A wage garnishment allows debt collectors to use your income to pay your debts. This typically happens after you’ve defaulted on your loans. According to a study by the ADP Research Institute, 7.2% of employees had their wages garnished in 2013. Out of that total, 2.9% of those were for student loan and court-ordered consumer debt garnishment.
Wage garnishment is usually the last option for a collector who has contacted you for months in order to receive payment. At that point, your credit score will have dropped and the lenders need to take action to recoup what you owe.
What Is Wage Garnishment?
In wage garnishment, creditors will contact your employer and legally require them to give part of your earnings to pay off your debts. There is another type of garnishment called non-wage garnishment, also known as a bank levy, in which creditors tap into your bank account. For this article, we will focus on wage garnishment only.
What Is the Wage Garnishment Process?
You Default on Your Loans
If you don’t make payments for 180 days for most loans, then your loans become delinquent. A loan is delinquent until you bring the account up to date or you go into forbearance or deferment. If your loans continue to be delinquent, then they may go into default, which means the balance is due in full and the installment payments no longer apply.
The point that student loans are considered to be in default varies depending on the type of loan. If you have a loan under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, then you will default if you fail to make payments for nine months. For loans under the Federal Perkins Loan Program, then you may default if you don’t make any scheduled payment by the due date.
You Are Sued and Receive a Notice of a Hearing
If a collector is unsuccessful in obtaining payment, the debtor will be sued. You’ll receive notice of a hearing and should get legal advice on what to do next. If the borrower responds within 30 days that she wants a hearing, then the garnishment order is postponed.
If the borrower requests a hearing after the 30-day deadline, then the order will continue but can cease or the garnished amount may be adjusted after a successful appeal by the borrower.
Important: Federal student loan holders are not required to have a judgment before their wages are garnished. After the student loan has defaulted for three to six months, then the lender will send a warning letter to the borrower notifying him or her that the wage garnishment will take effect in order to give the borrowers a chance to have a hearing.
You Receive a Judgment
The hearing is your opportunity to state that either you don’t owe the debt, it has exceeded the statute of limitations, or that you want a deal. If you don’t show up or lose, then the creditor wins the judgment and will garnish your wages. This typically begins five to 30 business days after the judgment. This continues until the debt and any court fees and interest are paid in full.
If you’re successful, then your wages will not be garnished for one year or the amount garnished could be reduced.
How Much Can Be Deducted in Wage Garnishment?
Debt collectors can garnish up to 25% of your disposable wages or the amount by which your income exceeds 30-times the federal minimum wage (they will deduct whichever is less).
- Garnishable Wages = Your Disposable Income * .25
- Garnishable Wages = Your Disposable Income – (30 * Federal Minimum Wage [$7.25])
What this means is any wages over $217.50 can be subject to wage garnishment of a maximum of 25%. $217.50 is determined by this calculation:
- $7.25 x 30 = $217.50
If a pay period is two weeks, then it would be 60 times the Federal Minimum Wage. The wage garnishment law specifies that the garnishment restrictions do not apply to certain bankruptcy court orders, or to debts due for federal or state taxes.
For student loans, the Debt Collection Improvement Act allows collection agencies who are under contract with the US Government to collect up to 15% of disposable income to repay debts owed to the U.S. government. The Higher Education Act allows collection agencies in contract with the Department of Education to collect up to 10% of disposable income.
You can check out the U.S. Department of the Treasury’s wage garnishment calculator to determine what your disposable income and wage garnishment would be.
How is Disposable Income Calculated?
Disposable income is calculated by subtracting your tax obligations and other withholdings from your gross pay such as social security, Medicare, state tax, city/local tax, health insurance premiums, involuntary retirement or pension plans.
If you have the following types of income, however, they typically cannot be garnished:
- Social security
- Pensions, 401(k), IRA, Retirement Fund
- Disability Benefits
- Child Support
The exceptions to these limits are when collecting federal income tax, child support, and alimony, which allows up to 60% of your disposable wages to be garnished. In these cases, your Social Security and retirement benefits can be used to repay tax and child support.
How Long Does Wage Garnishment Last?
Wage garnishment continues until the loan is paid although you might be able to negotiate an earlier end to your wage garnishment in your hearing.
How Can I Prevent Wage Garnishment?
The best way to prevent wage garnishment is by taking control of your finances. Here are a few ways to do so:
- Negotiate payment terms: Negotiate payment terms that are acceptable to the Department of Education or collection agency and make sure that the Department receives the first payment no later than 30 days after the garnishment notice was sent.
- Create a budget and stick to it: The first step to staying out of financial trouble is to create a budget that takes into account all sources of income and all expenses you incur every month. It’s important to be disciplined and make sure all loan and debt payments are included in your budget.
- Set up automatic payments: Establishing automatic payments on your loans will ensure the funds are automatically deducted from your bank account each month. This is a great way to make sure you don’t forget your due dates, Setting it up right after your paycheck arrives gives you a greater chance of maintaining the rest of your budget throughout the month.
- Establish an emergency fund: Whether your car breaks down or you need lots of dental work you’re going to need money saved to pay for these unexpected situations. Don’t rely on credit cards, because they’ll get you further into debt. Make a point to create and maintain an emergency fund that is three to six months of your salary.
How Can I Stop Wage Garnishment?
If you’ve already received notice that your wages are going to be garnished, there are at least four ways to stop garnishment:
Win Your Hearing
As soon as you receive the notice of intent from the Department of Education to garnish your wages you should:
- Read the letter and make sure you understand it.
- Verify that the debt is accurate.
- Contact your lender to talk about alternatives.
- Evaluate your options such as loan consolidation.
- Get help from an attorney or local credit counselor.
The letter will explain the start date of your garnishment and how to find out more about the debt you owe. It will also tell you any deadlines to make appeals. You can appeal after garnishment begins and if you win your case, then the garnishment will stop.
Request a Hearing to Object to the Wage Garnishment
For federal student loans, you need to request a hearing from the Department of Education. You will have the chance to explain your side of things and delay the start of garnishment. Some ways you can stop garnishment include:
- Hardship: You would be placed under extreme financial hardship due to garnishment.
- Being laid off: If you were involuntarily terminated from your job and were in the position for less than 12 months.
- Bankruptcy: You filed for bankruptcy recently or the loan was addressed by bankruptcy.
- No default: You repaid or are current on the loan or have already worked out a repayment program with your loan servicer, your loan might be eligible for forgiveness, or you might’ve been confused with someone else.
- ID theft: Someone fraudulently used your identification to take out the loan.
If you would like to request a hearing, complete this form and mail it to:
US Department of Education
ATTN: AWG Hearings Branch
PO Box 5227
Greenville, TX, 75403
Consolidate Your Loans Into A New One
Consolidating your loans into the William D. Ford Direct Loan program is sometimes an option depending on whether your wages have actually been garnished yet. Generally, when an active wage garnishment is taking place the loans will not be allowed to be consolidated. If, on the other hand, your wages have not been garnished yet but you have received a letter that they will be, you might be able to consolidate and remove the default status and stop the wage garnishment from happening. Many borrowers have been able to go through a consolidation prior to the wage garnishment taking place, and in many others, they have received loan consolidation denial letters. It’s unclear why the discrepancy happens. If this is going to be your plan of action, it’s critical to act right away as the consolidation process typically takes 60-90 days.
Loan consolidation can help people looking for more affordable monthly payments and people who are unable to keep track of multiple lenders. You’ll also have a new loan that’s in good standing instead of your defaulted loans. To consolidate a loan that’s in default, you’ll need to use a consolidation loan with an income-driven repayment plan such as:
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
These types of plans can pave the way for you to get back on track with your loans and begin rebuilding your credit. It’s the time to take a disciplined approach to repaying your loans in order to avoid defaulting again.
Loan rehabilitation means you keep your existing loans with the goal of getting them out of default with on-time, monthly payments for 10 months. You can also stop having your wages garnished after five successful payments.
This can be a difficult option for people on a small budget, because you need to make two monthly payments — one on the payment under the rehabilitation program and another to the wage garnishment. Your rehabilitation payment, however, can be very low depending on your income.
Pay off the Debt
The final and most straightforward option is to pay off the loan. This means you’ll need to find a repayment program that will please your lender or collection agency. If you had been negligent in paying off your loans, but had enough money to pay them all along then this could be an option for you. For most people, however, this isn’t the reason they defaulted on their loans.
What Are the State Laws Concerning Wage Garnishment?
Typically, state wage garnishment laws are lenient compared to the federal laws. You can use discrepancies between your state’s laws and federal rules as “exemptions” in a federal case. This means that you can argue that the state law should be applied in your case.
States that have significant differences include North Carolina, South Carolina, Pennsylvania, and Texas, which do not allow garnishment for credit cards or auto loans.
What Are My Rights?
It’s your responsibility to be aware of the following rights in regards to wage garnishment:
- You need to be legally notified of the wage garnishment.
- You can file a dispute if the notice is inaccurate or you don’t owe the debt.
- Social security benefits and veterans benefits are typically exempt from being considered income. They could, however, be seized once in your bank account.
- You cannot be fired for having your wages garnished, but if you have more than one garnishment, then you may be fired.
- You can challenge the judgment if it was made in error or if you think the garnishment will cause undue harm to your finances.
What Are The Consequences of Wage Garnishment?
The consequences of wage garnishment have more to do with defaulting on your loans. These consequences can be severe and include the following:
- The credit bureaus will be alerted to your default and your credit rating will drop. A wage garnishment judgment will stay on your credit score for up to 7 years.
- You may have difficulty buying a car, house, or obtaining a credit card. Your tax refunds may be withheld and applied to your loan, which is called “Treasury offset.”
- You may not be able to buy real estate.
- You may incur court feeds, collection fees, attorney’s fees, and other costs from collection.
- It can take years to reestablish your credit.
- You might have your academic transcript withheld by your school until the loan is paid. This can impact your ability to apply for a new job.
How Do I Handle Wage Garnishment With My Employer?
At worst, wage garnishment is an embarrassing situation to be in. Be as forthright as possible with your employer and bring it up proactively so you can address the situation head-on. It’s possible that your employer has dealt with this before and it’s simply an administrative change on their end.
Your employer is legally required to keep your garnishment confidential so you don’t need to worry about your privacy being violated. Your employer cannot retaliate against you for having your wages garnished nor can you be fired unless you have garnishments for more than one debt.
It can be scary having your wages garnished, but remember that it’s not the end of the world. You can still get your finances back on track by learning all of the options available to you and becoming more disciplined with your money in the future.