When I was a little kid, I used to listen to adults using financial terms and totally panic. “How could I ever understand what these things mean??” I would think.
I vividly recall reading the biography of U.S. gymnast Dominique Moceanu and how her family put a second mortgage on their home to pay for her athletic training. At the time I couldn’t even understand what a mortgage was – but a second mortgage? That sounded serious.
I became totally convinced that adulthood must be really hard if you have these kinds of complex terms dominating your vocabulary. Being the anxious kid I was, I became angered that these things weren’t taught in school. “How would I ever survive adulthood if I can’t learn this stuff?” I would think.
Little did I know that years later people would start pushing hard for financial literacy in schools as it has become apparent that adults really aren’t always prepared for financial adulthood. But until that training becomes more widespread, we’re tackling a few important terms and concepts on our blog. Today’s term: wage garnishment.
What is Wage Garnishment?
To start, here’s a definition of wage garnishment:
“A wage garnishment is any legal or equitable procedure through which some portion of a person’s earnings is required to be withheld by an employer for the payment of a debt. Most garnishments are made by court order.” — United States Department of Labor
In other words, if certain financial obligations go unpaid, it’s possible to be sued for the unpaid amount. And if you can’t pay it all upfront, then a certain portion will be deducted from your paychecks to recoup the defaulted funds. Pretty scary if you’re already just barely making ends meet! So the question is, what types of default can lead to wage garnishment?
Wage Garnishment And Your Debt
The short answer to which of your defaulted debt accounts can be garnished is…all of them. That means credit card debt, student loans, mortgages (and foreclosures), repossessed vehicles, taxes, and medical debt.
The good news is that the path to wage garnishment has a few twists and turns that should let you know what’s coming (which gives you time to take control of the situation). Here’s a general timeline:
1. You miss a payment and maybe two or more. Your lenders contact you to say that you’re past due. If you remain past due for a certain amount of time, they’ll take other steps to recoup the defaulted amount:
A. If you’re in credit card default, your debt may get sold to a debt collection agency.
B. If you’re in medical debt default, your debt may get sold to a collection agency.
C. If you’re in mortgage default, your lender may go straight to wage garnishment or they may foreclose on your home. If they foreclose on your home and it sells for less than you owe, they may try to garnish your wages for the “deficiency”, or amount they lost in the sale.
D. If you’re in car loan default, your lender may repossess your car. Like a foreclosed home, if they sell the car for less than you owe, they may try to garnish your wages for the deficiency.
E. If you’re in student loan default, your loans could end up getting sold to a collection agency. If they continue to go unpaid, your taxes could be withheld to recoup the defaulted amount.
F. If you’re in tax debt default, you’ll first be charged a penalty and interest on the unpaid amount. The IRS can also claim your refund to put towards the debt, claim your social security for the same reason, and even put a lien on your property. Ultimately, unpaid tax debt can even send you to jail. Unpaid tax debt has a multitude of consequences so this is one to take very seriously.
2. If the lender’s bills and phone calls to you go unanswered and the tactics above lead to no resolution, the next step is to file a judgement against you with the court. Once you have a judgement against you, you are given a specified amount of time to respond. You can then contest the judgement, try to settle with the lender, or declare bankruptcy. If you do none of these things, you’re on the road to wage garnishment.
*Note: Debt owed to the IRS or The Department of Education can be garnished without a court order – thus leading you to loss of wages with less of a warning. If you’re in default on either of these types of debt, take action immediately – even if you’ll need to ask for a payment plan to get back on track.
Even if you’ve not been aware of how far the situation on your debt has progressed, once you have the judgement, you still have one last chance to take action before wage garnishment. If you’re not sure what to do at this point, you may want to seek a lawyer or credit counselor for help. But remember, you can always contact your lenders and try to negotiate with them yourself. Garnishing wages is a time consuming and expensive process for them as well, so this is a good time to try to settle the debt before it escalates to that point.
*What if you’re unemployed?
If you’ve defaulted on your debt and you’re unemployed, you are not exempt from the process of having your money garnished. Your bank account(s) could be garnished as well. This is a process that could result in your account(s) being frozen for weeks and even months, and possibly even emptied out at the end.
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Wage Garnishment Laws That Protect You
If you’re already dealing with wage garnishment, there are at least two laws on your side. Below, I’ll summarize and explain these two laws:
1) There is a Limit to Wage Garnishment
Garnishment laws limit the total amount of your earnings that can be garnished. The United States Department of Labor explains these limits:
“The amount of pay subject to garnishment is based on an employee’s ‘disposable earnings,’ which is the amount left after legally required deductions are made. Examples of such deductions include federal, state, and local taxes, the employee’s share of State Unemployment Insurance and Social Security. It also includes withholdings for employee retirement systems required by law.
Deductions not required by law—such as those for voluntary wage assignments, union dues, health and life insurance, contributions to charitable causes, purchases of savings bonds, retirement plan contributions (except those required by law) and payments to employers for payroll advances or purchases of merchandise—usually may not be subtracted from gross earnings when calculating disposable earnings under the CCPA.
The law sets the maximum amount that may be garnished in any workweek or pay period, regardless of the number of garnishment orders received by the employer. For ordinary garnishments (i.e., those not for support, bankruptcy, or any state or federal tax), the weekly amount may not exceed the lesser of two figures: 25 percent of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage (currently $7.25 an hour).”
As an example, if you earn $217.50 in one week (or less), then you are exempt from garnishment. If you earn more than that, any wages above $217.50 can be garnished.
2) Your Employer Cannot Fire You for Your First Garnishment
Your employer will become aware of your wages being garnished, as they are the ones that need to work with the court to enact the process. However, if this is your first time this has happened to you, your employer is legally prohibited from firing you for this reason. Unfortunately, that law does not protect you after you’ve been garnished for two or more debt accounts.
Act Now if You’ve Defaulted on Your Debt
Defaulting on debt is scary. Even one missed payment can set you on a path to feeling like you can never catch back up. Don’t let this setback get you down – no matter how far behind you are. The truth is, no situation is totally hopeless. And the sooner you take action, the better your circumstances will be!
Image Credit: Nicholas Noyes