While you may think you're doing someone a favor by cosigning on a loan or line of credit, you may be setting yourself up for financial failure. When you sign your name on the dotted line, you're guaranteeing the lender that you will be responsible for the debt if the primary borrower is unable to pay. In some cases, creditors may seek to garnish your bank account or wages for the unpaid debt.
How a Garnishment Works
To pursue garnishment of your wages, the creditor must first file suit against you in civil court. The creditor may sue you independently of the other debtor or file suit against both of you. If the creditor wins its case, it may file a writ of execution or garnishment order with the court that granted the judgment. The time frame for filing a writ of execution varies from state to state. You must be given the opportunity to object to the garnishment or file claims for exemption prior to its enforcement. If you are unable to reverse the garnishment, your employer must begin withholding your wages as specified by the order.
How Much Can Be Garnished
The Consumer Credit Protection Act determines how much of your wages can be garnished. As a cosigner, the judgment creditor can pursue garnishment for a portion of the debt or for the full amount. Under federal law, a creditor can garnish a maximum of 25 percent of your net income each pay period or the amount by which your weekly net income exceeds 30 times the hourly minimum wage. Depending on your state's laws, the percentage used to calculate a garnishment limit may be lower. Federal law requires creditors to use the calculation that results in the lower garnishment amount.
Claiming Exemptions
Under federal law, you can exempt certain types of income from garnishment. According to the Federal Trade Commission, these include Social Security or Supplemental Security Income benefits, veterans' benefits, military survivors' benefits, student assistance and federal retirement and disability benefits. Income you receive from a qualified retirement account, such as an IRA, is also exempt. Depending on the laws in your state, you may also be able to claim an exemption for child support or alimony payments you receive, worker's compensation pay or unemployment payments. You must file your exemption claim within the time frame specified by the writ of garnishment in order to exempt your income.
Considerations
Read the terms of any contract carefully prior to cosigning for someone else. The Federal Trade Commission requires creditors to provide specific details as to the obligations for which a cosigner assumes responsibility if the primary borrower defaults. Ask the creditor to notify you immediately if a default occurs on the account. Filing bankruptcy can halt collection or garnishment actions against you; however, this protection does not apply if you cosigned for someone's student loan. If you pledge any property as collateral to secure the loan, such as your car or home, the creditor can potentially pursue a lien against these assets if the primary borrower defaults.
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