The financial crisis is affecting most of society, but the rising interest rates are particularly difficult for people with unsecured debt. Research from Cornell suggests that this impact could be lessened if these residents who may be behind on their bills are protected by the government.

The timing of this research couldn’t be more relevant, as credit card debt continues to rise and some experts anticipate that the United States may soon experience a recession. During this time, a significant number of Americans may struggle with overwhelming debt. The study shows that while protections for things such as cars and homes have generally increased over time, this hasn’t been the case in terms of protections for wages.

“This means that those who own homes are more protected from debt collectors than wage earners who rent their homes,” the researcher explains. “Exemptions are most applicable for those who own property, even tenuously.”

Financial support

The focus of the author’s study was the impact of state exemption laws on economic insecurity between 1986-2012. They found that during times of economic recession, states that provide higher exemption protections experience fewer residents losing significant portions of their disposable income.

While protections for assets such as homes and vehicles are most effective during tough economic times, wage protection serves to decrease economic insecurity regardless of the state of the economy.

Under federal laws, there are limitations on how much of a person’s wages can be garnished for consumer debts. Individuals can keep 75% of their disposable income or no less than 30 times the minimum wage, which is currently $217.50 per week.

Some states offer more extensive protections, including a higher percentage of a person’s income or a higher floor. In 2012, Massachusetts had the highest rate in the nation, protecting 85% of income or a minimum of $500 a week from garnishment.

Interestingly, the variation in exemption laws among states is not closely linked to the political beliefs of lawmakers or residents. Instead, the presence of farm employment is the leading predictor of higher exemption protections.

“I suspect that states that rely on farming may have the highest protections since farming requires both land and equipment to function,” the author explains.

Supportive steps

To prepare for a potential economic downturn, policymakers and lawmakers at the state level have the opportunity to take action that benefits their residents. According to the author, steps such as expanding the social safety net or subsidizing higher education tuition could decrease the necessity for individuals to take out loans with high interest rates.

Additionally, states could implement more robust measures to safeguard individuals who fall behind on their debts by increasing the protections for wages. This would have a direct impact on lessening the negative impact associated with being unable to pay off debts.

“States should also consider increasing protections that may be more likely to benefit the less wealthy —like those for wages and government benefits deposited in bank accounts or cash for rent and other necessary expenses,” the author concludes. “Limiting some of a creditor’s recourse is a bare minimum protection but one that appears to increase economic security when times are tough.”