When you enter into a legally binding contract to purchase a car and then default on the payments, the lender will repossess the vehicle. If you don't "redeem" it and pay what you have to in order to get the car back, the lender sells the vehicle. If the car sells for less than the balance you owe, this is called a "deficiency," and in most states, the lender can sue you for this amount. If the lender gets a deficiency judgment against you, it can garnish your wages for the money.
Federal Law
The Consumer Credit Protection Act (CCPA) sets the limit for the maximum amount your auto lender can garnish from your paycheck. It can't take more than 30 times the federal minimum wage or 25 percent of your weekly income after taxes, whichever is less. At the time of publication, federal minimum wage was $7.25 per hour. Therefore, your lender can't take more than $217.50 from your weekly paycheck, or $7.25 times 30, and it can only take this much if your weekly pay is $870 a week or more, because 25 percent of $870 is $217.50. If your weekly net pay is $600, it can take only $150, or 25 percent of that amount, because this is less than 30 times the federal minimum wage. If your weekly take-home pay is $900, 25 percent of that would be $225. Since the lender must garnish the lesser amount, it would be limited to taking $217.50 because that number is less.
State Laws
Each state has its own individual laws regarding garnishments. However, these laws don't always apply because the CCPA dictates that if your state permits a greater garnishment than federal law, then federal law takes precedence. For example, if you live in Massachusetts, the law only exempts $125 per week of your earnings from garnishment. Title 3 protects more than that, so federal law applies. However, North Carolina does not allow any garnishments for car loans at all, so if you live there, state law would govern your garnishment. Utah, South Carolina and Pennsylvania exempt 100 percent of your earnings from garnishment. Florida exempts 100 percent if you're the head of your household, and Missouri exempts 90 percent under the same circumstance.
Statutes of Limitation
State laws trump federal law when it comes to how long your lender can pursue you for the deficiency judgment. Most states have a six-year statute of limitations for written contracts, such as an auto loan. However, Iowa, Missouri and Rhode Island will allow a garnishment for up to 10 years. South Carolina, Mississippi and the District of Columbia give the lender only three years. Because state laws can vary so much, if you're facing a garnishment, speak with an attorney knowledgeable with the laws of your area to find out where you stand.
Tips
Exceptions to federal law exist if your pay is being garnished for another loan in addition to the one for your auto. You have less protection in this event, and the terms of the CCPA don't apply. Speak with an attorney to find out how to mitigate your damages.
If you work for tips, these usually don't count as income that can be garnished.
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