The nation is finally and slowly emerging from the Great Recession – a period during which delinquency rates on consumer debts were five times higher than the rates during the previous five years. Simply put, many North Carolinians could not pay their debts because of lost jobs and fast-declining home values.
The result, not surprisingly, has been an explosion in lawsuits, especially by large, national debt-buying outfits that specialize in purchasing bad debts from the original creditors for pennies on the dollar and then trying to collect whatever they can.
The balance between the rights of these giant creditors to seize property from debtors and the rights of the debtors to keep property necessary to provide for their families is a delicate one. Those who have the ability to pay debts ought to do so. But when confronted with the choice of paying a consumer debt like a credit card bill or providing for a family’s needs, family should come first. Unfortunately, the ability to put families first has been jeopardized by a wage-garnishment proposal that Sen. Andrew Brock has introduced in the North Carolina Senate.
To understand Brock’s proposal, a little history is helpful.
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North Carolina law has long placed reasonable limitations on the right of a creditor who has successfully sued a debtor to seize his or her wages. Since 1870, state law has prohibited the seizure of such wages from the previous 60 days when it can be shown that the earnings “are necessary for the use for a family supported, wholly or in part, by his labor.”
Our courts have repeatedly upheld and applied this law to allow a debtor to protect 60 days of wages from creditors, whether in the form of unpaid wages or wages received and in the bank, but only so long as they are necessary for the support of the debtor’s family. In other words, for almost 150 years, North Carolina has balanced the competing interests in this area by allowing a debtor to provide for his or her family.
Unfortunately, the Senate proposal would destroy this balance by allowing a creditor to garnish 25 percent of a wage earner’s “disposable income,” which it defines as the debtor’s gross wages, minus taxes.
Let’s think about how this would play out in the real world.
Consider a single mother with two children who earns $42,000 a year as a state employee. From her gross monthly pay of $3,500, $700 is deducted for taxes, $210 for retirement and $200 for medical insurance, leaving her with take-home pay of $2,390. No one can dispute that she needs all $2,390 to support her family. However, Senate Bill 632 would allow a creditor to garnish $700 from her pay, leaving her with only $1,690. The consequences would be devastating to her family.
As a practical matter, the only refuge for such an unfortunate wage earner would be to file bankruptcy. But here’s the rest of the story: North Carolina has one of the lowest bankruptcy filing rates in the nation. For the first quarter of 2014, the national average for bankruptcies was 3.23 for every 1,000 people. North Carolina ranked 40th among the states with a rate of 1.82.
By contrast, the rates in our sister Southeast states that allow wage garnishment along the lines of Brock’s proposal are the highest in the nation. Tennessee is first with a rate that’s 350 percent of North Carolina’s. Georgia and Alabama are second and third with three times the North Carolina rate. Virginia has a rate 70 percent higher than North Carolina. South Carolina, which has no wage garnishment, has a filing rate 13 percent lower.
The conclusion from all this is inescapable: If the General Assembly and Gov. Pat McCrory enact a law that dramatically expands wage garnishment in our state, bankruptcy filings will soar 200-300 percent.
As a bankruptcy lawyer who has represented debtors for over 30 years, I don’t find these statistics surprising. Contrary to conventional wisdom, people are not quick to file bankruptcy. Whether their reluctance emanates from embarrassment, a sense of defeat or simple personal morality, most will not file until they see no alternative – until they have to. For thousands upon thousands, expanded wage garnishment will provide the “have to.”
So, while the Senate proposal is clearly in the best financial interests of bankruptcy lawyers, it is bad public policy, and I strongly urge state lawmakers to reject it.
William Brewer is a bankruptcy lawyer who practices in Raleigh and a past president of the National Association of Consumer Bankruptcy Attorneys.
By the numbers
3.23 The national average rate of bankruptcies for every 1,000 people in the first quarter of 2014
1.82 The rate in North Carolina, making it 40th lowest among the states
6.37 What the bankruptcy rate is in Tennessee, which allows wage garnishment similar to what has been proposed in N.C. – the highest rate in the nation
70 By percentage, how much higher the rate is in Virginia, which also allows the garnishment
13 By percentage, how much lower the bankruptcy rate is in South Carolina, which has no wage garnishment