As the economic downturn forces many consumers into insolvency, there has been a big increase in credit card delinquencies. In California and nationwide, credit card issuers and collection agencies are suing delinquent borrowers by the millions, and often enforcing court judgments through wage garnishment.

Far from simply collecting debts fairly owed, however, some banks have managed to use the legal system to keep consumers virtually in perpetual debt.

In many states, when a debtor cannot afford a lawyer and offers no defense, courts enter what is called a "default judgment," often without a judge ever hearing the case. A default judgment allows the creditor essentially to set the terms of repayment instead of having them approved by a judge.

In a typical situation, a debtor falls behind on credit card debt and receives notice that he or she is being sued. Assuming there is no real defense, and often having no access to legal counsel, the debtor simply doesn't offer a defense. A default judgment is entered, and the creditor moves forward to collect the original debt plus penalties, bank fees, attorneys fees, and interest -- sometimes of up to 30 percent.

Although the percentage of a worker's wages subject to garnishment is capped for most types of debt (at 25% in California), some default judgments have resulted in payment plans so onerous that the debtor can make virtually no headway against the principal.

This has led to growing concern among consumer advocates, government analysts and even judges that borrowers' lack of access to good information or appropriate legal counsel makes them too vulnerable to abuse by creditors.

A recent New York Times article cited several examples where individual debtors were subject to crippling wage garnishments, often with no discernible effect on their levels of indebtedness.

In one case, a disabled woman in Cleveland had already paid nearly $3,500 on her original debt of $1,900 to Discover. Discover sued her for an additional $5,564 -- mostly representing compounded interest, fees and penalties.

As her only defense, the woman sent a handwritten note to the judge: "After paying my monthly utilities, there is no money left except a little food money and sometimes it isn't enough." The judge threw the case out, calling Discover's actions "unconscionable."

Creditors defend these actions as a reasonable response to debtors who refuse their attempts to settle through debt negotiation. For the working poor, however, living paycheck to paycheck can become immensely harder when that paycheck is reduced by 25 percent.

Related Resource

"Pay Garnishments Rise as Debtors Fall Behind," (The New York Times, April 1, 2010)