If you’re facing financial challenges, you may have creditors coming at you from every direction. You might owe money to the IRS, your state tax agency, a payday loan company, or even private creditors including credit card companies, healthcare providers, and other lenders.
You might also face student loan debt or even owe back payments for child support. Everyone wants their money – even if you have nothing left to give after buying groceries and paying a few bills.
If you owe money to private creditors, such as a bank, credit card company, or a business that extended you a line of credit, you might wonder if creditors can garnish your wages. Read on to find out exactly who can garnish your wages, how much they can take, and how to stop wage garnishment.
The IRS and Wage Garnishment: What You Need to Know
Most people know the IRS can garnish your wages if you owe past-due federal taxes. Likewise, state tax agencies in places like New York and California can also garnish wages if you owe state income taxes.
It’s very difficult to stop IRS wage garnishment once the state or federal agency has contacted your employer and started garnishing your wages. You may be able to stop IRS wage garnishment once it has started in the following ways:
- Pay your tax bill in full
- Establish an installment agreement
- Prove the wage garnishment is causing undue financial hardship
The IRS has very high limits for wage garnishment. The agency can take up to 70% of your gross income, leaving you with just hundreds of dollars per month to live on. With today’s inflation rates, this amount will barely buy gas so you can drive to work. If you are an independent contractor, self-employed or a business owner, the IRS can take up to 100% of your pay.
California wage garnishment laws are more lenient. The government can take up to 25% of your pay through wage garnishment in California for personal income tax debt. Other state rules may vary.
If you are facing wage garnishment due to tax debt in California or anywhere else in the U.S., Alleviate Tax can help you negotiate a payment plan, stop wage garnishment, and help you collect your full paycheck so you can get back on your feet financially.
Besides the IRS, Who Can Garnish Your Wages?
While IRS wage garnishment is discussed most frequently and is often a cause of stress for taxpayers, it’s important to understand the IRS and state tax agencies aren’t the only organizations that can garnish wages.
Most creditors, including credit card companies, payday loan companies, personal loan companies, private banks or credit unions can garnish your wages for non-payment. Hospitals and other healthcare providers can also garnish wages for non-payment of a medical bill. If you own a business and a vendor has granted you a line of credit or trade terms, that company can garnish your wages if you fail to pay.
Fortunately, these type of companies and organizations have lower limits for wage garnishment than the IRS.
According to the Department of Labor website, creditors can garnish the lesser of 25% of your disposable earnings or disposable earnings exceeding 30 times the federal minimum wage after required deductions. Required deductions include:
- Federal, state, and local taxes
- FICA distributions (taxes for Social Security, Medicare, and State Unemployment Insurance)
- Other required withholding taxes
Your creditors can garnish your regular earned income, as well as lumped sum earnings like commissions, bonuses, profit-sharing, holiday pay, severance pay, and back pay, according to DOL.gov. Social Security benefits and some other federal and state benefits are exempt from garnishment.
Some state wage garnishment limits may be lower, but not higher, than the federal limits.
Wage Garnishment Process
While the IRS or state tax agencies can garnish wages after mailing a series of notices and tax bills trying to collect your past-due tax debt, the process is different for private entities and corporations to collect the money you owe.
According to the Consumer Financial Protection Bureau, a creditor must first take you to court over the debt owed. If the judge determines you owe the debt, the court may issue an order allowing the creditor to garnish your wages up to federal limits. You should be served a notice of income execution. At that point, you’ll have some time to establish a payment plan to avoid wage garnishment.
At that point, the court will send an order to your employer to withhold a percentage of after-tax pay. Once the paperwork is in the hands of your employer, stopping the garnishment is more difficult. A lender can continue garnishing your wages until the debt, plus interest, fees, and collection costs, are paid in full.
Consequences of Wage Garnishment
Wage garnishment makes it difficult to survive without falling further behind on your bills. It may also affect your credit score, which has long-lasting ramifications. If your future plans include buying a home, renting an apartment, leasing a car or taking out a car loan, consolidating debt with low-interest credit cards, or other financial activities Americans with good credit take for granted, wage garnishment can create challenges.
Wage garnishment won’t appear as a line item on your credit report, but lenders can indicate wage garnishment as the means of collection, according to Equifax credit bureau. If you’ve missed several credit card or loan payments, your credit score is already feeling the impact; wage garnishment can drag it down further.
How to Stop Wage Garnishment
The best way to stop wage garnishment is to attend court proceedings and argue that the garnishment would cause undue financial hardship. Be prepared to prove your necessary living expenses, including housing, utilities, food, and a vehicle to get to work. Your state may allow you to file for specific exemptions that could reduce the garnishment limit.
By the time creditors have garnished your wages, the fastest way to get out of the situation is to pay off the debt in full. If that’s not possible you may consider contacting your creditor to negotiate a repayment plan that will leave you enough money to live on.
Keep in mind that many major lenders, such as banks and credit card companies, sell off debt to collections agencies, so you will need to contact the company that is garnishing your wages, not necessarily your original creditor. You can also speak to a credit counseling company who can help you negotiate a settlement or consolidate debt.
In a worst-case scenario, you might consider filing for bankruptcy to stop collections actions. Keep in mind that a bankruptcy may not discharge certain federal tax debt that is less than three years old. However, the IRS may suspend collections actions or an installment agreement during bankruptcy proceedings. This will extend the collections statute expiration date (CSED) on your debt, only prolonging your situation.
If you’re facing unpaid tax debt along with your other financial worries, Alleviate Tax is here to help you right now. We can help you establish a plan that works for you to pay off state and federal tax debt, reducing your stress and allowing you to focus on building a brighter financial future.
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What is the most a creditor can garnish?
A creditor who is not the IRS garnishing wages for tax debt can garnish up to 25% of your take-home pay (after required exemptions), or any income that exceeds 30x the federal minimum wage, whichever is less.
Can they garnish your wages for credit card debt?
After taking you to court over unpaid credit card debt and issuing a court order, a credit card company or other private lender can garnish your wages up to the limits allowed by federal law.
What money cannot be garnished?
Federal law prohibits lenders from garnishing Social Security wages, Supplemental Security Income (SSI), veterans’ benefits, and some forms of federal government and civil service worker retirement benefits. Some states protect money in your bank account from wage garnishment, up to certain limits. The federal government is allowed to garnish up to 15% of Social Security or Social Security Disability Income benefits to cover past-due taxes.
