a settlement to your creditor of a less-than-full balance. While it is true that settlement can save you money, there are risks that you should be aware of.  Your question brings up one of those risks.

A debt settlement is basically a lump sum payment offered as payment in full for less than the total amount you owe. Since you say you have been making timely payments to your program that probably means that the company you are working with is putting those payments into an escrow account on a monthly basis until they have collected enough money to offer a lump sum payment to your creditors. This is the way these programs are designed to work. 

The problem with this scenario is that while you are busy making timely payments to the debt reduction program, your creditors are not being paid. This is causing your accounts to fall behind and chances are very good that your creditors are not aware that you have entered into this program.

What that means is that very soon, if they haven’t already begun, you will start getting calls from your creditors and they will want a payment. The fact that you are making payments on a settlement that has not even been negotiated or accepted yet will mean very little to your creditors. What will also start to happen, and again may already have happened, is that your credit report will start to reflect missed and delinquent payments. This will negatively affect your credit score, which may not concern you now but will remain on your reports for the next seven years.

Depending on how far behind you are, what could also happen is that you will be sued by your creditors. You do not want to ignore any court summons regarding your accounts. If you do not show up in court, you waive your  right to defend yourself and you could indeed find yourself in a position where your checking account is garnished for amounts you owe. Your wife’s account may not be in jeopardy, but much will depend on whether you reside in a community property state. In those states, debt and income earned during marriage are assumed to be owned by both spouses.

The Federal Trade Commission has outlined the perils of entering into debt settlement with a third party company, and suggests other options for handling debt, including a debt management plan with a reputable nonprofit credit counseling agency and bankruptcy options.

If the program you are in happens to be a debt management plan through a reputable agency, you should not have these worries. The agency will already have worked out your plan with your creditors and most importantly, the money you have been sending will be going to your creditors in a timely manner. 

Remember to always use your credit smarts!

See related: How wage garnishment works, how to avoid it

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Updated: 11-21-2017