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When debts become insurmountable

Many Ohio residents have debt, whether it be in the form of student loans, credit card debt, a mortgage or some other obligation. When individuals do not have the means of paying off these types of obligations, it is usually advisable to let the creditor know. If a creditor sends a letter or a statement to a debtor demanding payment, and the notice is ignored, a creditor will often take faster action to collect the entire balance due.

One way that creditors may get funds from people who owe them money is through wage garnishment. Most creditors need to get a court order to garnish wages. A court order obligates the employer to withhold a certain amount of money from an employee's paycheck. The money taken out of the paycheck is still treated as income, and thus the employee will need to report this money for tax purposes. Even though the amount garnished is limited by federal consumer laws, the action may still put debtors in a financial bind.

Creditors may also seek to garnish commissions and bonuses in addition to salary. When money is owed to the Internal Revenue Service or some other government agencies, a court order is not even required for the wages to be garnished. However, if a creditor is put on notice that a debtor can only pay for a certain portion of the obligation, it may in some cases provide debt relief in the form of a partial discharge.

A bankruptcy attorney may also be able to advise clients as to which debts they may seek to lower and which they may try to restructure. Even if debtors obtain a partial discharge, the amount that is saved may be deemed taxable income.

Source: Forbes, "Taxes From A To Z (2014): G Is For Garnished Wages", Kelly Erb, March 14, 2014

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