Tough Times Series: You Can Avoid Wage Garnishment

Collection calls and letters may be unpleasant, but they're not the biggest guns in a bill collector's arsenal. In some cases, creditors�the people and businesses you owe money to�have the right to garnish your wages. That means your employer would be obligated to deduct money from your paychecks and give it to your creditor until the debt is paid in full.

If you haven't paid your debt voluntarily, presumably it's because money is tight. Wage garnishment makes it even tougher to make ends meet.

Could you still afford to pay for your most vital needs, such as food and housing, on a reduced income? Without a doubt, the best way to deal with past-due debt is to be proactive about satisfying the financial obligation. Doing so not only will help salvage your credit score, it will leave your paycheck intact.

Garnishment rules

Whether or not a creditor can garnish your wages, and for how much, depends on federal and state law and the type of debt you owe.

All states allow garnishment for child and spousal support, student loans, federal nontax debts, and federal tax. Some states also allow for collection of state or local taxes and other debts owed to state agencies. Many states now use garnishment to collect overpayment of benefits such as unemployment insurance. A few states�North Carolina, Pennsylvania, and South Carolina�don't allow garnishment for "commercial" debt, such as credit card balances. Texas does not allow garnishment of wages.

In states that do allow garnishment for creditor debt, the process typically requires the creditor to obtain a judgment against the debtor. States vary in their regulations for obtaining a judgment. Once the judgment is issued, the creditor may request the right to garnish the debtor's wages. If granted, the debtor's employer is notified, generally by the creditor's attorney, to withhold the required amount from wages until the debt is paid off or the garnishment order expires.

The federal Consumer Credit Protection Act (CCPA) restricts an aggregated percentage of how much can be withheld from employee pay for certain types of debts. Other laws cover different types of wage attachments, such as federal tax levies.

For debts such as unpaid credit card balances, medical bills, and student loans, federal law allows weekly garnishment up to 25% of disposable income (what is left after deductions required by law) or the amount by which disposable income exceeds 30 times the federal minimum wage, whichever is less. At the federal minimum wage of $6.55 ($7.25 beginning July 24, 2009), at least $196.50 per week is off limits to creditors.

For example, let's say you earn $900 per week and, after taxes, mandatory deductions for state disability or unemployment insurance, and mandatory retirement contributions for certain public or railroad employees, your usual take-home pay is $700. Under federal guidelines, your paycheck could be garnished $175 (25% of $700) or $503.50 ($700 minus $196.50). Since the law dictates that the lesser amount be taken, the maximum garnishment would be $175.

State law that dictates an even lower garnishment limit supersedes federal law. Conversely, federal law supersedes state law if it results in a lower garnishment amount.

State law dictates how long your wages can be garnished. In some states, the order will stand until you repay the debt, plus accrued interest. In other states, it will expire after a certain time period�say, 60 or 90 days�and may be renewed if the debt is not yet satisfied. Each time it is renewed, court costs are added to the debt.

These limits apply even if more than one creditor is garnishing you. Other limits apply if you are being garnished for support, delinquent taxes, and certain other debts. For example, in the case of spousal and child support, the CCPA permits garnishment of as much as 50% to 65% of disposable earnings.

And, according to Amorette Bryant, an employer wage garnishment expert and author of "The Complete Guide to Federal and State Garnishment, 2009 Edition," levies for state taxes can take up to 100% of a debtor's paycheck, after required deductions and child support have been deducted. The IRS (Internal Revenue Service) , on the other hand, is kinder and gentler these days. The agency provides a guide�Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income�for employers to use to calculate how much is exempt from levy. The amount is based on 1040 filing status and number of dependents, and pay cycle. The difference between net pay (gross earnings less deductions in effect at the time of the levy) and the exempt amount is sent to the IRS.

Garnishment limits are the same for members of the military: 50% to 65% of disposable wages for support payments, and an "involuntary allotment" of up to 25% of the servicemember's pay if a creditor has been awarded a civil judgment against him or her.

It's against the law for your employer to fire you because your wages are being garnished by a single creditor. However, depending on which state you live in, that protection can disappear with additional judgments against you.

How to avoid wage garnishment

Garnishment is a last resort for creditors�it's expensive and time-consuming to pursue a judgment. However, if the size of your debt is large enough and the creditor has not had success using other collection methods, garnishment may be seen as the only remaining option.

Experts say the best way to avoid garnishment is to give your creditor an easier, less expensive way to get repaid. In most cases, that means communicating with the creditor, creating a reasonable repayment plan, and following through with what you have promised.

Todd Ossenfort, CEO of Pioneer Credit Counseling in Rapid City, S.D., and online financial Q&A writer "The Credit Guy," says creditors will sometimes hold off on suing and garnishing if the debtor participates in a debt-management plan (DMP) through a credit counseling agency. Participants in a DMP make one payment to a credit counseling agency each month, which the agency then distributes to creditors on the plan. In some cases, the agency can negotiate a reduced payment, interest, and fees on the debt.

"You'd think that with this economy, [creditors would] jump at the chance to go to court and garnish," says Ossenfort. "We've actually seen a softening." His theory is that creditors think they are more likely to recoup what is owed to them if the consumer can take a holistic approach and get back on track with all creditors. However, he cautions DMP participants that there is no leeway at all once they promise to make payments.

"This is your last-ditch effort," says Ossenfort. "Miss a payment, and you're going to get garnished." So, definitely don't agree to a repayment plan you can't afford. And whatever you do, don't ignore notices from your creditors.

"Some consumers put their heads in the sand," Ossenfort says. "But the issue won't go away."

And you can't bank on your creditors being "soft." Bryant says her clients and peers actually are reporting an estimated 15% to 20% increase in wage garnishments. She agrees that the best way to avoid garnishment is to establish a payment plan, either through a credit counseling agency or independently, and stick to it.

If your creditor does decide to file for judgment, you must be notified of any pending legal action so you have time to prepare and respond. Do show up at the hearing prepared to make your case. All states have laws that exempt certain income and property from being taken by a creditor or debt collector. Find out what income you can declare exempt in your state and make sure that it is excluded from any garnishment order. If you can barely make ends meet on your full paycheck, bring documentation of your essential expenses�housing, utilities, food, transportation, and so on�to prove your hardship claim.

If you want to discuss your options with an attorney, the time to do so is immediately upon receiving a threat of legal action.

Your options after garnishment begins

If you haven't succeeded in avoiding wage garnishment, you have just a few options left:

Formally contest the garnishment. A claim of exemption�the name varies by state�is your formal objection to the garnishment. In it, you must present a valid reason why your garnishment should be suspended or reduced. Hardship could be one argument for your claim. Another might be that the garnishment should be lower, under either federal or state guidelines.

"Look at the claim of exemption procedure and look for a legitimate case for why you shouldn't be garnished at all, or why the amount should be reduced," advises John Lamb, co-author of "Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom (11th edition)."

For military servicemembers, garnishment for creditor debt is called an "involuntary allotment." According to the Defense Finance and Accounting Service, a servicemember may contest an involuntary allotment for a number of reasons, including "exigencies of military duty"�it must be determined that the requirements and circumstances of active duty "prevented the member from appearing during the judicial proceeding that resulted in the judgment upon which the [involuntary allotment request] is based." In such a case, the request for garnishment may be rejected. The creditor may appeal the decision.

Pay off the debt. This might be stating the obvious, but you can protect your paycheck by paying off your debt. Assuming you don't have the cash to do so, you might compare the costs of options such as a loan from a traditional lender such as your credit union or from a friend or family member, a credit card advance, or the sale of some possession of value. Upon repayment, make sure you get written confirmation from the creditor showing you have satisfied the debt.

Quit your job. Without a paycheck, there are no wages for the creditor to garnish. And, assuming you don't have savings and checking accounts or other assets, the creditor is left with nothing to seize. Understand, though, that quitting your job and remaining unemployed so you can avoid a garnishment is extreme, and does not provide a long-term solution to your debt problem.

File bankruptcy. Bankruptcy stops all creditor collection activities, including garnishment, while the court makes its evaluation. Under a Chapter 7 bankruptcy, the court will discharge most commercial debts (not past-due taxes, support payments, or student loans). Under Chapter 13, the debts become part of a repayment plan and are not subject to garnishment.

Though it may seem like an immediate solution, there are heavy disadvantages to bankruptcy. For example, a Chapter 7 filing stays on your credit report for 10 years, making it difficult to get new credit and, possibly, insurance coverage, a particular type of job, or a rental home.

Speak to a qualified and trusted adviser, such as a credit union credit counselor, before making a decision about bankruptcy.

Let the garnishment stand. Assuming you can survive on your smaller paycheck, you could just let the garnishment continue until the debt is paid off.

What you can't do is convince your employer not to garnish your pay.

"Employers' hands are tied," says Bryant. Unless the employer is withholding the wrong amount of money, and "that doesn't happen that often," there isn't anything the employer can do, she says.

Your best route, Bryant says, is to "do everything you can to avoid garnishments." Dealing with your debt proactively, she says, not only saves you money on court costs, collection fees, and possibly employer fees, it could ultimately save your job�and your paycheck.

Don't wait until you're in deep trouble to ask for a financial checkup at your credit union. In fact, the earlier you ask for a review, the better the outcome can be.

Published April 20, 2009