Yes. Virtually any kind of creditor can come after your paycheck. A garnishment happens when a creditor sues you, wins, and gets the court to take part of your wages to pay the debt. Before you go too far down the rabbit hole, the first questions to ask are: “How much can they take?,” “Are they taking too much?,” “Do they even have the right to garnish me?,” and “What are my options?”
There is a limit on how much a creditor can take: no more than 25% of your disposable income, or the amount of disposable earnings above 30 times the federal minimum hourly wage, whichever is less. That’s the limit unless you file bankruptcy or convince the judge a lesser amount should be allowed. And all the players in your life– the bank, the credit union, the credit card company, the medical bill collector, all of them– can invoke the same process.
Child support and alimony are different; the creditor can be an ex-spouse or legal guardian. And they can garnish as much as 65% of your wages for back child support or alimony. Criminal restitution is different, too. Courts have decided that the garnishment statute applies only in civil cases, so if you’re ordered to pay restitution to a victim or the state, the 25% cap doesn’t apply, and you can be forced to pay more. Bankruptcy can, however, reorganize restitution debt so you can pay it in a more manageable way.
”Wages” Is a Technical Term
It may come as a surprise, but “wages” is a technical term. It used to apply only to money from your paycheck. Over time, though, it’s been applied to all sorts of other income. In Indiana, for example, the legislature has defined “wages” as wages, commissions, income, rents or profits remaining after amounts required by law to be withheld. State and federal courts alike have interpreted - and sometimes restricted - exactly how much protection you get from the wage garnishment rules.
Business owners, especially sole proprietors, should pay attention: the courts have said that if you’re a sole proprietor and you alone decide when and how much you’re going to pay yourself, then the wage exemption isn’t yours. But one court suggested that if you could show a history of paying yourself on a schedule, based on some predetermined formula, you would likely be able to use the wage exemption. Bottom line: It needs to be a set periodic payment.
And along similar lines, courts have ruled that 1099 income paid to subcontractors can also qualify as wages. Bonuses and severance packages, however, might not: the court takes a look at whether the income is paid “periodically” or not, and if not, the exemption may not apply. And the same is true for teachers: in a recent case, a court ruled that the escrow account set aside for teachers who choose to be paid over 12 months (so they get paid in summer), isn’t “wages” either, and can be completely grabbed.
Court Decisions Have Been Debtor-friendly
Fortunately, a number of court decisions have been debtor-friendly. When the law was first enacted, the creditor’s position was that it didn’t apply in bankruptcy, meaning that your wages were safer outside of bankruptcy than in it. But bankruptcy courts ruled that wasn’t consistent with the “spirit” of the exemption - you can now exempt your wages in bankruptcy as well. Many courts have also held that the creditor can’t use contempt to force you to continue showing up in court about the garnishment - the courts said it was essentially jailing someone for owing money to a private creditor.
Stop a Garnishment
How do you stop a garnishment? First, obviously, the best way would be to pay off the debt. Unfortunately, if you could do that you probably wouldn’t be reading this article.
Your second option isn’t really an option: do nothing. Eventually that one debt may get paid off, but meanwhile you can’t pay your car note, rent or mortgage, and those fall behind. Then your other creditors may swoop in and start the next garnishment.
Finally, the last option (which I call the least expensive and most effective) is bankruptcy. Either a Chapter 7 or a Chapter 13 can stop the garnishment and give you a fresh start.
If you’re the business owner whose paycheck is being garnished, don’t just accept it. Check out whether the creditor has hit a limit, whether it’s taking too much, and whether it’s even entitled to garnish you at all. How you pay yourself from the business could matter, so a set, regular payment may be worth considering. Doing nothing is the worst option.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
