Saturday, 16 October 2021

How Does Wage Garnishment Work?

How Does Wage Garnishment Work?
29 Nov


Wage garnishment is a legal process that allows creditors to deduct money from a borrower’s paycheck to collect their unpaid debt. It is usually a lender’s last resort after other debt collection methods such as letters and phone calls are unsuccessful. With wage garnishment, you are forced to repay outstanding bills, back taxes or unpaid student loans out of your paycheck whether you want to or not.

While this collection method may seem unfair, it can take quite a while for your debts to fall so far into default that a creditor seeks a judgment against you and begins garnishing your wages. For the most part, wage garnishment only happens when you refuse to deal with your debts and do not take steps to prevent wage garnishment before it starts.

If you’re worried about having your wages forcibly garnished, it’s crucial to know how you can prevent this debt recovery tactic. But it’s also important to understand wage garnishment limitations, as well as the legal processes involved.

How wage garnishment works

While nearly any debt can result in wage garnishment, creditors of some types more commonly use the method. These include:

  • Federal student loans
  • Unsecured consumer debts
  • Federal taxes
  • Unpaid child support

But it’s important to note that wage garnishment doesn’t happen overnight — and there are limits to how much of your wages can be garnished. Here are the main steps involved in most wage garnishment cases.

Step 1: You default on a debt, whether that’s unsecured credit card debt, taxes owed to the federal government or child support you owe on a regular basis.

Step 2: Depending on the debt you have, you will likely receive letters and phone calls about your delinquent debt.

Step 3: A debt collector decides to sue you. If they win, the court could award a judgment against you or allow you time to appeal.

Step 4: If you don’t appeal or you lose your appeal, the debt collector can be granted a court order that allows them to garnish your wages.

Step 6: The creditor works directly with your employer to garnish your wages to the full extent of the law. The funds you owe will be deducted from your paycheck before you receive it until your debt is paid off.

What are the limits of wage garnishment?

The federal Consumer Credit Protection Act sets limits on the amount of money that debt collectors can collect from your wages and implements several more rules that protect consumers from some of the consequences of wage garnishment.

Employment. For starters, your employer cannot fire you for having your wages garnished the first time. But this rule doesn’t protect you against losing your job if your wages are garnished for a second time or beyond that.

Percentage limits. The law also sets the standard for how much of your wages can be garnished. In most cases, this is based on your disposable earnings, defined as the amount of money you have left after legally required deductions are covered. These deductions include federal and state taxes, payments for Social Security, Medicare and unemployment insurance taxes, and contributions to state employee retirement systems required by law. Deductions often paid through payroll such as health insurance premiums, union dues and charitable contributions are not deducted from earnings when calculating disposable earnings.

Once disposable earnings are calculated, the Consumer Credit Protection Act limits the amount of earnings that may be garnished in any workweek or pay period to 25% of your disposable earnings or the total of your disposable earnings above 30 times the federal minimum hourly wage — whichever is less.

The federal minimum hourly wage is $7.25 an hour, and 30 times that amount is $217.50. This means that individuals who earn less than $217.50 a week are not subject to wage garnishment in most cases.

It’s important to understand that this section of the law does not apply to unpaid child or spousal support or back taxes. We’ll go over limits and rules for those two categories in the sections below.

How wage garnishment occurs

If you’re behind on your debts and could face wage garnishment in the future, the next steps depend a lot on the type of debt you have.

Credit card debt and other unsecured debts

When consumers get behind on their credit card bills and other unsecured debts, a long and drawn-out process usually takes place before wage garnishment is even considered.

The process usually unfolds in the following manner:

1. You stop making payments on your bills. Once your bills are late, you will begin receiving late notices in the mail as companies try to collect from you.

2. Once your debt is 180 days in default, the creditor will either hire a debt collection agency to collect on its behalf or sell the debt altogether to minimize its losses. The debt collector will also try to collect from you by calling you on the phone and sending you letters.

3. The creditor may decide to file a lawsuit against you in your state’s civil court.

4. If you don’t appear in court or you do appear and lose the case, the debt collector will receive a judgment against you that says you owe a set amount to the creditor. This judgment is a formal decision by the court that confirms you owe the creditor a set amount of money.

5. The creditor has the right to enforce that judgment by contacting your employer and beginning a garnishment of your wages.

Most people who owe credit card debt have gone through a long and stressful collections process before the creditor files a lawsuit and pursues wage garnishment, according to consumer protection lawyer Jay S. Fleischman. Because of that, far too many people don’t appear in court.

Fleischman said this is part of the reason that wage garnishment for credit card debt and other unsecured debts is so common. It’s easy for creditors to win when debtors don’t show up to defend themselves.

When it comes to limits on wage garnishment for unsecured debts, the Consumer Credit Protection Act applies. This means that, for any given week of work, your wages can be garnished by the lesser of:

  • 25% of your disposable earnings
  • Any income that exceeds 30 times the federal minimum wage

But it’s important to note that some states do not allow wage garnishment for unsecured debts. Texas, Pennsylvania, North Carolina and South Carolina only allow wage garnishment for taxes, child support, federal student loans, and court-ordered fines and restitution.

Federal student loans

Wage garnishment to repay federal student loans is also common. This is mostly because the U.S. Department of Education has a mechanism in place that starts wage garnishment without a court order, Fleischman said. You must be given a 30-day advance notice of an opportunity for a hearing, but other than that, the process is automatic.

While your federal student loans become delinquent as soon as you miss a payment, your loan falls into default once it has been delinquent for at least 270 days. At this point, you will become ineligible for federal student aid and your default will be reported to the three credit reporting agencies. You could also be prohibited from buying and selling real estate, and you could be taken to court and charged collection costs and other fees.

Once in default, you will receive a letter from the Department of Education that gives you 30 days to resolve the default or begin repaying your loan. You can also request a hearing to explain why you shouldn’t be subject to an administrative wage garnishment.

If you do want to get your federal student loans out of default, you may be able to do so via a process known as loan rehabilitation. Under this agreement, you must contact your loan servicer and agree to make at least nine affordable, consecutive payments within 20 days of their due date over a 10-month period. Once you have met the terms of the agreement, your loans are no longer in default.

If you don’t respond or begin repaying your loan within 30 days, your wages will be garnished, with the same limits as unsecured debts.

Federal taxes

If you’re behind on taxes, the IRS also has rules in place that garnish your wages. But you will receive the following notices in the mail before wage garnishment and other legal processes begin:

  • A notice and demand for payment
  • A notice of intent to garnish your wages
  • A notice of your right to a hearing

If you opt to ask for a hearing, you can dispute your back taxes or ask the IRS for a payment plan. Fortunately, the IRS does offer short-term and long-term repayment plans that can help you catch up on your taxes while avoiding wage garnishment.

If you don’t pay the taxes you owe or make payment arrangements with the IRS, your wages will be garnished. The amount of wages it can collect from your paycheck depends on your filing status and how many dependents you have. Either way, wage garnishment limits are very high.

As an example, if you are single, have no dependents and get paid $600 a week, the IRS can take $369.23 of your paycheck each week until your tax debt is paid off.

Child and spousal support

You don’t want to fall behind on child and spousal support. Federal law allows much higher limits for wage garnishment in these categories.

For back child or spousal support, the Consumer Credit Protection Act allows garnishment of up to 50% of someone’s disposable earnings if they have remarried or have another child who is not part of the court order. If they do not fall into that category, garnishment can reach up to 60% of the person’s disposable earnings. Another 5% of disposable earnings can be garnished if support payments are more than 12 weeks behind.

But keep in mind that some states set lower limits on wage garnishment for child and spousal support.

Like many types of debt, wage garnishment for spousal and child support is determined by court order. The claimant will need to file a case with family court in their state to receive a judgment. Once the judgment is handed down, wage garnishment is set up through the employer.

How to get out of wage garnishment

When it comes to getting out of wage garnishment, an ounce of prevention is worth a pound of cure. In other words, you’re a lot better off figuring out a way to repay your debts from the start.

Plus, most of the avenues to get around wage garnishment are not quite ethical. For example, New York-based debt resolution attorney Leslie Tayne said you have the option to switch jobs or cut your work hours so that you earn so little that wage garnishment doesn’t apply. You could also quit working altogether to halt wage garnishment. Wage garnishment only works if you’re an employee receiving a W-2, she said.

Of course, Tayne said these are poor solutions when it comes to overcoming wage garnishment. Not only will you continue owing the debts in question, but you will suffer financially as well.

Another way to get out of wage garnishment is to try to resolve the debt with the creditor directly, Tayne said. Pick up the phone and call your creditors to see if a payment plan can be worked out. If it can, then you’re wise to stick with the plan and pay off your debts over time. Of course, this strategy works best if you negotiate your debts shortly after you default instead of later in the process.

You can also file bankruptcy to stop wage garnishment — at least for a while. When you file for bankruptcy, an automatic stay comes into effect that prevents most creditors from being able to continue involuntary collections activities against you. Depending on the type of bankruptcy you file, you may be able to discharge your debts completely or reorganize your debts and pay them off over time.

Living with wage garnishment

If you’re facing wage garnishment and are worried about the impact to your take-home pay, keep in mind that wage garnishment won’t last forever.

You might need to find ways to supplement your income, Tayne said. It’s possible you could pick up more hours at work to make up for your loss in pay, for example. You could also pick up a part-time job or a side hustle to make ends meet.

Having your wage garnished might also be a sign to approach your finances in a different way. Instead of trying to avoid bills and liabilities, you could try to focus on finding ways to pay them, Fleischman said. And don’t forget that you could make a huge difference in your finances by cutting your expenses. The less you owe in regular bills each month, the more money you’ll have to live on. You could try cutting your cable television package, finding a cheaper apartment or cooking at home instead of dining out.

Wage garnishment is far from convenient and you might even see it as unfair, but it’s something you may have to endure — at least until your debt is paid off.

“Sometimes you just have to live with it,” Tayne said.

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Holly Johnson


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