Protecting assets and wages can help debtors in a tough economy

States could now take steps to mitigate the effects of a recession by protecting residents with unsecured debt, a new study reveals an unfair patchwork of protections for Americans who are behind on their bills.

The study is especially timely as credit card debt is on the rise and some experts are predicting that the US could soon enter a recession, a time when far more Americans could face unmanageable debt.

Released November 2022 in American Journal of SociologyThe study finds that while protections for assets such as homes and cars have increased over time, protections for wages have largely stagnated.

“This means that those who own a home are better protected from debt collectors than wage earners who rent out their homes,” said research author and Frank HT Rhodes postdoctoral fellow Elizabeth Martin, who works with the Cornell Population Center and the Jeb E. Brooks School belongs to Public Order. “Exceptions apply best to those who own property, even if it is tenuous.”

Martin studied state exemption laws and their impact on economic insecurity from 1986 to 2012.

She found that during recessions in states that offer higher protections, fewer residents lose large chunks of their disposable income. Protections for valuable property, like houses and cars, are most effective when the economy is struggling. However, protecting wages reduces economic uncertainty regardless of the state of the economy.

Federal laws limit how much of a person’s wages can be garnished for consumer debt; Individuals can keep either 75% of their disposable income or as much as 30 times the minimum wage ($217.50 per week). Some states protect more — either a higher percentage of a person’s income or a higher floor. Massachusetts protected 85% of income, or at least $500 a week, from foreclosure in 2012, the highest rate in the country.

Surprisingly, the divergence between state laws has little to do with the policies of legislators or residents. Rather, the prevalence of agricultural employment seems to be the main indicator of higher exemption protection. “My guess is that states that rely on agriculture may enjoy the highest level of protection because agriculture requires both land and equipment to function,” Martin said.

State politicians and lawmakers could now take action to protect their constituents in the event of a recession. Raising the social safety net or subsidizing college tuition could reduce the need for residents to take out risky, high-interest loans, Martin said.

More directly, states could reduce the damage caused by default by increasing wage protections. “States should also consider increasing protections that might benefit the less affluent — such as those for wages and benefits deposited into bank accounts, or cash for rent and other necessary expenses,” Martin said. “Limiting some of a creditor’s recourse is an absolute minimum protection, but one that appears to increase economic certainty in troubled times.”