A common method for creditors to collect money when debts become extremely delinquent is wage garnishment. In order to garnish, an unsecured creditor (one for which there is no collateral securing the debt, i.e. credit cards, personal loans, medical bills) must first sue the debtor. Typically this does not occur until the debt is around six months delinquent. The creditor sues in either small claims or civil court, depending on the size of the debt. If the outcome of the trial is in favor of the creditor, they then obtain a judgment. A judgment allows the creditor more options for debt collection.
Usually, the first collection method a creditor will use is wage garnishment. Your employer is notified by the sheriff to withhold a portion of your wages. That money is then sent to the sheriff who deducts his costs and forwards the rest to the creditor. Unsecured creditors in most parts of the country can garnish 25% of the debtors net pay. Net earnings are gross earnings less all mandatory deductions.
However, 30 times the federal minimum wage (about $150) a week is considered exempt, and cant be touched. So, if a debtors net pay is $400 a week , $100 is available to the creditors, leaving the debtor $300 a week. If, though, the debtor is earning $160 net a week, only $10 is available to creditors because $150 is exempt. If a debtor is sued by more than one creditor, the creditors must either wait in line to garnish, or, more rarely, share the 25%. For most debts, the total amount garnished cannot exceed 25%.
Other exempt income sources include: Cash welfare benefits (Temporary Assistance for Needy Families, GAU, etc.), Supplemental Security Income (SSI), Social Security, Unemployment Compensation, student loans, grant or work payments, and almost all pension and retirement benefits. For all of these exemptions, both the monthly check you receive and any savings you have which you can show came from these sources are usually exempt.
Before your paycheck is garnished for the first time, you will receive a wage withholding order from your employer. This withholding order provides information and instructions for filing a claim of exemption. On the top right hand corner of the withholding order is the address of the appropriate clerks office where you will need to file the exemption.
The cost to file the exemption is eight dollars and may be a way to substantially reduce the amount you are required to garnish. This is an opportunity for you to have a hearing in which to list your living expenses and make clear any attempts that you have made to handle the debt without garnishment.
It is a good idea to file the claim soon after receiving the withholding order because it can take a month or two for the hearing to be scheduled, and you may resolve the debt without garnishment during that time.
If you dont file a claim of exemption, the wage withholding begins 30 days from the judgment date and continues until the debt is paid off, as long as you remain employed, unless other arrangements are made. It is possible to try to negotiate with creditors at this point, but difficult to come to an agreement on an arrangement that the creditor would be more willing to accept than 25% of your net wages.
It is illegal for an employer to dismiss an employee for having one wage garnishment. If, however, the employee has more than one creditor garnishing for more than one debt, there is no legal protection. It would be wise for a debtor in this position to approach his employer and assure him that the situation is being taken care of as quickly as possible.
For past due child support payments, delinquent student loans and back taxes, many regulations do not apply. For example, up to 50% of the non-custodial parents wages can be garnished for delinquent child support or alimony if made into a court judgment. The parent has an opportunity to object if the amount is incorrect or will leave him or her with insufficient income to survive.
State and federal student loan agencies, and sometimes the collection agencies that represent them, can garnish 10% of the former students wages administratively. That is, they do not need to sue or obtain a judgment for the garnishment to go into effect. The borrower is notified in writing before his employer is contacted and given the opportunity for a hearing if he disputes the debt.
The Internal Revenue Service neednt sue to garnish wages either. Only $116 net a week is automatically exempt from garnishment by the IRS. As with unsecured creditors, the wage withholding order provided to the employee has instructions on how to claim exemptions to possibly modify the amount garnished.