Can Banks Garnish Your Wages for Unpaid Debt?

Wage garnishment is a legal procedure allowing creditors to collect unpaid debts by directing an employer to withhold a portion of a debtor’s earnings. This process begins after a debtor fails to meet financial obligations, prompting a creditor to seek legal action. This article explains the conditions, process, and protections related to wage garnishment by banks.

Conditions for Wage Garnishment by Banks

Banks require a court judgment to initiate wage garnishment. This judgment establishes that a debt is owed, allowing the bank to pursue enforcement. Without a judgment, a bank cannot compel an employer to withhold wages.

Wage garnishment commonly results from unsecured debts like personal loans, credit card debts, and lines of credit. These debts lack specific collateral. If payments become significantly overdue, a bank may pursue legal action to recover funds.

Secured loans, such as mortgages or auto loans, do not typically lead to direct wage garnishment. For these, the bank’s initial action involves repossessing collateral. If the collateral’s sale does not cover the full debt, the bank may seek a deficiency judgment, which could then lead to wage garnishment.

Federal student loans and unpaid taxes are distinct; government agencies can sometimes garnish wages without a prior court order. However, for most consumer debts owed to banks, a court judgment is required before wage withholding can begin.

The Wage Garnishment Process

Once a bank obtains a court judgment, the formal wage garnishment process begins. The judgment creditor files a garnishment order, also known as a writ of garnishment or writ of execution, with the court. This order legally authorizes wage withholding.

The court issues the garnishment order, which is then served to the debtor’s employer. This formal notification informs the employer of their legal obligation to withhold a specified portion of the employee’s wages. Employers must comply with these orders promptly.

Upon receiving the garnishment order, the employer calculates the amount to be withheld from the employee’s disposable earnings. Disposable earnings are income remaining after legally required deductions, such as federal, state, and local taxes, and Social Security contributions. The employer then deducts the amount from each paycheck.

The withheld funds are remitted directly to the creditor or the issuing court until the debt is fully satisfied. The process continues with each pay period until the total judgment amount, including any accrued interest and fees, is paid off.

Protections Against Wage Garnishment

Federal law provides protections for individuals facing wage garnishment, primarily through the Consumer Credit Protection Act (CCPA). This act limits the amount that can be garnished from an individual’s disposable earnings in any workweek or pay period. For ordinary consumer debts, the maximum amount subject to garnishment is the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage.

For instance, if the federal minimum wage is $7.25 per hour, 30 times that amount is $217.50 per week. If an individual’s weekly disposable earnings are $217.50 or less, their wages cannot be garnished for most debts. If disposable earnings are more than $217.50 but less than $290, only the amount above $217.50 can be garnished.

State laws can offer additional or more generous protections than federal law. Many states have their own exemption laws that may protect a higher percentage of wages or provide broader categories of exempt income. These state-specific rules often aim to ensure that individuals retain sufficient income for basic living expenses.

Certain types of income are entirely exempt from wage garnishment under federal law. These include Social Security benefits, Supplemental Security Income (SSI), Veterans’ benefits, federal employee retirement benefits, and certain public assistance payments.

Bank Account Levies

A bank account levy is a distinct debt collection action that differs from wage garnishment. While wage garnishment targets future earnings from an employer, a bank account levy seizes funds already present in a debtor’s bank account. This action effectively freezes the funds, preventing the account holder from accessing them.

Similar to wage garnishment, most creditors, including banks, must first obtain a court judgment before initiating a bank account levy. This judgment serves as the legal authorization for the creditor to pursue funds directly from the debtor’s bank accounts. After securing a judgment, the creditor requests a writ of execution from the court, which is then served to the bank.

Upon receiving a levy order, the bank places a hold on the funds in the debtor’s account up to the amount specified in the order. During this hold period, which can last several days to a few weeks, the bank transfers the levied amount to the creditor to satisfy the outstanding debt.

Federal regulations provide specific protections for certain funds held in bank accounts, particularly direct-deposited federal benefits. Banks are generally required to protect at least two months’ worth of direct-deposited Social Security, SSI, and Veterans’ benefits from most levies. This “look-back” period ensures that a minimum amount remains accessible for living expenses, even if mixed with other funds.