Judgment creditors have access to more aggressive collection tools including wage garnishment and judgment liens. These are tools that are not available without first obtaining a court judgment. Do they include tax refund interception? Perhaps. The answer lies in the various state laws governing judgment collection.
The Main Reason for Going to Court
Before answering the tax return question, it is a good idea to understand why creditors go to court in the first place. Knowing this makes it easier to understand a creditor’s mindset when it comes to tax returns.
Standard debt collection practices are limited by federal and state law. Due to said limits, it can be nearly impossible for a creditor to collect from a debtor who knows the law and how to game it to his advantage. As just one example, a debtor can immediately put an end to all electronic communications simply by opting out. Creditors are required to offer that ability.
Consumer protection laws restrict creditors so much that they often feel the only way to level the playing field is to go to court. Going to court and winning opens the door to the previously mentioned collection tools. That takes us to the idea of intercepting tax returns.
Federal Returns Are Off Limits
The federal government can intercept federal tax returns for the payment of certain types of debts, including income taxes. But as a general rule, private creditors cannot directly touch federal tax returns. They are off limits.
However, there is an indirect way a creditor could still seize a federal refund to help pay off an outstanding judgment. Salt Lake City’s Judgment Collectors explains how it works.
Most states allow bank account garnishment. A judgment creditor can petition the court for a writ of garnishment that is then delivered to the debtor’s bank, compelling the bank to seize the debtor’s cash assets and forward them to the creditor. A well-timed writ of garnishment can take advantage of a tax return deposited into the debtor’s bank account.
Once a tax return is deposited, it is no longer protected. It can be garnished along with any other cash assets the debtor has in the same bank account.
Some States Allow Interception
While federal tax returns are generally off limits for judgment collection, the same is not necessarily true for state tax returns. Many states, including California, allow judgment creditors to intercept state returns for the satisfaction of certain kinds of debts. Unpaid judgments are among those debts.
Under California’s Code of Civil Procedures section 708.710, judgment creditors can obtain a court order allowing for the interception and seizure of a state tax return. Such orders are issued on a one-off basis, requiring a judgment creditor to file a new petition in any year in which it wishes to intercept a debtor’s tax return.
Creditors Have Other Options
Tax return seizure is a nice tool to have if you are a judgment collection agency. But if it is not available, there are other options to look at. Wage garnishment is a tried-and-true collection tool that has been around seemingly forever. Judgment liens our tool creditors can use to establish a financial interest in a debtor’s property. And of course, there is also property seizure and sale.
All of this is a good reason to not fall behind on one’s debts. And if a debtor does fall behind, it’s best to work out some sort of amicable compromise that avoids collection or civil litigation. It is just not worth getting tied up in collection efforts that could drag on for years.
