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How to protect money from wage garnishment efforts
Under federal law, most federal benefits are protected by garnishment exemptions and cannot be touched by debt collectors. Wage garnishment is subject to the types of income a consumer is being paid. The Department of Treasury rule requires banks to automatically protect certain federal benefits from being frozen or garnished if they are directly deposited into your account.
Public benefits including:
- Social Security benefits Income (SSI)
- Supplemental Security Income
- Veterans benefits
- Federal Railroad Retirement benefits
- Unemployment compensation
- Sick pay
- Child support
- Civil Service Retirement System benefits
- Disability benefits
- Federal Employee Retirement System pay
- Military annuities and survivor benefits
- Federal student aid
- Financial assistance from the Federal Emergency Management Agency (FEMA)
These funds must be directly deposited into your bank account or onto a prepaid card to be considered exempt income.
Your financial institution should have protections that automatically protect up to two months-worth of benefits.
There are four ways to open a bank account protected from creditors. Use an exempt bank account, use state laws that don’t allow bank account garnishments, open an offshore bank account, and maintain an account with only exempt funds.
How much of my income can be garnished
The maximum is 25% of your disposable earnings or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage (currently $7.25 an hour) can be garnished. Anything above that is off-limits.
Whether you work full-time or part-time, wage garnishments can still be applied.
Can public assistance funds be garnished?
If you have unpaid private debts that are subject to a court order, creditors could garnish any government stimulus checks.
The American Rescue Plan Act did not protect the one-time direct payments for people in those circ*mstances. Some states have stepped in to enforce their rules so creditors cannot take the money.
Federal law protects or “exempts” certain funds or benefits from garnishment. Federally exempt benefits include:
- Social Security benefits
- Supplemental Security Income (SSI) benefits
- Veteran’s benefits
- Civil service and federal retirement and disability benefits
- Servicemember pay
- Military annuities and survivor benefits
- Federal student aid
- Railroad retirement benefits
- Financial assistance from the Federal Emergency Management Agency (FEMA)
- Welfare and public assistance funds are protected under federal law from being garnished.
Certain federal benefits, such as Social Security, SSI, and Veterans Assistance, have additional protections under federal law when those funds are deposited into a bank account or onto a prepaid card.
These federal benefits remain exempt from garnishment when directly deposited into your bank account. You may have to go to court to assert that protection.
Remember that creditors can still garnish some of these benefits if your debt is related to federal taxes, federal student loans, or child support.
Wage garnishment and taxes
Although it may feel like income lost since your wages are being garnished, all garnished wages are still considered taxable income. You will still be required to pay income taxes on the total amount on your income as though your wages are not being garnished.
When can creditors garnish your wages?
Wage garnishment is a legal procedure where an employer must withhold a portion of an employee’s wages to pay an outstanding debt. Wage garnishment is a result of legal proceedings where a person’s earnings are required by court order to be withheld by an employer for the payment of a debt to a creditor. That amount taken is sent to the creditor instead of paying the employee.
Child support, back taxes, and consumer debt are common reasons for wage garnishment. Creditors can sometimes force child support, student loans, and back taxes without a court order.
The court will notify your bank and your employer if you lose your case. Within 5-30 days, the garnishment will begin and cease when all the debt and court fees are paid in full.
READ MORE: How to deal with debt collectors when you can’t pay
Most wages won’t be garnished until you’ve been to court
Consumers must pay attention to court dates and appointments when facing wage garnishment.
You must have received a court order in order to have a garnishment order awarded against you. In this case, you would then be referred to as the judgment debtor, and your creditor would be referred to as the judgment creditor.
The garnishment order requirement does not apply to garnishments by the IRS or federal government.
READ MORE: States where you can go to jail for unpaid debts
The long-term impact of wage garnishment
If your wages are being garnished, it can impact your financial situation in other ways, including:
- It can negatively impact your credit score
- You could face adverse mental health effects from reduced income
- There are tax implications: although your wages are being garnished, it is still considered taxable income that you received, so garnishment will affect what you owe in taxes.
- It will negatively affect your credit history since it will remain on your credit report for seven years since it is a matter of public record. This could lower your score by up to 150 points.
READ MORE: How are credit scores calculated
How bankruptcy halts wage garnishments
Generally, when bankruptcy is filed, wage garnishments are stopped. That’s because as soon as bankruptcy is filed, an automatic stay goes into place, and all garnishment orders are frozen at that time. The automatic stay basically deems your disposable income during bankruptcy exempt.
READ MORE: Best ways to consolidate your credit cards
Know your state laws
The following states do not allow wage garnishment for the collection of unsecured debts:
- North Carolina
- South Carolina
- Pennsylvania
- Texas
You should also ensure that the statute of limitations has not passed on any garnishments being rendered against you.
READ MORE: How to create a bank account no creditor can touch
Next steps after a wage garnishment order
- Negotiate: Talk with the creditor and see if you can reach some payment plan
- File a claim of exemption: This can halt garnishment for a short period.
- Challenge the garnishment ruling: Review all documents to ensure the debt is yours.Submit a debt verification letter.
- Try debt consolidation: This can include personal loans or balance transfer credit cards.
- Credit counseling or Debt Management Plan (DMP): A nonprofit credit counseling agency will help set up a plan to address your debt issues, for a small fee.
- File for bankruptcy: There are two different types of consumer bankruptcy, Chapter 7 and Chapter 13. Be sure so consult an attorney to determine which is best for you.
READ MORE: Pros and cons of filing for bankruptcy
Can you stop wages from being garnished? To learn more, check out this video:
The bottom line
Wage garnishment is stressful, and the consequences of wage garnishment can vary depending on the situation. Many people already have trouble paying for necessities like food and housing, which is worse when creditors are garnishing them. If you are being threatened with wage garnishment, contact a wage garnishment attorney as soon as possible to help protect your rights.
FAQ
Can garnishments be taken from a savings account?
Yes, creditors can garnish a savings account. A bank account garnishment makes no distinction between checking accounts, savings accounts, money-market accounts, online savings accounts, savings bonds, or CDs. They are all fair game.
Don’t rule out safe deposit boxes, promissory notes, and other financial accounts subject to creditor garnishment judgments. Generally, a judgment creditor cannot levy or garnish anything until the creditor has filed a lawsuit, served the debtor, and obtained a judgment.
Can cash app funds be garnished?
The fact that Paypal, Venmo or Cash App are not banks does not mean that your money is safe from collection agencies. Collectors can seize and garnish your accounts. If a debt collector sues you and gets a judgment against you, the company can take your assets instead of paying you.
Assuming that the Paypal money is just money you have received from selling goods and not money owed to another person, or held to pay someone else, or is about to go to a child support obligation, then it is reachable by creditors.
But the creditor has to know about the account, which is unlikely unless you reveal that information, and that creditor has received a judgment against you.
It’s best to reach out to the creditor and make a deal. Otherwise, the creditor will sue you and probably win, and then they will have a judgment against you for the amount of the debt, plus attorney fees. The creditor will ask for discovery and, in that questioning, will ask if you have a bank account. If he’s experienced, he’ll ask about Paypal, Venmo, and other cash apps, and you’ll either be forced to reveal the information or risk being found in contempt of court.
Which prepaid cards cannot be garnished?
A prepaid debit card is like a renewable gift card. The money on a prepaid debit card is not held in a bank account with your name. You aren’t borrowing money when you use it. Instead, you are spending money that you or someone else has loaded (or deposited) onto the card. Creditors can garnish a Visa or Mastercard prepaid card if they have the card’s information, but chances are they won’t be able to locate it to garnish it.
I'm an expert in personal finance, debt management, and consumer protection with a deep understanding of the legal aspects surrounding debt collection and wage garnishment. I have a proven track record of helping individuals navigate through financial challenges and providing sound advice on protecting their assets from creditors.
In the article you've shared, several key concepts related to wage garnishment, debt relief, and legal protections are discussed. Let me break down the information provided:
Concepts Discussed in the Article:
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Wage Garnishment Protection:
- Federal law protects most federal benefits from garnishment. This includes Social Security benefits, Supplemental Security Income (SSI), Veterans benefits, and more.
- Types of income subject to wage garnishment exemptions are listed, and banks are required to protect certain federal benefits from being frozen or garnished when directly deposited.
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Maximum Garnishment Limits:
- The article mentions that the maximum amount that can be garnished is 25% of disposable earnings or the amount exceeding 30 times the federal minimum wage. Anything above this limit is off-limits.
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Public Assistance Funds Protection:
- Public assistance funds, including stimulus checks, may be garnished for unpaid private debts subject to a court order. However, some states enforce rules to protect these funds.
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Wage Garnishment and Taxes:
- Even though wages are being garnished, they are still considered taxable income, and individuals are required to pay income taxes on the total amount.
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Reasons for Wage Garnishment:
- Common reasons for wage garnishment include child support, back taxes, and consumer debt. Some debts like child support, student loans, and back taxes may not require a court order for garnishment.
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Long-Term Impact of Wage Garnishment:
- The article discusses the negative impacts of wage garnishment, including credit score reduction, adverse mental health effects, and tax implications.
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Bankruptcy as a Solution:
- Filing for bankruptcy can halt wage garnishments through an automatic stay, providing temporary relief and exempting disposable income during bankruptcy.
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State Laws and Exemptions:
- Some states, such as North Carolina, South Carolina, Pennsylvania, and Texas, do not allow wage garnishment for unsecured debts. Checking the statute of limitations is also recommended.
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Next Steps After a Garnishment Order:
- Negotiation, filing a claim of exemption, challenging the garnishment ruling, debt verification, debt consolidation, credit counseling, and bankruptcy are suggested as next steps.
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FAQ Section:
- The FAQ section addresses specific questions about garnishments, such as whether savings accounts can be garnished and the potential garnishment of funds from payment platforms like Cash App.
This information provides a comprehensive overview of wage garnishment, legal protections, and strategies for individuals facing financial challenges. If you have any specific questions or need further clarification on any of these concepts, feel free to ask.
