Wage garnishments are a collective action taken by the creditors to get their money back. But the creditors cannot easily get garnished wages when you get behind on your payments. They first need to obtain legal permission to do the same. For this, the first step is filing a lawsuit in the court against you. And if they win the judgment, they get permission from the court to garnish your wages.
Once the court has agreed to the wage garnishment, the employer will be withholding a certain portion of your monthly income. This portion of your monthly income will be known as ‘garnished wages’ and will be sent to your creditor until the complete debt is paid off. If possible, you can even send off some extra payments apart from the garnishing amount. It will help to pay off the debt and end the garnishment sooner.
Some government agencies don’t even need a court order to garnish your wages. State and federal tax agencies can collect the unpaid debt by imposing a levy on your wages to make up for your tax balance.
Out of all the above-mentioned types of wage garnishments, federal debt is the most important. The employer will have to pay that first. However, in the case of a child support garnishment, the latter takes priority. Once the debtor has paid all the federal tax debt, the employer can start the state wage garnishments.
Overall, there are 5 forms of wage garnishments:
Federal tax debt
This is the debt that you owe to the IRS. This federal tax agency has the power to garnish your wages without any court order. Apart from wage garnishment, they can take other collection actions against you as well, like bank levy, tax lien, etc.
This has the highest priority among all the wage garnishments. It is a federal tax obligation to use the income of the employee to satisfy the requirements of child support first before any other debt. According to the law, family support, alimony, and spousal support debt can have automatic wage withholding. If a wage garnishment has been issued, it is the responsibility of the employer to notify the employee. The employer should also report the employees the wage garnishment amount deductible from every monthly paycheck.
If you are unable to pay your federal student loan, the government has every right to garnish up to 15% of your wages. The U.S. Department of Education is responsible for issuing all federal student loans. So, student loans are federal debts. Before the wage garnishment starts, you will receive at least a 30 days prior notification. Student loans come second in terms of priority after child support.
State tax debt
Once all the federal debt has been paid off, the state tax agencies can start wage garnishments to collect all unpaid debt. State wage garnishments happen when you report your income incorrectly or don’t file your returns on time. When you fail to pay the state taxes, up to 15% of your wages can be garnished until the entire debt is paid off. However, it is to be noted that the rules of wage garnishment vary from state to state.
Credit card and other debts
Once all the federal and state debt have been paid off, private organizations can start the wage garnishments. This usually includes credit card debts, bank loan payments, medical bills, or any other consumer obligation that you didn’t pay. For all types of consumer debt, the order of priority is given according to the date when you acquired the debt. Then, according to the order of the time of the debt, garnishments will continue. Also, the wage garnishment amount will depend on the laws of the state you are working in. You can contact a tax expert to help in determining what are the obligations for wage garnishment in your state.
According to the Consumer Credit Protection Act, there is a limit on the wage garnishment deductible from your paycheck. This means that no creditor can take all your paycheck, making it difficult for you to pay for basic living expenses. Creditors can garnish only a portion from your wages, known as disposable earnings. This includes eliminating the taxes and other qualifying deductions. The wage garnishment amount is the lesser of the following:
- If the disposable income is more than $290, 25% of it.
- The amount that is more than 30 times the minimum wage set by the federal government.
However, this limit is not applicable to wage garnishments for tax debts, support for child or spouse, voluntary wage assignments, and bankruptcy court orders. In case of payment for child/spousal support, when you have another spouse or child to support, 50% of the disposable earnings can be garnished. If you don’t have any other dependents, this can increase to about 60%. If you are paying for more than 3 months of back payments, an additional 5% will be taken from your income to cover these payments.
All federal agencies have the right to take 15% of your income as wage garnishment to pay off your debt. This includes the IRS and the Department of Education. However, different states have different limits for wage garnishments. In case there is a difference between the federal and state limit for wage garnishment, the one that leads to the less amount of garnished wages will be used.
The wage garnishment amount also depends on your disposable income. It is the income left after the employer has made all the legally required deductions from the gross income. These deductions include social security, tax, unemployment insurance, and state retirement systems. It does not include deductions that are not legally required like charity contributions, 401(k), and health insurance. In fact, after the wage garnishments, these deductions will come from the remaining income you have left.
Yes, there is a limit to the wage garnishment amount. However, the amount is still very high. This leaves some people unable to pay for basic living expenses. If your case is one of them, you can get the wage garnishment amount reduced by filing a claim of exemption. Another option is bankruptcy. But, this does not work for tax debts, child support, and student loans.
If you are facing wage garnishments, it is best that you hire an expert to help you get out of it. An expert tax relief services will figure out a solution to take you out of this and get back on your feet again.