Debt lingers on credit report even after garnishment, repayment

Let's Talk Credit
Let's Talk Credit columnist Jane E. McNamara
Jane E. McNamara is president and chief executive officer of GreenPath Debt Solutions, a nationwide, not-for-profit, providing financial literacy through consumer education and counseling for more than 50 years..
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Question for the expert

Dear Let's Talk Credit,
If my wages were garnished to repay a secured loan I took out years ago, should the loan still be showing on my credit report as a charge-off? I paid the entire amount due on the debt through the garnishment process. Thank you in advance! -- Ronald

Answer for the expert

Dear Ronald,
It's great that you paid off your debt. However, paying the debt in full does not remove the account from your credit report. The loan will continue to show up on your credit report for seven years from the first date of continued delinquency. The Fair Credit Reporting Act requires that most negative items be removed from your credit report after seven years. However, until that period elapses, the item will continue to be reported as charged off.

The good news is that you paid what was owed on the account. Anyone reviewing your credit report before the account drops off will see that you did pay, even though it was late and not as agreed. You said that the loan was charged off several years ago. Another piece of good news is that the more time passes, the less negative impact the charge-off will have on your credit score.

You don't say why you defaulted on your loan, but I hope your circumstances have changed for the better and that you have a spending plan in place that includes saving money each month. With an emergency savings cushion of at least six months' living expenses, it is much easier to avoid unwanted debt and the consequences of being unable to make loan payments. If you are not currently saving, I recommend that you start now. Putting aside even a small amount each pay period will add up faster than you think.

For you and other readers, I wanted to say a few things about wage garnishment. In order for creditors to collect what is owed them through wage garnishment, they must first sue you in court. The creditor is required to notify you that it is suing to collect, and you have the right to defend your side of the case. If the debt is valid and owed, the creditor will likely receive a judgment from the court for the amount due. The judgment can then be executed by the court in the form of a wage garnishment, bank levy or a lien against real personal property.

If at all possible, it is better to work out a repayment plan with the creditor before it reaches the courts. Offer what you can reasonably afford to pay each month and if the collector agrees, get the agreement in writing before you start making payments.

Let's keep talking!

See related: Your first budget, in 3 easy steps, How wage garnishment works, how to avoid it, 3 ways to rebuild credit after garnishment 

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Updated: 11-23-2017