A collection agency is a company that seeks to collect repayment on overdue debts. A collection agency will either be hired by a creditor and seek repayment of a debt on commission, or it will purchase old debts itself for a low price, then attempt to collect them. Collection agencies have many ways of encouraging debtors to pay what they owe, including garnishment of wages. However, in nearly all cases, a collection agency cannot garnish a person's income tax refund.
Garnishment
Garnishment is the process by which a debtor's income is diverted to a creditor to pay off a debt. Many collection agencies will file a motion in civil court to garnish a debtor's wages. To do this, the agency must first sue the debtor. After a judge issues a civil judgment against the debtor, the creditor can file a motion seeking an order of garnishment. However, this order cannot usually be applied to income tax refunds.
State and Federal Laws
Both the Internal Revenue Service, the government agency responsible for collecting taxes in the United States, and the lion's share of state tax agencies do not allow private creditors to garnish income tax refunds. While certain state and federal agencies may be allowed to take possession of a person's tax refund, particularly if the person owes back taxes, this same option is not available to a private creditor, such as a collection agency.
Michigan Law
As of December 2010, the only state that allows private creditors to apply for the garnishment of an individual's income tax refund is Michigan. To do so, the collection agency must apply to the Michigan Department of the Treasury. Only state income tax refunds can be garnished, as the state of Michigan has no jurisdiction over federal income taxes. This garnishment will only be granted after the debtor has been given a chance to respond to the order.
Considerations
While an income tax refund cannot, in most cases, be directly garnished, this does not mean that the money is exempt from seizure. Income derived from certain kinds of government benefits, such as Social Security benefits, cannot be garnished by private collection agencies. However, this does not apply to tax refunds. Therefore, if a tax refund is placed in a bank account, the collection agency could conceivably convince a judge to freeze the bank account and then seize the funds therein.
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