Q: “I’m facing a garnishment if I don’t pay a company nearly $7, 000. I borrowed $1, 000 and defaulted on the loan. I called and asked if they would settle, they said ‘No.’ I received a letter stating that I must pay them in full, or pay 25 percent of my next paycheck, or they are going to go to court for garnishment.

I can’t do either of their demands right now. I’m thinking about filing bankruptcy but I don’t want to. Can you give me any suggestions on how to handle this situation?”

A: Well, the first thing I would advise you to do is to get back on the phone, and try to negotiate with this company. Simply because you asked for a settlement and they said “No”, doesn’t mean that you should end your settlement talks or negotiation efforts there.

I’m at a little bit of a disadvantage to advise you specifically on the steps you should take because there are three key things that I don’t know, that you didn’t disclose to me in your email. One, I don’t know the state in which you are operating.

Two, I don’t know what kind of debt this was. You said you borrowed $1, 000 and defaulted on a loan. Was this a secured loan, was it an unsecured loan? Was it a credit card, was it a line of credit, was it some other debt?

You also said that you face garnishment, if you don’t pay nearly $7, 000, but you said you borrowed $1, 000. So I’m curious as to why there’s seven times as much being asked. Was this a very old debt, from 5, 10, 20 years ago?

That matters greatly as well. You need to know the statute of limitations or the time frame after which a company can legally come after you in court or try to pursue a judgment against you, or potentially a wage garnishment.

If in fact this is a very old debt, and the statute of limitations has expired in your state, then you may not have to pay anything at all.   In most states in the country, a statute of limitations for credit card debt, for example, expires anywhere from three to 10 years.

Again, I don’t know what kind of loan specifically you took out. Whether it was a promissory loan, whether it was an oral loan that was made, I don’t know those particulars.

But I can say that what you should do is first look at the law in your area. Get pre-paid legal assistance if necessary or go to a legal aid society. That might be able to give you free to low-cost help, to determine whether or not the statute of limitations on this loan has expired.

Even if you find out that it hasn’t and that you do still legally owe something, at least $1, 000 that you initially borrowed. You should negotiate very aggressively to try to make monthly payments, but not to the tune of $7, 000. Again, clearly, they’ve added on interest, late fees, or charges of some kind to make your debt mushroom from $1, 000 to $7, 000.

So I would say, request to speak to a supervisor. Don’t worry about them saying, “You must give us 25 percent of your paycheck, or we’re going to take you to court.” I’m not saying don’t worry about the reality or the prospect of a wage garnishment. What I’m saying is that they don’t get to dictate how much you pay out of your paycheck. Only a judge can do that.

If they end up taking you to court, to pursue a wage garnishment, you would be able to tell the judge your financial circumstances. You’ve already said to me, “I’m thinking about bankruptcy, and that I cannot give 25 percent of my paycheck, and I cannot settle and pay in full.” So that tells me that you are cash-strapped.

A judge would be able to be a neutral third party who would look at everything in its entirety. Your income, and your current expenses and obligations.

If you are issued a summons to go to court in this matter, do show up for court. That will protect your legal interests. And do make sure that you present your side accurately, in terms of saying what the original debt was — versus what they’re trying to get you to pay up right now.

I don’t think that bankruptcy is the preferred avenue for you, based on everything that you’ve described to me thus far. Especially because this was essentially a $1, 000 loan. And I would hate to see you have a bankruptcy which will last on your credit report for 10 years, just for a $1, 000 debt.