When you owe money to a lender and stop paying, the lender has the legal right to file a lawsuit to get their money back. The court may agree to the amount and garnish your wages. You will lose money with each paycheck until you pay off the amount due. Looking at how wage garnishment works and what you can do can help you decide your next step.
Reasons for Wage Garnishment
Secured loans refer to money that you borrow against something. If you take out a mortgage and stop making your monthly payments, the bank can foreclose on the property and sell the home to recoup their losses. Unsecured debt refers to loans that you get without any collateral. This is the most common type of debt that leads to garnishment. The lender must first make reasonable attempts to get its money back. If those efforts fail, the lender can go to court. You only receive a wage garnishment order if the court sides with the lender and issues an official order. Courts can issue a garnishment order if you owe on your student loans or back child support.
How it Works
Once the lender receives a garnishment order, it will find your current employer and send the order to them. Your employer is legally responsible for deducting a certain amount from your paycheck and sending it to the lender. Depending on how much you own, you might find that they take a small amount of your wages or a major portion. According to Louis DeNicola, lenders usually cannot take more than 25% of your disposable pay, which is the amount that you bring home after taxes. Child support enforcement agencies can take up to 60% of your paycheck. This amount drops to 50% if you have a new spouse or multiple children.
Can Lenders Take Everything?
One thing to keep in mind is that lenders cannot take everything that you make or go after any income source. If you receive money from Social Security through your retirement or a disability claim, lenders cannot touch it. They cannot take money from any other government benefits that you receive, including food stamps or veteran’s benefits. One exception is if you owe back child support. An official order gives the lender the right to take a percentage of your weekly benefits as well as money that you get back in the form of a refund the following year.
Working with the Lender
Talking to the lender is one thing that you can do if you receive a garnishment order. Write a letter that explains how the garnishment presents hardship and how it will affect your life. You can offer to make smaller monthly payments or make a lump sum payment for less than the total amount that you owe. A lump-sum payment is one that the lender accepts if they think that they will not get the total amount back. You need to show that you cannot afford to make the monthly payments.
You may receive a wage garnishment order when you owe back taxes to the IRS. Contacting the IRS directly is the best thing to do because it lets you set up a payment plan. The amount that you pay each month will depend on how much you owe, but the IRS will accept any amount as long as you can pay the total due within the next six years. Payment plans are typically only available for those who owe $50,000 or less. Instead of issuing a garnishment of wages order, the IRS can deduct the money from your bank account every month or agree to let you make payments online. If you default on your payment plan, you need to pay a small amount to set up a new one. Most lenders will work out payment plans with you if they think you will make an honest effort to pay off the money. Payment plans save them money when compared to court costs.
Any type of unsecured debt can lead to a court case where the judge determines that you need to pay off the money you borrowed through wage garnishment. Take the right steps to avoid losing money and potentially having lenders go after your bank account.