Garnisment is when creditors file suit against a debtor and get a court order to take away the debtor's wages or property. If an injury victim falls behind on debts and the creditors make claim, it is possible that his settlement money will be subject to garnishment. Debtors facing the loss of a settlement to creditors need to know their state laws and how to protect their assets.
Injury Settlements and Debts
When a person falls behind on his payment towards his debts, creditors have the legal right to sue to collect monies owed. Oftentimes, filing suit against the debtor results in the creditor garnishing wages or claiming rights to the debtor's assets. While certain types of pay like unemployment or child support are protected from garnishment by federal law, injury settlements are not.
Even though federal law does not protect injury settlements from creditors, several states have their own laws in place regarding settlement garnishment. For example, in Florida, debtors may protect their settlement assets by entering them into a structured settlement annuity. In Minnesota, injury income is not exempt from garnishment. Because the law varies widely from state to state, it's important to know the law in your area and to discuss the situation with a local attorney. Many states allow garnishment of injury settlements, but also consider what the debtor has left to live on after assets are taken away.
To legally garnish a debtor’s assets, including settlement money, creditors have to follow a specific process. First, they must file a lawsuit against the debtor explaining the debt and clearly stating the amount owed. If the judge rules in their favor, the court will decide the amount the debtor is responsible for and what assets are subject to garnishment. After that, it is the responsibility of the creditors to begin the garnishment process. The assets garnished may include bank accounts, so if a lump sum injury settlement is in the debtor’s account, it may be at risk for garnishment.
Protecting Injury Settlements
Debtors can somewhat protect their settlements from creditors. If the settlement is in a lump sum, putting the money into an Individual Retirement Account or other retirement plan may guarantee its safety as several states do not allow the garnishment of these types of funds. Debtors may also try and work out a payment plan with the creditors or fight the original lawsuit to prevent garnishment.