Limits on Garnishment

If you are currently being garnished, the first you need to know is whether there is a limit on that garnishment.  Is the creditor taking too much?  Do they even have a right to garnish you at all?  What options do you have if you’ve been hit by a garnishment?

Garnishment Defined

A “garnishment” occurs when one of your creditors sues you, wins, and then gets the court to take part of your wages to satisfy the debt.  Unless you file bankruptcy or convince the judge why a lesser amount should be allowed, the creditor may be able to take up to 25% of your disposable income or the amount of the disposable earnings that exceed 30 times the federal minimum hourly wage – whichever is less.

Who can garnish my wages?

Virtually any type of creditor possesses the ability to garnish your wages.  Banks or credit unions, credit card companies, and, most commonly in Southern Indiana, medical bill collectors all enjoy access to the same legal framework that allows them to garnish your wages.  Shockingly, the Consumer Financial Protection Bureau released a report in 2014 showing that 43 million Americans have unpaid medical bills on their credit reports.

In the event child support or alimony is owed, the creditor can be a legal guardian or ex-spouse.  Moreover, a child support or alimony creditor may garnish up 65% of your wages for payment of past due child support or alimony.

What constitutes wages?

“Wages” initially meant money that you received from your pay check.  That term has evolved to apply to whole range of types of income.  “Wages” is currently defined by the Indiana Legislature as “wages, commissions, income, rents, or profits remaining after the deduction from those earnings of amounts required by law to be withheld”.

Federal and state courts have further expanded and limited the applicability of this wage garnishment statute.

Example of expansion of state wage garnishment statute

When the statute was first enacted into Indiana state law, creditors disputed that it applied in bankruptcy proceedings.  Hypothetically, debtors enjoyed more protection of their wages outside of bankruptcy than inside of bankruptcy.  Bankruptcy judges found this to inconsistent with the “spirit” of the state wage garnishment exemption so debtors can now exempt their wages within bankruptcy, too.

Many courts have also ruled that your creditor cannot use contempt against you as a way to force you to repeatedly attend hearings related to the garnishment.  The courts have held that this practice basically amounts to putting someone in jail because they owe money to a private creditor.

Example of limits of state wage garnishment statute

Multiple courts have found that the wage garnishment statute applies only in civil proceedings.  This means that if you are prosecuted criminally and ordered to pay criminal restitution to your victim or the state, the 25% cap on wage garnishment does not apply to you and you can be forced to pay more.  Bankruptcy can, however, reorganize that debt to allow you pay it off in a more manageable way.

Sole proprietorships also need to exercise caution where garnishments are concerned.  Courts have come out and said that if you are a sole proprietorship and you alone decide when and how much to pay yourself, then you don’t get that protection.  The court’s opinion did speculate, though, that if you could show a history of paying yourself on a schedule based on some predetermined formula that you would likely get to use the wage exemption statute.  The bottom line is that it needs to be a set periodic payment.

In that same vein, courts have also found that 1099 income paid out to subcontractors may qualify as wages.

Those in the education/teaching profession have also run into some (more) bad luck.  A recent ruling found that the escrow account set aside for some teachers who elect to be 12-month employees so they can get paid in the summer does not constitute “wages” and can be completely taken.

Bonuses and severance packages also fall into this category.  This is, again, because the court looks to determine whether the income is received “periodically”.  If not, then no exemption.

How to stop a garnishment?

The first and most obvious option is to just pay off the debt.  However, if that were really an option, you wouldn’t be reading this article to begin with.  The second option, which I don’t really consider an option at all, is to do nothing.  Sure, eventually you may pay off the debt and that one creditor won’t be garnishing you any more; but you won’t be able to pay your car note, or your rent or mortgage and then those fall behind and you’re in real trouble.  Also, how many other creditors will be waiting in the wings to swoop in with the next garnishment?  The last, least expensive and most effective option is bankruptcy.  Chapter 7 Bankruptcy or Chapter 13 Bankruptcy each have the power to stop garnishment and get you a fresh start.