No one likes to see their hard-earned paycheck reduced by debts such as child support or student
loans. Sadly, wage garnishment is a legal and necessary mechanism to help pay off their arrears. The National Bureau of Economic Research in the United States estimates that one in every 100 employees gets their wages garnished by an average of 11% of their gross income.
It’s easy to think that nothing good comes from seeing your pay slashed every month. However, employers must abide by strict rules to prevent a worker’s take-home pay from being reduced to zero. By design, wage garnishment should only stop people from being delinquent on their debts. On top of that, here are several other things worth noting about it:
- It Can Only Garnish So Much
At the federal and state levels, wage garnishment is limited to how much it can deduct from the person’s wages. Under Title III of the Consumer Credit Protection Act (CCPA), employers can only deduct up to 25% of a person’s paycheck. There can be no garnishment for people earning the minimum hourly wage of USD$7.25 (or USD$942.50 monthly).
The 25% deduction doesn’t apply to debts not covered by the CCPA, such as court-ordered child support and bankruptcy, but they have their respective limits. For example, Title III sets the maximum for alimony or child support at 50% of income for people supporting another family or 60% for those who aren’t.
Some states enact their own wage garnishment laws, in which case the arrangement that yields a greater amount takes priority. For example, Oregon garnishment laws stipulate that if the 25% federal limit doesn’t apply, the garnished amount must leave the person with the following:
- USD$254 for weekly wages;
- USD$509 for biweekly wages;
- USD$545 for half-month wages; and
- USD$1,090 for monthly wages.
Oregon is one of over a dozen American states with these garnishment tables. Other states either follow the federal guidelines or offer exemptions for specific situations. Only four states—North and South Carolina, Pennsylvania, and Texas—don’t allow wage garnishments.
- Most Require A Court Order
Wage garnishment can only begin if the debtor loses their case against the creditor. Once a court has issued a garnishment order, a copy is provided to the authorities, which will provide a copy to the debtor’s employer. If the debtor owes alimony or child support, the court sends the order directly to the employer.
The debtor can challenge such an order, arguing that some of their income is exempted from the deduction under federal or state law. Most states exempt the following from garnishment (note that this list isn’t exhaustive):
- Social Security benefits;
- Unemployment benefits;
- Workers’ compensation;
- Household items, appliances, and furniture (up to a fixed amount);
- Occupation-related tools and equipment (up to a fixed amount);
- Federal annuities;
- Provisions and fuel (up to a fixed number of days);
- Veterans benefits and loans;
- Medical assistance; and others.
Generally, challenging a legal order requires a lawyer’s help, but this advice isn’t straightforward in this case. Even if a debtor manages to lower the amount or get the order dismissed, the legal fees might put them in more debt. Hiring a lawyer may help if the debtor suspects the creditor of abuse or they’re in danger of losing their job because of the garnishment.
Unpaid taxes are the only kind of debt that doesn’t require a court order. The Internal Revenue Service (IRS) determines the amount to be garnished based on this exemption table. Aside from wages, the IRS can seize properties and other possessions for garnishment as well, known as a levy.
- Bankruptcy Is The Only Means Of Escape
No doubt that wage garnishment will cause financial difficulties for many people, more so if they owe alimony, child support, or back taxes. If challenging a garnishment order fails to stop it, the only option left is to file for bankruptcy.
Bankruptcy stops wage garnishment because of what legal experts call ‘automatic stay.’ Section 362 of the Bankruptcy Code orders all debt collection activities—including wage garnishment—to be temporarily suspended. This pause buys debtors time to get their finances in order: between three and five months for Chapter 7 or three and five years for Chapter 13.
While helpful, this provision in the Bankruptcy Code can’t prevent the collection of some debts. These include alimony and child support, pension loans, and other debts involved in criminal proceedings. Repeat bankruptcy filings over a short period (usually one year) can also make a person ineligible for an automatic stay.
More importantly, such a ruling isn’t unbeatable. Creditors can petition the court to lift the stay if they can prove it’s costing them money or the earmarked assets won’t be worth as they are once the bankruptcy case is settled.
Conclusion
Naturally, the best way to prevent wage garnishment is to avoid having debt in the first place. If the debt is unavoidable, the least you can do is settle it as soon as possible, whether by paying or considering other debt settlement options.
Then again, some situations will lead to hard-earned paychecks being deducted by a court order. In this case, know that consumers have the right to be protected from unjust wage garnishments and to continue making a living.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
