Do Garnished Wages Affect Your Credit Score?
Unravel the link between wage garnishment and your credit score. It's often the debt's history, not the garnishment, that matters most.
Wage garnishment is a legal procedure where a portion of an individual’s earnings is withheld by an employer to satisfy a debt, typically as ordered by a court or governmental agency.
Understanding Wage Garnishment
Wage garnishment involves a legal instruction for an employer to deduct a specific amount from an employee’s disposable earnings and directly remit it to a creditor. This action is most often the result of a court order, meaning a creditor has pursued legal action and obtained a judgment against the debtor. However, certain federal and state entities possess administrative authority to garnish wages without first securing a court order.
Common types of debts that can lead to wage garnishment include consumer debts such as credit card balances, personal loans, and medical bills, which typically require a court judgment. Federal student loans and unpaid taxes can also lead to garnishment, often without the need for a prior court order. Additionally, child support and alimony obligations are frequently collected through wage withholding orders, which are often automatically included in the initial support order. Federal law, specifically Title III of the Consumer Credit Protection Act (CCPA), sets limits on the amount of earnings that can be garnished and provides job protection for employees garnished for a single debt.
How Garnishment Affects Credit
The act of wage garnishment itself, the direct withholding of money from a paycheck, is not reported directly to the three major credit bureaus—Equifax, Experian, and TransUnion. The negative impact on credit scores primarily stems from the underlying financial distress and the events that led to the garnishment being issued.
A significant indirect cause of credit damage is a civil court judgment. For most consumer debts, a creditor must obtain a judgment against the debtor before wage garnishment can occur. While civil judgments are generally no longer reported on credit reports by the major bureaus as of 2017/2018, the severe delinquencies and collections that precede such judgments are reported and can significantly lower credit scores. These negative marks, such as missed payments or accounts sent to collections, are typically recorded on a credit report long before garnishment begins. For certain federal debts like federal student loans or taxes, garnishment can proceed without a prior court judgment, but the default or lien associated with these debts is what impacts credit.
Credit Impact of Underlying Debts
The actual damage to a credit score comes from the specific types of debts that lead to garnishment and how those debts are reported to credit bureaus. For consumer debts like credit cards, personal loans, or medical bills, late payments, accounts being sent to collections, or charge-offs are reported to credit bureaus and cause significant drops in credit scores. A civil judgment, even if not directly on the credit report, indicates that these severe delinquencies have occurred.
Defaulting on federal or private student loans is another common cause of credit score damage. When a federal student loan becomes 90 days or more delinquent, the loan servicer reports this to the national credit bureaus. If the loan goes into default, this event is reported and can severely lower a credit score. This negative information can remain on a credit report for up to seven years from the date of default.
For unpaid taxes, the Internal Revenue Service (IRS) does not directly report tax debts to credit bureaus. However, a Notice of Federal Tax Lien, which is a legal claim against property due to unpaid taxes, was historically reported. As of 2018, tax liens are generally no longer included on credit reports by the major credit bureaus, although they remain public records and can be discovered by lenders. State tax warrants can still appear on a credit report as a public record, potentially impacting scores.
Child support and alimony payments generally do not appear on credit reports if they are paid on time. However, if payments become severely delinquent, known as arrears, this information may be reported to credit bureaus, particularly if the amount owed exceeds $1,000. Missed child support payments can remain on a credit report for up to seven years, negatively affecting creditworthiness.
Reviewing Your Credit Report
Individuals are legally entitled to a free credit report once every 12 months from each of the three nationwide credit bureaus: Equifax, Experian, and TransUnion. These reports can be accessed through the official website AnnualCreditReport.com.
When examining your credit report, look for derogatory marks such as late payments, collection accounts, and charge-offs related to consumer debts or student loans. These entries indicate a history of missed payments or unresolved debts, which are the primary drivers of credit score reductions. You should also check the public records section. While civil judgments and tax liens are largely excluded from credit reports now, bankruptcy filings still appear and significantly impact credit. If any errors or inaccuracies are found, you have the right to dispute them with the credit bureaus.