Debt can make some people do some very desperate things.
Former Oshawa, Ont. city councillor Robert Lutczyk recently plead guilty to kidnapping city solicitor David Potts in October 2012. The incident occurred after Potts returned home from a council meeting and a waiting Lutczyk lead him from his driveway into a car at gunpoint.
At the time, Lutczyk had fallen on hard times. After more than a decade on council, he lost his seat in 2010 and then lost his next job teaching juvenile offenders in 2012. Plus, he was deeply in debt to the tune of hundreds of thousands of dollars and efforts had been made to garnish his wages while he was still a city councillor.
Most people probably won’t kidnap someone when their finances start to go south, but there’s a real possibility a creditor may go to the courts to have your wages garnished if you’re significantly in arrears on a payment. If that has happened to you, it’s important to know what it is, how it works and what you can do about it.
What is Wage Garnishment and What Can be Seized?
A wage garnishment is an order from the court allowing an owed creditor to intercept a percentage of your wages on every paycheque until all the money owed to that creditor is paid back.
“In order to garnish your wages, a debtor must go to court to obtain a seizure summons and to get that, they must receive a judgement, which is merely an acceptance by the court that the creditor does have a claim against you,” says Kelly Chow, a chartered insolvency and restructuring professional and trustee for BDO Canada in Vancouver.
With that seizure summons a creditor can look for physical assets to seize or if they know who your employer is they can serve the writ of seizure on your employer to garnish your wages. Typically, when someone is getting their wages garnished, it’s because they have little to no assets or equity that can be seized.
Provincial and federal law protects what kind of assets can be seized and how much income can be garnished. Though similar laws apply across Canada, in B.C. normal household goods and appliances cannot be seized as long as the sale value is more than $4,000, so it’s extremely rare for anyone to go after household goods. Personal effects and clothing are also off the table as seizable items and the value or equity in a vehicle up to a maximum of $5,000 can’t be seized either. However, if a creditor knows where you bank, they can seize any cash in your bank account.
“It’s a common misconception by debtors that creditors can seize their lines of credit. The real answer is no, lines of credit cannot be seized because they are not cash,” says Chow.
When it comes to wage garnishment, only 30 per cent of pay from an employer can be garnished. However, if you’re self-employed, a creditor can take 100 per cent of your earnings.
How Wage Garnishment Works When You’re Self-Employed
The 30 per cent rule only applies as a protection of wages. But if you’re self-employed, the dollars you’re earning aren’t wages because you’re a subcontractor.
“Theoretically, a creditor could garnish you 100 per cent. But commonly, a creditor would rather bleed you of your money a little at a time than force you to quit and find a job some place else, ” says Chow.
To garnish someone who is self-employed, a creditor must serve someone who owes that person money and garnishee orders are usually only good for a limited time, (i.e., ten days) so the creditor has to catch the right timing to collect.
When are Your Wages Likely to Get Garnished?
It’s also a question of timing when it comes to how likely a creditor will seek a garnishment against you.
“Someone is making a decision within that creditor or collection agency about what action they’re going to take and when, so somewhere along the line it comes down to someone’s personal choice,” says Chow.
That being said, very seldom will you see a creditor go to court to get the judgement for someone who has only been in arrears for a short period of time because, even in small claims court, time and manpower has to be used to go seek the judgement, so the money it costs to use this time and effort has to be worth it.
“There’s no hard and fast rule to how they do it. Someone has to ask themselves, are they going to go through the time and expense of getting a judgement when we don’t know where they work or what assets they’ve got? If that’s the case, probably not,” says Chow.
Provincial law includes limitation periods limiting how long a creditor has to collect a debt. In many provinces these laws were recently changed to the advantage of the debtor. It used to be the creditor could not collect on a debt if the debtor had not made a payment or given the creditor a written acknowledgement of the debt in six years. Now, most limitation acts have been amended from six years down to two years.
“However, if a creditor goes to court and gets a judgement, that judgement is good for ten years. A debtor going to court doesn’t necessarily mean they know of assets to seize or income to garnish, they just may want to preserve their claim before time runs out,” says Chow.
How to Start Over
If you don’t want your creditors to seize your assets or garnish your wages – pay them.
Of course, that doesn’t mean you’ve got the money in the first place, but don’t be afraid to ask for help and go to a friend or a relative to help you pay them off. If you can’t pay them in full, the next best thing to do is contact them and negotiate.
“The court only determines that a debt can be collected, it doesn’t outline how a creditor should collect or set a payment schedule,” says Chow.
That means it’s up to you and your creditor to work out a payment plan. Maybe that means you go to a debt solutions centre and work out a consumer proposal – where all or a portion of your debt can be consolidated into one lump sum payment – or maybe you negotiate with your creditors individually.
“Maybe you go to your creditor and say, ‘Look, I can’t afford this and if you keep doing this, you’ll force me to quit my job,’ so maybe your creditors will agree to take a lesser amount over a longer period of time so they don’t lose you as a debtor,” says Chow.
“A negotiation is as broad as a debtor’s imagination and for the creditor, some money is better than no money at all.”
Finally, you can apply for relief through the courts, but this is time consuming and won’t necessarily solve the problem of your debt. You can also take the final step of bankruptcy, so your creditors will no longer be able to touch you, but this could have a lasting impact on your ability to apply for credit or a loan.
“As an insolvency professional, I try to look at this with a holistic approach. If you have one creditor owed $5,000 garnishing you, is that the only problem or do you actually owe $50,000 or $500,000? What’s the point of negotiating with that one creditor when, quite frankly, you should go bankrupt or do a consumer proposal?”
Often, those relying on faint hope by negotiating with one creditor are the same people Chow and his team see in six months or two years because they haven’t solved those big picture issues that got them into debt in the first place.
“Most people think that if you go bankrupt, you’re screwed for a long-time, but I’ve had people go bankrupt and have credit within six months to a year quite easily. It depends more on the individual and their situation more than anything else,” says Chow.
“If you’ve had the same job and lived in the same house for 18 years, the moment you’ve gone bankrupt and cleared all that debt, you’re a great risk for anyone who wants to give you more credit, so bankruptcy doesn’t have to mean it’s over for you financially.”