Using the Courts for Private Debt Collection: How Wage Garnishment Laws Affect Civil Judgments and Access to Credit

Abstract

Using court orders called civil judgments, creditors can garnish wages and seize assets for unpaid consumer debts. We provide the first comprehensive description of civil judgments across states and time. Civil judgments are about twice as common as bankruptcy filings. Civil judgments are 20 times more common in some states than others. Their incidence is the highest around age 40, decreases with credit score, and is concentrated in census tracts with a greater proportion of Black residents. To understand the cross-state variation, we build the most comprehensive panel measuring wage garnishment across states. We show that a decrease in the amount garnishable per week decreases the number of judgments per capita and increases the average civil judgment amount. These findings are consistent with a simple theoretical model where creditors optimally choose which debts to bring to civil court. Yet a decrease in the amount garnishable reduces credit card limits and open credit card accounts. The results suggest that policymakers may need to weigh access to credit when considering protecting debtors.