If you have to default on a loan because you have no way of paying it, both federal and state laws provide you with some protection. A creditor cannot take all of your wages or salary; the creditor must leave you with something to pay your regular bills and enough wages to live on. Generally, a creditor will garnish your bank accounts before attempting to attach your wages. When a creditor attaches your wages, it collects on your debt by a little bit each pay period. Garnishing bank accounts usually results in larger, immediate sums.
The Process
A creditor cannot garnish your wages until he has received a judgment against you for outstanding debt; this judgment must be issued by a court. Once your creditor has obtained a judgment, the creditor can then petition the court for permission to use that judgment to garnish your pay. The creditor then sends the judgment and the wage garnishment order to your employer, who is obligated to deduct a certain percentage from your paychecks and send the money to the creditor.
How Much Can Be Garnished
The amount deducted from your pay depends on a few different factors. First, a creditor can only garnish your "disposable" income. According to the Internal Revenue Service (IRS), this is the amount left over after taxes, Social Security and other mandatory deductions. Once your disposable income is determined, the creditor can take either 25 percent, or all your pay over and above $217.50, whichever is less. If your after-tax net pay is $500 per week, your creditor can take $125 of that, or 25 percent, and leave you with $375. If he instead took everything you earn in excess $217.50, or 30 times the federal minimum wage of $7.25 per hour as of the time of publication, your creditor would get $282.50 each pay period. Your creditor would be limited to the lesser amount under the Consumer Credit Protection Act (CCPA), or $125, 25 percent of your pay.
Exceptions
If you owe back child support and your state gets a garnishment order against you, the CCPA provides you with less protection. In this case, the law allows garnishments of between 50 and 55 percent if you have other dependents besides the child you're paying support for, and between 60 and 65 percent if you do not, depending on how far behind you are. If you owe taxes, the garnishment rate is usually 25 percent, with no considerations for current minimum wage.
Employer Restrictions
Your employer can't fire you if someone garnishes your wages, at least not for the first debt. If he does, he's subject to a $1,000 fine as of the time of publication. However, if it happens again and two creditors have garnishment orders against you for two different debts, your boss can let you go, according to CCPA rules. If your individual state's laws result in less of a garnishment than CCPA rules, your employer must use those guidelines instead.
Tip
You can prevent garnishment by paying your debt within 10 days of the garnishment order, but for many debtors, this simply isn't possible. Another option is filing for bankruptcy protection. Your creditor would then be subject to an automatic stay against doing anything to collect from you, so it would have to lift the garnishment. Although taxes, child support and student loans are not dischargeable in bankruptcy, eliminating other debts might allow you to catch up on child support. Even though you would still owe your taxes, if the IRS is garnishing you, bankruptcy does stop wage garnishment.
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