Which Is Worse: Garnishment or Bankruptcy?

Sometimes, filing bankruptcy might be the only way to avoid a wage garnishment.
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If your financial life is at the point you are choosing between garnishment and bankruptcy, you are facing a tough challenge. Both will have long-lasting impact on your finances and credit. Bankruptcy provides some protection from creditors and can often result in smaller payments than a garnishment. However, bankruptcy often carries a stigma that is hard to overcome, and the effects on your credit report can be longer-lasting than a garnishment.

Garnishment vs. Chapter 7

If you qualify to file for Chapter 7 bankruptcy protection, that might be a better option than succumbing to a wage garnishment. In Chapter 7, you get your debts discharged without having to pay your creditors, and you can often escape without having your assets liquidated, subject to the exemption laws in your state. Garnishment will continue to take your wages until your creditor is paid off. A Chapter 7 discharge can often dismiss the debt that triggered the garnishment, although some debts, such as child-support obligations or some back taxes, cannot be discharged in Chapter 7.

Garnishment vs. Chapter 13

In many ways, a wage garnishment is like a Chapter 13 bankruptcy filing. In both cases, you must pay your creditors a set amount every month until certain debts are paid off in full. However, a garnishment can take up to 50 percent of your wages in some cases, whereas a Chapter 13 payment plan only requires the amount the court agrees you can afford. In both instances, your property is not subject to seizure. Depending on your income, it's possible to get a very low monthly payment in a Chapter 13 case, so that might be a better option than having a wage garnishment.

Credit Score

In terms of your credit score, there isn't a lot of difference between wage garnishment and filing for bankruptcy protection. Before an account reaches the point of wage garnishment, it has typically fallen into collections status. According to credit reporting agency Experian, collections accounts are nearly as damaging as bankruptcy to your credit score. Both garnishment and bankruptcy reflect your failure to pay creditors, which counts for the largest part of your FICO credit score: 35 percent.

Credit Report

Both garnishment and bankruptcy are public records that remain on your credit report for at least seven years. In the case of a Chapter 7 bankruptcy, that time period extends to 10 years, making it slightly less desirable than a garnishment, for credit report purposes. In all cases, the effects of your negative accounts diminish over time.

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