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Laws & Restrictions Around Wage Garnishment

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

The process of wage garnishment compels an employee to pay owed debts through payroll withholding but is subject to a number of protections and limits. Let's review the highlights of relevant wage garnishment laws and restrictions.

Wage Garnishment Laws

Wally has been having problems keeping track of his finances in the last few years. His credit card company has finally sued him for failing to pay his bill. The credit card company won the case and has entered a judgment against Wally. The judgment allows the credit company to take specific legal actions to collect the debt, which includes wage garnishment. In this lesson, we will review with Wally what wage garnishment is along with some of the relevant laws, restrictions, and monetary limits of this debt collection option.

A wage garnishment is when an employer withholds money from Wally's pay that is then sent to a creditor. Creditors can include any sources of debt, such as credit cards, and auto, student, or personal loans. A court order can also require wage garnishment when an individual fails to pay child support or alimony obligations.

Important Points and Applicable Laws

It's important though to distinguish between garnishments and voluntary debt payments. With many employers it's possible to voluntarily choose to make payments to a loan or domestic support recipient directly through payroll. A garnishment is a mandatory order made through legal proceedings.

Although garnishment is often referred to as wage garnishment, garnishments can come from many sources of earnings. Hourly wages, salaries, bonuses, and commissions are all able to be garnished for the satisfaction of debts. The one exception is tips; this source of money is not considered garnishable earnings.

Title III of the Consumer Credit Protection Act contains the applicable laws for wage garnishment. One valuable protection under the Act that Wally will be happy to know is that by law an employer cannot fire an employee for having a single debt garnishment. There is no legal protection from termination for garnishments beyond that first instance, though.

Garnishment Restrictions

In order to determine how much of Wally's paycheck can be garnished a threshold needs to be established. The garnishment does not take priority over obligations, such as income tax or social security payments, Medicare, legally mandated retirement contributions, and any other taxes are collectively subtracted from Wally's income. The remaining amount after these mandatory deductions is called disposable income. Only the deductions required by law can be used to determine disposable income. Voluntary withholding for items such as health insurance, charity, and option retirement investors cannot reduce his disposable income.

The law also establishes a maximum amount of money that may be garnished from Wally's paycheck. Under circumstances that don't cover domestic obligations, bankruptcy or tax matters, one of two limits applies. The first is a general rule that 25% of an employee's wages may be withheld for the garnishment. The exception is that if the employee's disposable earnings amount to more than 30 times the federal minimum wage the entire amount above that threshold can be garnished. Garnishment restrictions do not apply in cases where the garnishment is to pay state or federal taxes and certain bankruptcy court orders.

Wally's case falls under the 25% of disposable income rules since he doesn't fall under one of the other exceptions. Let's say that Wally earns $2,000 every two weeks, but his disposable income is ruled to be $1,400. In this case 25% of his $1,400 disposable income results in a $350 garnishment per paycheck.

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