Are debt collectors garnishing your wages or taking money from your bank account? You’re not alone. Wages and bank accounts are the most frequently garnished property in the US.
In a recent study by ADP, a payroll processor, about 7% of the population has a wage garnishment. For Generation Xers the rate hit 10.2%
If it happens to you, there are several ways you can respond. In this post, we’ll cover what’s wage garnishment and how you can stop it.
What is wage garnishment?
Wage garnishment occurs when a court orders your employer to withhold part of your paycheck to repay a debt owed to a creditor. While there are some exceptions, most creditors need to win a judgment against you to be able to garnish your wages.
If you have a wage garnishment, it generally means that several things have already happened: the creditor tried to collect its debt unsuccessfully; it’s gone to the courts to file a debt collection lawsuit, and it secured a judgement against you to garnish your wages.
So if you’ve been delinquent on a debt, a garnishment shouldn’t come as a total surprise. Some examples of debts that require creditors first obtain a judgment before they can garnish your wages include:
- Credit card debt
- Consumer debt
- Medical bills
Sometimes garnishment can happen without requiring a judgment. Creditors who can garnish wages without first suing you include:
- The IRS for unpaid taxes
- Collectors of federal student loans
- Child support and alimony owed
Garnishments generally stay in place until you pay off the debt owed or settle it with the creditor.
Can creditors take money from your bank account?
Before creditors can put a levy or freeze your bank account, they must start a lawsuit to collect the money they claim you owe. If they win it (whether by default if you miss the hearing or otherwise), they’ll obtain a judgment against you.
The process will differ depending on where you live. In some states, the law allows a creditor to start the process without obtaining a judgment first if you’re served with a lawsuit that you don’t answer in a given number of days.
Other states protect your bank account by requiring the creditor and the bank to take certain steps before your bank account can be levied or restrained.
Some jurisdictions go even further, and require the judgment creditor to issue exemption forms to the bank to give to you, and to appropriately address any claimed exemptions you may have such as social security or child support funds.
If the bank restrains your account, you won’t have access to your funds while they’re frozen. Depending on your balance, this may cause your checks to bounce, or you may incur overdraft charges during this time.
How much of my wages can be garnished?
How much of your wages can be garnished will vary depending on where you reside. The maximum amount that can be garnished is generally the greater of:
- 25% of your disposable earnings per week or
- The amount of your disposable earnings that exceeds 30 times the hourly minimum wage per week (40 times in New Mexico), whichever is lower
The garnishment will continue until the judgment against you is paid in full or settled with your creditor. Here, disposable earnings refers to your earnings after taxes and other deductions.
Some common exemptions include:
- Life, accident and health insurance proceeds
- Social security benefits
- Some pensions
- Supplemental security income (SSI) benefits
- Unemployment benefits
- Veterans benefits
- Welfare benefits
- Workers compensation
Laws vary by state. So your state may offer additional or different exemptions from the ones listed above. In addition, in some states creditors can file an objection to your claim of exemption and take the process back to the courts.
How can you stop wage garnishment?
You have several options to protect your hard-earned money. If you’ve reviewed all the documentation involved to verify that it’s your debt, and you can’t pay it off, here are three alternatives to consider.
Contact your creditor
One way to stop wage garnishment is by contacting your creditor to work out a debt repayment plan. Doing so might help you make lower monthly payments on your debt than the amount that’s being garnished from your paycheck.
First figure out the amount you can afford each month towards debt repayment. If you haven’t already done so, work out a debt repayment budget and contact your creditor to negotiate your debt obligation.
If the creditor or collection agency agrees to your repayment plan, request a written confirmation containing an acknowledgment of the monthly payment you agreed to make. You’ll also want to ask them to confirm they won’t be showing late payments if you stay current with your agreed-upon repayment plan.
Defend the garnishment
If the garnishment is causing you undue harm or you believe it was made in error, you may object it in court. In all types of wage garnishments, you may object to the garnishment itself or to the amount of money that is being garnished.
To defend yourself, you must file a claim of exemption with the court that issued the garnishment. But time is of the essence. The period of time you have to file your claim is short – as little as 5 business days in some states.
Also, some states allow both you and your spouse to file a claim of exemption, helping you double the amount you can exempt.
File for bankruptcy
Sometimes your financial burden may be too much to handle on your own, and stopping a wage garnishment may not provide enough relief. If budgeting hasn’t helped, and you haven’t found ways to make money fast, bankruptcy may provide you with a fresh start.
Filing for Chapter 7 bankruptcy will stop wage garnishment in most cases. After you file, most creditors will be prohibited from continuing their claim while your bankruptcy case is ongoing.
Is bankruptcy right for you? Before you decide, consider credit counseling. Credit counseling organizations offer a range of debt relief services and are typically non-profit. Just keep in mind that their non-profit status doesn’t guarantee free, affordable, or even legitimate services. So make sure you understand all fees and conditions before you consider one.