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Can a loan company garnish your wages

can a loan company garnish your wages

The short answer is that many different financial institutions or loan companies can garnish your wages if you fail to pay them back. The details of garnishment will depend on the specific loan, lender, and the state where you live. 

If you have a loan that you are struggling to pay back, you may be wondering “can a loan company garnish your wages?” Some financial institutions that may garnish wages are credit card companies, personal loan lenders, payday lenders, and more! 

Other types of debts, such as federal debts, are under the jurisdiction of the Debt Collection Improvement Act. The Debt Collection Improvement Act was established in 1996 with the purpose of tasking the U.S. Treasury with certain responsibilities regarding governmentwide debt collection.1 Some of those responsibilities include: 

  • Ensuring debtors have the ability to verify, challenge, and/or compromise debt collection claims. 
  • Ensuring the general public is aware of current debt collection policies of the Federal Government. 
  • Ensuring that the general public is aware of what their obligations are when it comes to paying back federal debt. 

Here, you will learn more about the wage garnishment process and how you may be able to prevent it. You will also find more information on what to do if you do find yourself in a situation where your wages are being garnished and how you can achieve the debt relief you deserve. 

How Does Garnishing Wages Work?

This table provides a quick reference for the maximum amounts that can be garnished from wages for different types of debt, both with and without a court order. It’s important to note that these are federal limits and individual state laws may provide additional protections.

Type of DebtMaximum Garnishment Without Court OrderMaximum Garnishment With Court Order
Federal TaxesNo set limit, depends on tax bracket and number of dependents. No set limit, depends on tax bracket and number of dependents.
Child SupportUp to 50% if supporting another spouse or child, or up to 60% if not.Up to 60% if supporting another spouse or child, or up to 65% if not. 
Student LoansUp to 15% of disposable income. N/A
Other Debts (credit cards, personal loans, etc.)N/ALesser of 25% of disposable income or the amount by which income exceeds 30 times the federal minimum wage. 

What Is a Wage Garnishment Order?

Wage garnishments are when a lender or financial institution takes money directly from a delinquent borrower’s bank account. The purpose of wage garnishment is for lenders or financial institutions to retrieve money owed to them. 

Usually, if a lender has the right to garnish wages from an employee’s earnings, it will say so in their loan agreement. Before committing to a loan, borrowers have the opportunity to read and review their loan agreements. This means that borrowers can tell if a lender can garnish their wages before they even sign onto their loan. 

If you are uncomfortable with the possibility of a wage garnishment, talk to your lender before you sign your loan agreement. They may be able to adjust your terms or give you some helpful tips on how you can avoid wage garnishment. 

While wage garnishment is possible in most places throughout the United States, state laws prohibit wage garnishment in the following states: 

  • North Carolina. 
  • Pennsylvania. 
  • South Carolina. 
  • Texas. 

When Can a Loan Company Garnish Your Federal Minimum Wages?

Sometimes, federal law limits the ability of financial institutions to garnish wages. However, a loan company may have the legal right to garnish wages if the borrower fails to repay their loan, even if they make federal minimum wage. Some unpaid consumer debt that may result in wage garnishment are: 

  • Federal student loans. 
  • Credit card debt from credit card companies.  
  • Medical bills or outstanding medical debt. 
  • Unpaid child support and alimony. 
  • Car loan. 
  • Fast payday loans

Unfortunately, wage garnishment is not all that uncommon. For example, there has been a 40% increase in wage garnishments for federal student loans since 2006. 

What Is the Difference Between Wage Garnishment and a Debt Collector? 

Instead of a wage garnishment, lenders may opt to instead send unpaid consumer debt to a debt collector. Debt collectors are a type of organization that contacts delinquent borrowers and attempts to collect unpaid debts they owe. If lenders cannot garnish wages and attempts at working with a debt collector are unsuccessful, it may be time to consider filing for bankruptcy. Keep in mind that filing for bankruptcy may not protect you from wage garnishment if a court order already is in place. 

Filing for bankruptcy means that a consumer has formally acknowledged to lenders and financial institutions that they officially no longer have the monetary means to repay their debts or take care of their existing financial obligations. 

When a consumer declares bankruptcy, their debts are often settled, and the consumer gets a fresh financial slate. However, claiming bankruptcy can significantly impact your credit score and other financial endeavors, so make sure you only declare bankruptcy as an absolute last resort. 

Can Wage Garnishment Affect My Credit Score?

Having your wages garnished may not directly affect credit scores, but it can easily lead to other circumstances that can undoubtedly impact your score. Having bad credit can really hold people back in the financial world. For example with loans, many lenders base loan details like funding amounts, interest rates, and payback terms on their applicants’ credit reports.   

When wages are garnished, this may leave you at risk of missing other due bills or payments. If you have automatic payments set up, wage garnishment may cause those payments not to go through or put your bank account in the negative. Being current and making your due bills and payments on time is crucial to maintaining a good credit score. So, if wage garnishment causes you to falter in your payment history, you may see a significant decline in your credit score on your following credit report. 

Your debt-to-income ratio and credit utilization ratio are other credit determining factors that may waver because of wage garnishment. A debt-to-income ratio is the amount of money a person owes in various consumer debts compared to how much money they bring in on a regular basis. A credit utilization ratio refers to the amount of available credit a person has compared to how much they are currently using. For example, say you have a credit card with a $2,000 spending limit, and you currently have a $1,000 balance to pay back. In this circumstance, your credit utilization ratio would be 50%. 

If your wages are being garnished, this most likely means you have accumulated more debt than you can handle.

For your reference, the main factors that determine a consumer’s credit score are: 

  • Payment history.
  • Credit mix. 
  • Length of credit history. 
  • Various debts owed.
  • Amount of hard credit inquiries. 

What Should I Do if a Loan Company Garnishes My Wages? 

If you find yourself in a situation where a loan company is garnishing your wages, there are a few things you can do. Do you believe you are having your wages garnished unfairly? If so, it may be in your best interest to seek out legal assistance. You may find out that there are wage garnishment exemptions you can take advantage of. 

If not, and your wages are garnished legally, it is time to devise a debt management plan. Organizing your finances and creating a budget is essential to a successful debt repayment plan.

Can Payday Lender Garnish Wages for Unpaid Payday Loan Debt?

Yes, unfortunately, payday lenders may have the right to wage garnishment. The right to wage garnishment should be clearly laid out in the loan agreement for payday loans or quick cash loans. Just like other loans, unpaid payday debt can lead to wage garnishment. 

Payday loans are one of the most common types of unsecured debts that may lead to wage garnishment. This is due to the inconvenient terms and extremely high-interest rates that almost always come with payday loans. These loans don’t necessarily set up borrowers for financial success, leaving them at risk of defaulting on their loans and potentially garnishing their wages.

If you have not yet committed to a payday loan, you may want to find another way to get the money you need. For example, personal installment loans are usually a much more convenient option than payday loans. 

How To Avoid Wage Garnishment 

To keep your credit score and general financial situation in tip-top shape, you want to avoid wage garnishment. Below are a few tips you can utilize to stop lenders from being able to garnish your wages. 

Pay Your Due Balance ASAP

To stop a lender or debt collector from garnishing your wages, it is important to become current on your debt payments as soon as possible. You can talk to your lender or credit counselor to come up with a debt payment plan that works for both of you. The sooner you pay back your lender, the sooner they can stop garnishing your wages! 

Get a Debt Consolidation Loan 

If you do not have the means to pay back your lender and stop them from garnishing your wages, getting a debt consolidation loan may be a good idea. A consolidation loan may help you pay off your other debts in one lump sum, so you only have to worry about one monthly payment instead of multiple. 

One of the most versatile consolidation loan types is a personal installment loan. These types of personal loans can come with competitive rates and convenient terms. You may get a debt consolidation installment loan from a private lender, bank, or credit union. 

Earn Some Extra Money 

Perhaps you don’t want to take out another loan in order to stop the garnishment of your wages. In that case, there are other ways you can acquire the quick cash you need. Some ways you may be able to get extra money to pay your debts are: 

  • Getting a temporary job or side hustle. 
  • Dipping into your savings account or emergency fund. 
  • Having a garage sale or selling unwanted items online. 
  • Ask a trusted friend or family member to loan you the money. 
  • Investing in real estate or acquiring another type of passive income. 
  • Starting a side business from the comfort of your own home. 

Debt garnishment is a serious issue that must be dealt with immediately. The sooner you take care of wage garnishments, the quicker you can get your finances back on track! 

Wage Garnishment FAQs

Can a debt collector garnish my wages without a court order?

Typically, a debt collector cannot garnish your wages without first obtaining a court order. The court order is a legal permission that allows the debt collector to start the wage garnishment process. However, there are some exceptions, such as unpaid income taxes, court-ordered child support, and student loans in default.

What are the federal law limits on wage garnishment?

Federal law limits the amount that can be garnished from your disposable income. Generally, the maximum amount that can be garnished is either 25% of your disposable income or the amount by which your income exceeds 30 times the federal minimum wage, whichever is less.

Can my wages be garnished for unpaid taxes?

Yes, the IRS can garnish your wages for unpaid taxes without needing to first obtain a court order. The amount that the IRS can take depends on your deduction rate and the number of dependents you have.

How does wage garnishment affect my income?

Wage garnishment can significantly reduce your disposable income. Disposable income is the amount of earnings left after legally required deductions (e.g., taxes) are made. Garnishments come out of this amount, which can make it harder to pay your other bills or save money.

Can my wages be garnished for child support?

Yes, if you owe child support and have not been making the required payments, your wages can be garnished. In fact, this is one of the most common reasons for wage garnishment. The garnishment rate for child support can be up to 50% of your disposable income if you are supporting another spouse or child, or up to 60% if you are not.

Can my wages be garnished if I’m making the federal minimum wage?

Yes, your wages can be garnished even if you’re making the federal minimum wage. However, federal laws protect a certain amount of your income. The maximum amount that can be garnished is either 25% of your disposable income or the amount by which your income exceeds 30 times the federal minimum wage, whichever is less.2

What is a wage garnishment order and how can I stop it?

A wage garnishment order is a legal document that allows a creditor to take money directly from your paycheck to repay a debt. To stop a wage garnishment order, you can pay off the debt, negotiate with the creditor, or file an objection in court if you believe the garnishment is unjust. In some cases, filing for bankruptcy can also stop wage garnishment, but this should be considered as a last resort due to its long-term impact on your credit.

A Note From CreditNinja

CreditNinja knows that having your wages garnished is the last thing anybody wants to go through. If you are worried about whether a loan company will garnish your wages, your best plan of action would be to pay off the existing debt as soon as possible. Other possible solutions include: 

  • Debt negotiation. 
  • Filing an objection if you feel your wages are being garnished illegally. 

To avoid wage garnishment it may be a good idea to stay away from traditionally predatory credit options, such as a payday loan. Instead, it may be wiser to seek more affordable funding solutions such as using your own savings, asking a friend or family member for a small loan, or even getting an additional job for a short period of time. 

But, if you decide getting a loan is the best solution, you may want to consider potentially more sustainable options such as a personal installment loan from your friends at CreditNinja! 

References: 

  1. DCIA – Debt Collection Improvement Act (1996)
  2. Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA) | U.S. Department of Labor
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