Ignoring outstanding credit card debt can take a bite out of your paycheck or bank account. Garnishment, a last-ditch effort at debt collection, hits debtors where it hurts: their ability to pay the bills, fill the gas tank and feed their families.
When facing credit card debt that can't readily be paid, the best plan of action is to act early, speak to creditors, reach some sort of payment arrangement and stick to a repayment plan. Otherwise, if debt goes unpaid and ignored, the courts may intervene by issuing a judgment requiring your employer to "garnish" or withhold a portion of your wages or bank accounts to pay back the debt.
A collection tool of last resort
"Garnishment is a legal remedy authorized by a court and should be considered a collection tool of last resort. In most states, the garnishment process can only be initiated by a court order and only if a judgment for monies owed has been entered," says David Cherner, the former legal and legislative director of state government affairs for ACA International, The Association of Credit and Collection Professionals.
"Clients are often embarrassed when faced with garnishment because now their paycheck is involved, which means their employer is aware of their financial situation," says Gail Cunningham, senior director of public relations at the National Foundation for Credit Counseling (NFCC). Employers are typically required to tell workers about the withheld amount. While it is against the law for an employer to fire an employee whose wages are garnished, that protection goes away after a second and third such judgment, according to the Consumer Credit Protection Act.
Creditors are required, per state laws, to provide lead time to debtors of any pending legal action, and generally prefer to avoid the hassle of filing a lawsuit. But once the judgment has been rendered, "the consumer's options are very limited," says Cunningham. (Story continues below.)
Credit card debt judgments and garnished wages
Once a credit card account (or any debt) goes into default, and the creditor decides it cannot collect, it may sell the debt to a debt collection company. If the credit card or debt collection company is unsuccessful in recovering the debt, then a lawsuit may be filed against the consumer in an attempt to recover its losses. If the ruling in the lawsuit goes against the consumer, a judgment may be issued to garnish property, bank accounts or wages.
"When faced with notices threatening legal action, consumers should contact an attorney immediately to, at least, discuss options before the situation escalates and the consumer is faced with lawsuits and garnishment," says Joseph Rosenthal, a lawyer with Rosenthal and Mintz, a general practice law firm in Hauppauge, N.Y. "Once the situation reaches this point, if it is a legitimate debt, the consumer's only recourse is to either make a deal with the credit card company or to declare bankruptcy. Otherwise, a judgment may result, followed by collection procedures," he says.
The only recourse for a consumer after a judgment has been rendered is to ask the court to adjust the amount of the garnishment if the reduction in pay severely impacts the consumer's ability to support himself and any dependents. Also, if a judgment is rendered in a state where the garnishment law differs from federal law, the law requires the court to adjust the garnishment to the lesser amount.
Don't bury your head in the sand When wages are garnished, or "attached," money is deducted from the debtor's paycheck and sent to the creditor. This form of debt collection is most often seen in delinquent tax situations and back-owed child support, but credit card debt is not immune. When other assets, such as property, are attached, a lien is associated to the property for the judgment amount -- or for as much of the judgment amount as can be secured -- so that when a property is sold, the money obtained from the sale would be distributed first to the creditors.
"Unfortunately, many consumers bury their heads in the sand when the notices start coming in," says Rosenthal. "They are usually overwhelmed with creditors, and by ignoring the situation, the lawsuit goes through and the consumer is faced with garnishment and minimal alternatives," he says.
According to the NFCC's Cunningham, "The smart consumer will reach out for help before he digs too deep of a financial hole. Judgments and garnishments can often be avoided if the problem is addressed early on."
Some funds exempt from garnishment
When an employer is notified of a judgment requesting wage garnishment, only a certain percentage of wages can be withheld -- according to the total of disposable earnings of the employee -- allowing the employee some income to live on, according to Title III of Consumer Credit Protection Act. Also protected from garnishment are deductions that are legally required to be paid by the employee, such as federal, state and local taxes, unemployment insurance, state employee retirement system payments and Social Security payments. However, deductions not required by law (health insurance, union dues) are not protected from garnishment.
State and federal law regulate the amount of money that may be garnished from a consumer's wages or bank account.
-- Gail Cunningham
National Foundation for Credit Counseling
According to the U.S. Department of Labor, Title III "also protects employees by limiting the amount of earnings that may be garnished in any workweek or pay period to the lesser of 25 percent of disposable earnings or the amount by which disposable earnings are greater than 30 times the federal minimum hourly wage prescribed by Section 6(a)(1) of the Fair Labor Standards Act of 1938. This limit applies regardless of how many garnishment orders an employer receives."
So, if an employee nets $600 a week, under the 25 percent formula, the maximum garnishment amount is $150 (25 percent of $600). Or, using the minimum wage formula, the maximum garnishment amount is $382.50 (30 times the minimum wage of $7.25 is $217.50, which is then subtracted from the $600 net compensation). Therefore, since the rule says to use the "lesser" amount, the maximum garnishment would be $150.
Bank account garnishment
There are two different forms of garnishment: wage and nonwage. "Nonwage garnishment is a procedure where a judgment holder attempts to garnish funds in a bank account," Cherner says. "Wage garnishment is used when it is determined the consumer is gainfully employed and has sufficient earnings to attach."
If the debtor is not gainfully employed, then the garnishment process begins when a debtor's bank receives a court judgment requesting a debtor's account be frozen. Federal law prohibits some money -- Social Security, disability or veteran's payments, for example -- from garnishment. However, if you owe federal or state debt, such as back taxes, the government does not need a court order to attach your bank funds and can also tap federal and state government payments. The process of separating exempt and nonexempt funds and unfreezing a bank account could take weeks or even months, leaving debtors with no access to bank funds during that time.
As a result of consumer advocates taking issue with the practice of freezing all bank funds and placing the onus on the consumer to prove which funds are exempt, a rule was passed on May 1, 2011, to protect exempted funds from garnishment orders. Electronically deposited exempted funds, such as Social Security, are now "tagged" by the federal government, making it easier for financial institutions to separate exempt and nonexempt funds to be garnished. The bank must also provide debtors with the amounts of these protected and unprotected funds once it is served with a garnishment order. Nonexempt funds that are not direct deposited, however, do not qualify, as they will not be electronically tagged.
State laws also may add extra rules on bank account garnishment. In New York, for example, state law mandates that the first $2,500 in a debtor's account remain untouched if that account received protected (Social Security disability checks, for example) electronic deposits in the 45 days prior to the bank's receipt of the restraining order. Unprotected funds of up to $1,716 are otherwise protected. Similar laws have been enacted in California and Connecticut.
It's important to note, however, that garnishment orders for some specific types of debt, such as delinquent child support, alimony and federal taxes, for example, can tap into these otherwise exempt funds.
Laws on garnishing
Garnishment policies vary from state to state and bank to bank, so it is important to understand your state's laws on the matter.
The NFCC's Cunningham adds, "There are some states in which garnishment is approved, and clients should be aware if their debt occurred in a garnishment state or a state wherein garnishment is prohibited. And, although credit card debt is often sold to a third-party collector, it can be -- and often is -- subject to wage garnishment." Wage garnishment is allowed in all states for unpaid taxes and child support.
"State and federal law regulate the amount of money that may be garnished from a consumer's wages or bank account. State law regulates the amount of time a consumer's wages or bank account may be garnished," says ACA's Cherner.
Garnishment can also complicate other debt issues, Cunningham says. "Garnishment can occur in addition to other existing debt issues. Whereas a counseling agency may be able to negotiate lower payment arrangements with a creditor, once a debt becomes garnished neither the consumer nor the counseling agency has any latitude," she says. "The payment arrangement is set by the court.
"A garnishment is a serious legal step, one that significantly impacts the consumer. Not only does his credit report receive a major negative ding, but his disposable income is decreased. It is at this point that the wise consumer will seek the help of a legitimate credit counseling agency. Living expenses need to be reviewed, and remaining debts need to be addressed. This can seem overwhelming, but help is available, and the sooner they reach out for assistance, the better off they're going to be," says Cunningham.
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