Anyone can be subject to an earnings withholding order depending on the circumstances. Learn when a creditor can garnish your income, and how federal and state laws limit how much money can be taken out of your paycheck.
Definition and Example of an Earnings Withholding Order
An earnings withholding order is a court order that forces your employer to deduct a certain amount of money from your paycheck to pay a creditor. It is used to collect debts such as defaulted student loans, unpaid credit card debts, delinquent bills, and more. Most creditors must win this kind of court judgment before your wages can be deducted to pay a debt. Both federal and state laws limit the amount that can be withheld from each paycheck. Withholding limits depend on your income, where you live, and the type of debt. Wage garnishment can negatively impact your credit. The garnishment itself may not be reported to a credit bureau. However, the account that is collecting payment this way may appear on your credit report, along with a note that it is being repaid via wage garnishment. This may limit your ability to obtain a loan or open a bank account.
Alternate name: Wage garnishment
For example, if you stopped paying a credit card debt, the credit processor could sue you in civil court. If they win, the creditor can file for an earnings withholding order to garnish wages from your paycheck to meet your court-issued financial obligation to them. Your employer will be required to deduct a portion of your disposable income until the debt is repaid.
How an Earnings Withholding Order Works
When a creditor can’t recover a debt from you, they can sue you for non-payment to try and recover the debt owed. If the creditor wins and the court confirms the debt, the creditor can issue an earnings withholding order to your employer. The order will contain instructions and details such as how much to withhold and where to send payment. An earnings withholding order is mandatory. If your employer does not comply, they could be held personally liable or in contempt of court. The court proceedings may differ slightly, depending on what state you live in. However, if a creditor sues you, you will be “served,” or notified by the court. You will have a limited time frame to object to the garnishment or submit an exemption form. You must respond to the lawsuit in some way. Refusing to accept service or delivery of the notification will not make the lawsuit go away. If you fail to appear in court, the lawsuit is likely to go against you. Once a judgment and subsequent earnings withholding order is entered against you, it is very difficult to reverse. Creditors such as the IRS or federal government do not need to sue for an earnings withholding order for debts like unpaid income taxes or other federal debts. Delinquent payments for things such as child support also don’t require the government to sue you for an earnings withholding order. If your wages are being garnished for multiple reasons, your employer must withhold child support payments from your paycheck before all other debts except a federal tax payment if that payment was in place before the child support order. In most cases, government assistance income such as Social Security, disability, and retirement benefits can’t be garnished to pay consumer debts. They can be withheld to pay debts such as back taxes, student loans, child support, alimony, or restitution. To prove that your income is exempt, you will likely need to file paperwork with your state. Your rights as a consumer, as well as these exemptions, can vary by state.You may need to talk to a legal advisor to understand all your options. Federal and state laws regulate withholding limits from an employee’s disposable income. Title III of the Consumer Credit Protection Act (CCPA), which establishes federal wage garnishment law, limits the amount of income that can be withheld from an employee regardless of the amount of earnings withholding orders an employee may have against them. For most debt types, the maximum amount allowed to be withheld weekly is whichever is lower of:
25% of the employee’s weekly disposable earningsThe amount by which disposable earnings are greater than 30 times the federal minimum wage ($7.25)
Therefore, if an employee makes $7.25 an hour and their weekly earnings are $217.50 or less ($7.25 x 30 = $217.50), their wages can’t be garnished. However, anything over $217.50 but under $290 ($7.25 x 40 = $290) may be garnished. Any income over $290 can be withheld as long as it doesn’t exceed the 25% maximum. If the pay period is biweekly or longer, then multiples of the maximum amount are applied. For example, biweekly disposable pay of $435 ($217.50 x 2) or less can’t be withheld. Continuing with the example from the last section, suppose you lost a civil court case for back-owed credit card debt and had an earnings withholding order sent to your employer to garnish your wages. Your weekly disposable income is $500. By federal law, no more than 25%, or $125 ($500 x .25 = $125), of your income can be held weekly until the debt is repaid. For alimony or child support, Title III allows up to 60% of disposable income to be withheld. If the employee supports another child or spouse, the maximum is 50%. The order may allow for an extra 5% if payments are more than 12 weeks behind. Some bankruptcy orders or debts owed for taxes are exceptions to state and federal withholding limits. If state law differs from Title III, then the law with the lower withholding limits applies.
Earnings Withholding Order vs. Income Withholding Order
These two terms both refer to wage garnishment and are often used interchangeably. There are, though, a few key differences.
