Wage garnishment occurs when your employer or bank are legally required to withhold your earnings to settle an outstanding debt.
This debt is often child support, unpaid taxes or student loans, but garnished wages can also be used to pay outstanding medical bills or credit card balances. The process often involves creditors filing suit and getting a court order, but not always, as is the case when who you owe is the Internal Revenue Service (IRS).
Read on to learn more about wage garnishment and how it works.
Table of Contents
- How does wage garnishment work?
- IRS and wage garnishment
- Wage garnishment by creditors
- Types of wage garnishment
- Types of income subject to wage garnishment
- How much of your disposable income can be garnished
- What to do when you receive a wage garnishment notice
- Wage garnishment FAQs
How does wage garnishment work?
Wage garnishment is a debt collection process used by either the IRS or private creditors when they believe there’s no other way of getting what they’re owed.
This process is overseen by the U.S. Department of Labor, agency that ensures Title III of the Consumer Credit Protection Act (CCPA) is followed. Title III limits how much of an individual's disposable income can be garnished and prevents employers from firing employees that have a garnishment order against them to repay a debt.
Having your wages garnished not only affects your finances, it can also impact your credit score and make improving your credit all the harder.
IRS and wage garnishment
When you have an outstanding tax debt, the IRS can place a levy allowing them to legally seize your wages, bank accounts or personal property. While the IRS doesn’t need a court order to start garnishing your wages, it must, however, give you ample notice.
The first of these notices is a Notice of Tax Due or Demand for Payment. This letter will include the amount you owe, any interest and penalties being applied, as well as the deadline for you to pay the debt in full.
If they don’t receive a response from you, then they will send you a Final Notice of Intent to Levy or Notice of Your Right to a Hearing which will include information on how you can appeal. You will have a 30-day window between the final notice and the start of garnishment to appeal the decision. Once the 30 days are up, the IRS will initiate the levy.
Wage garnishment by creditors
Wage garnishment is a legal action creditors use as a last resort after failing to receive payment from a debtor. Unlike the process with the IRS, creditors must get a court order before they can garnish your wages.
For creditors, the first step in this process is to sue you for non-payment. If the court sides with your creditor, it issues an order mandating the garnishment and sends your employer or bank a notice of the judgment. Employers or banks are then required to garnish your wages until the debt has been repaid.
Once you’ve been notified, the start date will depend on your creditor or state, but it usually starts anywhere between five to 30 business days after the notice of judgment.
What is considered disposable income for wage garnishment
Disposable income is everything that’s left from your salary after all legally required deductions are made. These deductions include local, state and federal taxes, as well as an employee's share of Social Security, Medicare and state unemployment insurance. Withholdings for employee retirement systems also fall under deductions, therefore can’t be garnished.
Types of wage garnishment
There are two ways your wages can be garnished: directly from your paycheck or through a levy. When a creditor files and wins a suit against you, the court orders your employer to garnish your wages. The IRS, in turn, doesn't need to file a suit. It can use a levy to seize your wages or assets until your debt is paid.
Wage garnishment is when the IRS or a court orders your employer to take out a determined amount out of your paycheck.
Non-wage garnishment, also called a levy, is when the IRS or court seizes your bank account, financial account or personal property.
When you owe creditors, a levy allows them to withdraw the funds owed directly from your bank account. In these instances banks often freeze your account after it’s notified of the legal action against you and sends the funds owed to the creditor who initiated the legal action.
Types of income subject to wage garnishment
Earnings from any type of employment are subject to garnishment. The CCPA, the wage garnishment law that regulates and defines garnishment, considers earnings to be any compensation paid or payable for personal services. These earnings include:
- Pension or retirement payments
- Employment-based disability programs
- Lump-sum payments (referral bonuses, service awards, etc.)
There are some types of income, such as Social Security or unemployment insurance benefits, that are exempt from garnishment if the debt is due to consumer credit cards or loans. However, this income can also be garnished if you owe child support or the federal government.
While there’s a federal garnishment law, each state has passed its own laws to provide further protections or exemptions. These only take precedence over federal law when the state law is more restrictive. For example, North Carolina, Pennsylvania, South Carolina and Texas don’t allow wage garnishment for debts owed to creditors although federal law allows it.
In California, your wages can be garnished only up to the limits established by the federal government, but the state uses the local minimum wage to calculate the garnishment amount.
New York creditors can garnish up to 10% of your gross income or 25% of your weekly disposable income, whichever is less, as long as this doesn’t reduce your weekly disposable income to less than $450 a week.
How much of your disposable income can be garnished
The rule is that garnishment may not exceed 25% of an individual’s disposable income for a week or 30 times the Federal minimum hourly wage (currently $7.25 an hour), whichever is less.
However, these limitations do not apply to bankruptcy court orders or garnishment to pay for debts owed for federal, state or local taxes.
Your particular circumstance and amount owed will determine the maximum amount of income that will be garnished. The table below breaks down how much can be garnished based on the type of debt.
|Types of Debt||% of disposable income that can be garnished|
|Taxes (Federal or state)||There’s no established percent because the CCPA’s Title III limits do not apply to federal or state taxes. The IRS bases the amount garnished on an individual’s deductions and the number of dependents they have.|
|Consumer Debts (credit cards, personal loans, medical bills)||Up to 25% of an individual's disposable earnings or no more than 30 times the federal minimum wage, whichever is less.|
|Child support and alimony||Up to 50% of a worker’s disposable income if the person supports a spouse or child and up to 60% if the person doesn’t claim any dependents on their tax returns. If the payments are more than 12 weeks overdue, another 5% may be garnished.|
|Federal student loans||Up to 15% of disposable earnings.|
What to do when you receive a wage garnishment notice
Owing the government is not the same as owing a private creditor, so the process of responding to wage garnishment from either will differ.
How to dispute an IRS wage garnishment
When you receive a garnishment notice from the IRS you should contact the agency immediately. By law, you have a right to appeal a wage garnishment. However, know that you can appeal to dispute the debt itself, not the garnishment. If the debt is legitimate you’ll have to pay it.
If the debt is legitimate, you can avoid the garnishment altogether by paying it in full. If you don’t have the funds to do this, there are several things you can do:
1. Request a payment plan - The IRS does give the option of a payment plan so you can afford to pay down your tax debt without it causing financial hardship. The terms of this payment plan will depend on how much you owe.
You can choose a short-term payment plan (pay in 180 days or less) if you owe less than $100,000 in combined tax, penalties and interest. Your other option is a long-term plan you can pay in installments. To qualify for this second option you must owe $50,000 or less in combined tax, penalties and interest, and have filed all required tax returns.
2. Apply for an Offer in Compromise - If garnishment would cause you undue financial hardship, you can apply for an Offer in Compromise so you can settle the debt for less than what you owe. However, the IRS highly encourages you to explore all other paying options before you submit your application.
If you do apply, know that the IRS will evaluate your ability to pay, income, expenses and asset equity before it approves your offer. You can confirm if you’re eligible by using the IRS’s Offer in Compromise Pre-Qualifier Tool.
3. Request a financial hardship exemption - The IRS will temporarily delay the collection process if it determines you cannot pay any of your tax debt because doing so would make it difficult for you to meet basic living expenses. While this delay stops collection, your debt will increase as it wont stop penalties and interest from being added to your existing debt.
Leaving a job will also immediately stop the garnishment, however, it’s only a temporary pause. Once you start a new job the IRS will eventually inform your new employer to begin garnishing your wages.
You could also file for an emergency bankruptcy to stop the garnishment and possibly get back whatever has been garnished already. However, don’t jump the gun on this as once you file the initial petition you’ll have a limited amount of time to present the bankruptcy documents. Also, there’s no guarantee that your tax debt will be discharged as part of the bankruptcy.
We strongly suggest you consult a lawyer or tax relief specialist to learn more about the process and explore the best options for you.
How to dispute a wage garnishment order from a creditor
When you receive a garnishment judgment, we suggest you act quickly because the time between when the court issues the judgment and the garnishment begins can be a few short days. After you get the notice you should:
1. Check for errors - Read the judgment carefully to make sure all the information is correct. Check the name of the creditor and the amount owed to make sure it’s your account. If all the information is correct, look for instructions on how to object to the garnishment.
If the information is inaccurate, you can dispute the judgment. In this case, we also suggest you review your credit score and dispute any collection information that is incorrect. Learn to remove debt collections from your credit report by reading our guide.
2. Work out a deal with creditors - Contact the creditor. Ultimately, what the creditor wants is to get paid, so reaching out and discussing your options with them directly may go a long way. You can negotiate a different deal or payment plan that can work for both of you. (Consulting a lawyer may also help you work out a deal.)
3. Accept and pay - If the creditor no longer wishes to negotiate or you don’t want to file for bankruptcy, then there’s nothing for you to do. In this case, you can opt for temporary solutions such as taking out a personal loan or borrowing from relatives.
Declaring bankruptcy does prevent creditors (including the IRS) from garnishing your wages. However, we don’t advise this as declaring bankruptcy will damage your credit for many years and will make it extremely difficult to buy a car, house or access any credit line for the duration of the bankruptcy.
Wage garnishment FAQs
Can the IRS garnish my wages?
When does wage garnishment start?
Wage garnishment begins between five and 30 days after the court issues the order and sends out the notice to you and your employer or bank. One exception is in Mississippi, where the law states that creditors cannot garnish wages for the first 30 days after the court order is served.
When an individual owes a non-tax debt to a federal agency, garnishment of wages begins the first pay period after receiving the order.
How long does wage garnishment last?
What happens after a wage garnishment is paid?
How does wage garnishment affect your credit?
The garnishment itself won't affect your credit. This is because courts don't send garnishment notices to the credit reporting agencies. What will be on your report is that you defaulted on the loan in the first place. Creditors can add a note to your account saying it's receiving payments as a result of a garnishment judgment.
Any negative information on your credit report — whether it's late or missed payments, accounts sent to collection agencies, outstanding loans or credit card accounts or bankruptcies — remains on your credit report for seven years.