DEFINITION of Garnishment
Garnishment refers to a legal process that instructs a third party to deduct payments directly from a debtor’s wage or bank account. Typically, the third party is the debtor’s employer and is known as the garnishee. Federal law prohibits employers from firing a worker to avoid processing a garnishment payment. Garnishments are used for debts such as unpaid taxes, monetary fines, child support payments and defaulted student loans.
BREAKING DOWN Garnishment
For a debtor’s wage to be garnished, a creditor must typically obtain a court order by saying that the debtor owes money and they have defaulted on payment. If the debt is an Internal Revenue Service (IRS) levy, a court order is not required. For example, if John Smith owes $10,000 in unpaid taxes that have been overdue, the IRS can resort to garnishment of his wages. The IRS would then direct Smith's employer to remit a portion of his salary for a certain amount of time until Smith has paid off his taxes in full. Garnishments can have a negative impact on an individual’s credit rating.
The Consumer Credit Protection Act stipulates the amount of income that can be garnished from an individual's wage. The garnishment amount is the lower of the following:
- Twenty-five percent of weekly disposable income if the individual’s disposable income is greater than $290.
- Any amount greater than 30 times the weekly minimum wage, which is $217.50 ($7.25 x 30).
Individuals who earn disposable income under $217.50 per week do not receive any wage garnishment. Individuals who receive a disposable income of between $217.50 and $290 per week can have any amount above $217.50 garnished. For weekly disposable earnings above $290, a maximum of 25% can be garnished. Disposable income is defined as gross income minus legally required deductions, such as federal, state and local taxes and social security deductions.
Wage Garnishment Exceptions
Garnishment limits set by the Consumer Credit Protection Act do not apply to unpaid tax debt, child support, bankruptcy orders, student loans or voluntary wage allocations. Federal agencies can garnish up to 15% of an individual’s wage, while the Department of Education can garnish up to 10%. Sixty percent of wages can be garnished for child support payments if an individual has no other dependants to support. Federal and state garnishment limits may differ, in which case the lower garnishment limit applies. If an individual faces financial hardship due to wage garnishment, they may be eligible to file a claim to reduce the garnishment amount. (To learn about garnishment and your IRA, see: Can Creditors Garnish my IRA?)