Can debt consolidation help you to stop wage garnishment?

Wage garnishment is a legal process conducted by creditors to collect unpaid debts. Practically, a garnishment is applied to unpaid accounts that are at least six months old. Creditors usually prefer this legal process if the debtor fails to initiate a repayment agreement.


Wage garnishment will require a court order or judgment to be initiated, except in some cases where federal debt is involved. After getting a judgment from the court, your employer might get an order to cut off a specific amount from your paycheck and give it to your creditor to satisfy the debt.


In 2013, a popular human resource management company named “ADP” analyzed the payroll data of US employees and found some amazing facts. The report revealed that 7.2% of the employees had their wages garnished that year. It is also revealed that 40% of these garnishment cases include child support and 20% of cases are for federal unpaid taxes.


Federal law has strict rules on how much creditors can take away from your paycheck as garnishment.


The wage garnishment amount is limited to 25% of one’s disposable income (after deductions) or a certain amount by which your weekly wages exceed 30 times the federal hourly minimum wage, whichever is lower.


Some states have a lower wage garnishment amount limit than the limit provided by federal law.


Money sources that can be considered income apart from your regular paycheck:


  •  Social Security benefits
  • Spousal or child support
  • Supplemental Security Income (SSI)
  • Welfare or public assistance
  • Veterans benefits and/or loans
  • Public or private pensions
  • Cash surrender value life insurance policies
  • Disability proceeds from life insurance policies


Types of wage garnishments


Practically, your wages may be garnished to serve two main categories:


1. To pay judgments on unpaid debts.


2. Paying for administrative orders. Typically it’s for paying specific debts such as student loans, spousal or child support, or back taxes.


a. Wage garnishments to pay off judgments A creditor might garnish your wages if you lose a lawsuit and a money judgment is entered against your unpaid debts.


First, the creditor should file a lawsuit against you with the court along with proper documents. Later, the court may order your employer to hold a part of your paycheck and give it to the creditor to pay off your debt.


Your employer should notify you about the garnishment when he starts withholding a part of your wages. After providing the garnished money to your creditor, the employer should also inform you about how you can protest the garnishment.


b. Wage garnishments to pay off administrative liabilities in some special cases, a creditor might garnish your wages without obtaining a judgment. This is typically known as administrative wage garnishment. Through an administrative wage garnishment, the creditor may collect debts such as spousal and child support, student loans, and back taxes.


The court may garnish your wages up to 50% of your disposable income for paying child support. But that may only happen when you are already providing financial support to a child or spouse.


Up to 60% of the disposable income may be taken from you if you aren’t supporting anyone else. If you are in arrears for more than 12 weeks, an additional 5% may also be taken from you.


As per the Debt Collection Improvement Act of 1996, the U.S. Department of Education may garnish your wages by up to 10% from your paycheck if you do not pay off your federal student loan debt on time. There’s no lawsuit or court order required to garnish your wages in this case, as it’s a federal debt. Whenever you are in default, you’ll face wage garnishment.


If you owe money to the IRS, they will straightaway garnish your wages and cut off a chunk from your disposable income. It doesn’t require a court order to initiate the process. In this case, the IRS will send you a Notice of Demand for Payment, and a final notice after that. This notice will give you 30 days to make repayments. If you do not make the payments within those 30 days, then the IRS may contact your employer to begin the garnishment.


State and local tax agencies may also have the authority to cut off your wages. However, in many states, federal law limits the amount.


In 4 U.S. states, Texas, Pennsylvania, North Carolina, and South Carolina, federal laws don’t allow creditors to garnish wages at all.


But there are exceptions. Wage garnishment allows for child support, federal student loans, tax-related debts, and court-ordered fines or restitution.


How to prevent wage garnishment

You can prevent wage garnishment if you can take control of your finances properly. Here are the best ways to do so:

  • a. Negotiate your payment terms negotiated payment terms with your creditor. Also, make sure that the creditor gets their first payment within 30 days after the garnishment notice has been sent.
  • b. Create a budget if you want to stay out of financial trouble, you must create a decent budget and stick to it. You must consider all income sources and all expenses each month. This way, you will be able to manage your monthly expenses such as mortgage payments, utility bills, credit card debt payments, medical bills, and many more.
  • c. Initiate automatic payments, you may set up automatic payments each month to make monthly debt payments. This is the best way to pay off your bills every month without fail. On-time payments will help lower your debt burden and give you a chance to maintain your budget properly.
  • d. Build an emergency fund Save money from your paycheck and from other income sources to create an emergency fund. Don’t depend on your credit cards; it’ll make you fall into a debt trap. Try to generate an emergency fund that is equal to your 3 – 6 month paycheck.

Would consolidating debts help you to stop wage garnishment?

You can opt for debt consolidation options if you want to stop wage garnishment or want to avoid it.


While using the debt consolidation option, you can take out a new loan and use the amount to pay off your existing debts, such as credit card debts, medical bills, utility bills, payday loans debts, etc. After paying off your credit card debts in full, you can close some of your accounts. You can even pay off the debt which is going through wage garnishment. By taking out a debt consolidation loan, you can reset the old debts with a new lower interest rate loan.


Before finalizing the debt consolidation loan, you must ask your creditor to provide you with a written confirmation on the exact amount that will cover up the judgment issued.


Once you’ve paid the amount, the creditor should contact the court to inform you that the judgment is satisfied. The creditor must also inform your employer of the same and request him to cease the wage garnishment. You should get a copy of the confirmation from the creditor and send it to your employer and the court.


It may take several weeks to get approved for a debt consolidation loan. It’ll take more time to repay your debts with the creditors and inform the court. So, during that time your wage garnishment won’t be stopped.


You may, of course, claim any wages that were garnished after you paid off the creditor.


A debt consolidation loan cannot be used to transfer or pay off certain types of debts like child support, back taxes, and federal student loans.


However, you can use a debt consolidation loan to pay off your creditor and stop wage garnishment. The debt consolidation process itself can’t stop court-ordered wage garnishment at all.


You can take out loans from different money sources which can be considered as income.