Wage garnishment – the last resort for debt collectors and cause for a great deal of panic by those affected. You may be far behind in credit card bills, child support, or alimony (more on that below), and need a solution, fast. Read below for everything you need to know to regain your financial footing.
So what does wage garnishment involve, exactly? Because of outstanding debts, your employer must allow access to your paychecks. The collector then deducts a portion of your funds in order to start paying off your debts. Think of it as similar to a bank levy. Although scary, this does not happen easily. You will receive notices and letters in advance.
Also, agencies and revenue officers must take several steps before being allowed to accessing your paycheck, such as obtaining a court order, and there are restrictions. However, wage garnishment does happen, and can cause a strain on your ability to pay for standard bills and a nick against your credit history. Luckily, there’s a way out. More on that to follow.
No matter how much you owe, debt collectors cannot take your whole paycheck. The Consumer Credit Protection Act puts restrictions in place, and also protects you in other ways, like preventing your employer from firing you (for the first wage garnishment, that is). The maximum amount that can be taken from your paycheck depends on the amount of your disposable income. ‘Disposable earnings’ includes the money left over after taxes and withholdings.
Federal law states that no more than 25% of your disposable earnings can be garnished, or the amount by which your earnings are greater than 30 times the federal minimum wage (whichever is less). This may help you breathe a sigh of relief. However, there are exceptions. If you owe child support, or federal/state taxes, garnishment law permits up to 60% of disposable income to be withdrawn, depending on how many people you support.
Also for back taxes, a court order is not required, and there is no limit on what can be taken. If you have delinquent federal student loans, a court order is not required either, but the limit is reduced to 15% of your disposable income.
If you live in Pennsylvania, North Carolina, Texas, or South Carolina, you’re in luck. These states do not allow garnishment by creditors. Further, some limitations stated above differ from state laws; whichever results in the lesser amount is the one that takes precedence. Research your state laws or consult a local tax professional to make sure you know the exact amount that can be garnished.
If you find yourself in the hands of collectors because of wage garnishment, you do have a few options other than letting the garnishment run its course.
This is hopefully a no-brainer if you have the financial means. We recommend employing the help of a professional for this one, but try to negotiate a payment plan with the debt collector directly, to perhaps lower the payments, but also to avoid further harm to your credit report. This is the ideal way to release a garnishment fast, but again, not always feasible.
This is typically lauded as the last resort, but is the best option for some with particular financial situations. When filing for bankruptcy, you can’t discharge certain debts, like those from the government. The wage garnishment can most likely be stopped, however. Many seek this out of desperation of wage garnishment relief, but consider your financial situation as a whole, and other options before settling on bankruptcy. You will certainly want to hire a bankruptcy lawyer for consultation.
An option for select circumstances, appealing the garnishment can prove successful. You can request an appeals conference during the 30-day period after receiving your notice, referred to as a Collections Due Process hearing, or CDP. Note that this is not to dispute the taxes or debts you owe, but instead to appeal the garnishment if the IRS failed to follow proper procedures.
Similar to an appeal, other ways to cease the garnishment quickly include situations such as: the time period to collect the tax from you expired before the garnishment was served, the IRS did not provide you a full 30 days to respond to the notice, and the agency was considering your offer in compromise or request for an installment plan before the garnishment was in place.
Hiring a tax professional is your best option, whether you take on the above options or not. They know the laws, how to confer with the IRS and collectors, and can often lower your debt obligation. Or, at least they can lower your payments. This is the ideal route if you have a large debt to pay. You’ll want to release the garnishment as soon as possible, unless you can pay the debt in full immediately.
Wage garnishment can be resolved and prevented. The most important thing is communication. Speaking with the IRS, your collectors, and trusted tax professional is the only way. It will help you to avoid the expensive hassle of allowing the garnishment to run through completion. Take action now, and your financial circumstances will improve.