Can all your income or wages be garnished by a creditor? Or if not, what garnishment exemptions can you rely on to preserve your income?
It’s important to draw a distinction between the federal wage garnishment exemptions and state exemptions—many states go further than the federal government does, and protect more of the debtor’s income.
Under federal law, up to 25% of your disposable income can be garnished. That means, one-quarter (1/4) of disposal income can be diverted to creditors—with the proper court order—to satisfy your debts: that’s what garnishment is.
What is disposable income? Disposable income is income left over after paying for the necessities of life: housing, utilities, food, transportation, etc. Obviously, there is no hard-and-fast number what this is, so “disposable income” is itself something that may end up being litigated in court, as the debtor tries to prove its less, while the creditor tries to show it’s more.
There’s an alternative test, for lower-income debtors. Under that test, the amount that can be garnished is the amount by which weekly earnings exceed thirty (30) times the federal minimum wage, which is currently (as of September 2010) $7.25 per hour. That means that no matter what, a debtor gets to keep at least $217.50 per week.
The 25% limit on garnishment applies to all garnishment orders—it’s not per garnishment. That means if creditor A is already garnishing 20% of disposable income, creditor B can only garnish another 5%. (Since 20% + 5% = 25%.) It may be possible, for someone with multiple creditors seeking garnishments to use earlier, already-in-effect garnishments as a “defense” to later ones.
However, in the event of alimony, child support, and tax debts, more than 25% can be garnished. In fact, 50%--or sometimes more!—of disposable income is potential subject to garnishment for these debts. (Similarly, these debts can’t be discharged in bankruptcy; the government really wants debtors to pay them.)
However, social security income is exempt from garnishment. This is a total or complete exemption, so to the extent someone’s income is furnished by social security, that person is exempt from garnishment.
Other forms of income are not, under federal law, so fortunate. Whether you’re hourly, salaried, paid by the piece, or commissioned; an employee or self employed; paid weekly, biweekly/semimonthly, monthly or sporadically, it doesn’t matter. Subject to the income limits or thresholds above, your income can be garnished.
First, as mentioned above, a critical—and often contested—issue is what exactly is your disposable income? An attorney can help you show that it’s as small as possible.
Second, state exemptions are often more generous than federal, and commonly protect unemployment insurance or disability payments, some damages awards from lawsuits, certain payments from annuities or insurance, and many kinds of public assistance. It’s vital to have an attorney review your state’s exemptions and your sources of income, to see what other exemptions you may qualify for.
Also, certain kinds of retirement plans have what’s called “anti-alienation” clauses. These have nothing to do with the immigration debate or the possibility of life on Mars, but rather are contractual provisions that prevent plan administrators from making payments to any individual other than the beneficiary—such as creditors. A lawyer can review your retirement plans (and also insurance contracts, which not-infrequently have similar terms) to see how much, if any, of your income is protected by anti-alienation provisions.