If you’re behind on debt repayment, your creditors can resort to a collection process known as wage garnishment. This is when your employer takes funds directly out of your work earnings and passes the money to your creditors. A creditor can’t simply demand your employer withhold your earnings though.
Wage garnishment shouldn’t come as a surprise because a legal process generally has to play out beforehand. First, a creditor has to file a lawsuit against you, and the case has to result in the court siding with your creditor. If you fail to meet your debt obligations at this point, the court may permit the creditor to proceed with wage garnishment.
What are the Limitations for Creditors?
Even after this court order, your creditors face limits when it comes to collecting owed funds from your paycheck. According to federal law, they can only take a maximum of 25 percent of your disposable earnings. In addition, your employer can’t fire you due to wage garnishment over a single debt. However, if creditors are attempting to collect on multiple debts, you have less legal protection.
Certain states have their own garnishment laws that come into play as well. For example, Pennsylvania, Texas, North Carolina, and South Carolina place heavy restrictions on creditors when it comes to wage garnishment. Essentially the process can only be used to collect court fees, tax debt, child support debt, and student loan debt.
Federal Agencies and Special Exceptions
Most creditors have to abide by the aforementioned process and limitations. However, certain federal agencies have a little more freedom when it comes to debt collection.
Unlike your other creditors, the Internal Revenue Service doesn’t need a court order to garnish your wages. If you have tax debt, the agency has the power to direct your employer to take funds out of your paycheck. Reaching out to the IRS to establish a payment plan is a smart move. Although it’s even smarter to make this move before the agency resorts to garnishment.
While federal laws cap wage garnishment at 25 percent, there are exceptions when it comes to child support payments. An employer can garnish up to 50 or 60 percent of your wages if you’re behind on these obligations. The 60 percent rate is usually reserved for people who aren’t currently supporting children or a spouse. The further you fall behind on payments, the more this rate can increase.
Student Loan Debt
The U.S. Department of Education is yet another entity that can garnish your wages without relying on a court order or lawsuit. If you’re defaulting on your student loans, the agency can garnish 15 percent of your wages.
Before proceeding with garnishment, the agency will have to inform you of how much you owe and present the option of a voluntary repayment schedule. It’ll also explain how you can request a hearing on the process and access records regarding the defaulted loan.
Ways to Handle it
Is it possible to stop wage garnishment? That depends on your specific situation. Here are a few possible solutions.
Look to State Laws
Take a moment to look into your state’s laws surrounding garnishment. You might find a way to lessen your burden.
For example, the Ohio Legislature established trusteeship, a system in which you pass a certain percentage of your earnings to a court. The court then distributes that amount out to your creditors for you. As long as you continue to pay into your trusteeship account, creditors can’t garnish your wages.
Make an Objection
After you receive a notice of garnishment, you can object to a wage garnishment process. If you believe your creditor didn’t follow the law in regards to a proper notification, submit that complaint in writing.
Likewise, if you believe your creditor is taking too much money, you can file an objection. Before making a formal objection, use a wage garnishment calculator to determine if you’re unfairly penalized.
Seek Credit Counseling
Reach out to a nonprofit counseling service that can assist in negotiations with your creditor. If the service can reach an agreement with your creditor, you might benefit from a more reasonable repayment plan.
It’s also possible to negotiate with a creditor on your own, but make sure you’re prepared for the discussion. Review your budget beforehand and explain to your creditor how much you can pay.
Consider bankruptcy a last resort. By declaring bankruptcy, you’re telling your creditors that you don’t have the money to repay them. This clears your debt, but there are two important factors to consider.
- This process typically won’t save you from obligations such as tax debt or student loan debt.
- Bankruptcy stays on your credit report for 7 to 10 years.
Consult a financial expert before taking this path, as it might cause far more harm than good.