When debt collectors are calling every day, demanding that you repay your bills, it’s tempting to just ignore them. Don’t pick up the phone and maybe you won’t have to deal with it. Unfortunately, debt collectors have ways to collect whether you allow it or not.
Wage garnishment is the act of a creditor taking debts owed right out of your paycheck.
The Default Process
When you take out a loan or get a credit card, you sign a contract agreeing to make specified payments for a certain amount of time. That contract will have provisions for your rights and the rights of your lender. It will also describe what happens when you miss a payment or make only a partial payment. For example, the contract for a Bank of America Visa credit card states that you default on the contract by failing to make one minimum payment. For an auto loan, you generally default by missing one payment. When you “default,” you break the contract. You still owe your balance (and probably a fair amount of interest) and your lender has the right to collect it.
If you default on a loan, the lender will probably try to collect from you by itself. Agents will call you asking for payment and may offer to work out a payment plan with you. If they don’t succeed, your lender will generally assign your account to a debt collection agency.
Debt collectors are paid based on what they collect, so they’re motivated to get you to pay. The Fair Debt Collection Practices Act (FDCPA) limits the tactics they can use to get you to pay, but you should still expect regular phone calls and letters. The FDCPA prohibits debt collectors from making any threats they legally can’t carry out (such as causing you physical harm) but also prohibits them from making any threats they don’t intend to carry out. That means that if a debt collector tells you she’s going to sue you for collection, she means it.
It’s a lot easier and cheaper for debt collectors if you simply pay your debt, so they’ll try to convince you to do that first. If you don’t, however, they will sue you for collection. You’ll get a notice from the court, called a “summons,” that you’ve been sued. You have 35 days from the day the court sends you the summons to send an answer. You have to pay a $15 filing fee with your answer. In your answer, you’ll explain why you either don’t owe the money, why you owe a different amount, or why you shouldn’t have to pay. When you send in your answer, you’ll receive a court date. The judge will read your answer and you’ll have a chance to answer any questions and defend your actions. Then the judge will determine how much you owe, if anything. If you don’t file an answer and show up, the court will enter judgment against you by default. R. 1:13-7. Then you’re out of luck – you won’t be able to fight the debt anymore.
Collection of Judgment Debt: Wage Garnishment
When a debt collector gets a judgment against you (whether by default or not), the debt collector becomes a judgment creditor. A judgment creditor may apply to the court for a Writ of Execution against your wages. As long as you earn more than $48 weekly, a creditor may garnish your wages as payment for the debt. N.J.S.A. 2A:17-50. The judgment creditor will get the Writ and send it to your employer. Your employer must legally follow the Writ and withhold part of your paycheck to send to your judgment creditor. If you don’t have a steady employer (if you’re a freelancer, for example), the judgment creditor can get court orders for liens on your property, for the right to levy your bank accounts, or for the right to seize and sell your property.
Wage Garnishment Limits
Fortunately for debtors, the law protects some of your wages from debt collectors. Under federal law, they can only garnish 25% of your disposable earnings or the amount by which your weekly earnings exceed $217 (30 times the federal minimum wage), whichever is less. Your “disposable earnings” are your wages after taxes and payments to Social Security. 15 U.S.C.A. § 1573. New Jersey state law provides even greater protection than federal law, limiting the maximum garnishment to 10% of disposable earnings as long as the individual earns less than 250% of the federal poverty level.
If the debtor will earn more than 250% of the federal poverty level after the garnishment, creditors may garnish the full 25% of the debtor’s earnings. N.J.S.A. sA:17-56. Say you’re married and have two children. After taxes, you take home $600 weekly. For a family of four, the federal poverty level is $23,550 per year. Two hundred fifty percent of the federal poverty level is about $59,000, or about $1150 weekly. Because you make less than 250% of the federal poverty level, New Jersey state law limits the amount creditors can garnish from your wages to 10%, or $60, per week. If you’re a family of four and you earn $2000 a week after taxes, creditors can garnish a full $500 because you’ll still earn $1500 after the garnishment, which is more than 250% of the federal poverty level.
If the debt that led to wage garnishment is for child or spousal support or for unpaid taxes, these limits don’t apply. If you’re supporting a child or spouse at home, the court may garnish up to 50% of your disposable earnings to support another child or spouse. If you’re not supporting anyone else at home, the court may garnish up to 60% of your wages for child or spousal support. If you’re more than 12 weeks behind on your spousal or child support payments when the garnishment order goes into effect, those figures jump to 55% or 65%. 15 U.S.C.A. § 1673. Garnishment for unpaid taxes is determined by a complex formula involving your income and the number of dependents you claim, but is not restricted by any of the above limits.
Your income for the purposes of wage garnishment doesn’t include any government payouts. In other words, any social security payments, disability benefits, or state-administered benefits don’t count toward your income. They’re safe from garnishment.
Priority of Garnishment
Sometimes, more than one collector sues and gets an order for wage garnishment. Only one creditor may garnish wages at a time, so all of your garnished wages will go to the first creditor to receive the garnishment order until that debt is paid. Then the next creditor will start garnishing your wages. If the garnishment order is for child or spousal support, that takes precedence over any others, no matter when the court granted the Writ of Execution.
Wage Garnishment Affects Your Credit Score
Your payment history determines about one-third of your credit score, making it the most important factor. Wage garnishment is a method of payment, so it will show up in the payment history section of your credit report. That’s going to have a serious impact on your score, making it very difficult for you to get loans or approval for a cell phone plan or apartment rental, all of which require a credit check. Wage garnishment will stay on your credit report for 7 years after the end of the garnishment, although you can start to rebuild your credit as soon as the garnishment stops. Wage garnishment may lower your credit score as much as bankruptcy would, especially if you have serial garnishments.
You Have Options
First, try to avoid having your debt go to collections in the first place. Your lender doesn’t want to go through the hassle and expense of a lawsuit any more than you do. If you know you’re going to miss a payment, contact your lender. Explain that you’re going to come up short this month and why. Chances are good that your lender will be willing to work with you on a payment plan. If that doesn’t work, try to work out a settlement with the collections agency. Finally, if you do have to go to court, follow all the necessary procedures, pay your fees, and file all the necessary paperwork. That’s your last chance to dispute the debt.
Filing for Bankruptcy
Sometimes, none of those tactics help you with the debt. If your creditors are garnishing your wages, you have another option: bankruptcy. Many consider filing for bankruptcy a last resort, but it can help protect you from creditors. When you file for bankruptcy, you invoke the protection of the automatic stay. When the automatic stay is in effect, creditors have to stop all collection actions. They can’t sue you, they can’t seize your property, and they have to stop garnishing your wages. The automatic stay lasts as long as you’re in the bankruptcy process. At the end of bankruptcy, the court will discharge your unsecured debts. You won’t owe anything to your unsecured creditors and you’ll be able to start again debt free. Bankruptcy will negatively affect your credit score, but so will wage garnishment. If you’re struggling with debt, speak to an experienced attorney about your options.