Garnishments are the legal process of taking money from an employee’s disposable income to pay off debt. They can be due to unpaid taxes, child support, delinquent federal student loans, and other consumer debts.
If you receive a wage garnishment notification, it is essential to act quickly, as this type of debt is often time-sensitive and can lead to penalties if not processed promptly.
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Disposable Income
Disposable income is an essential factor for budgeting and economic analysis. It is the money a person receives after taxes have been deducted from their salary.
Economists use disposable income to indicate consumer spending and the economy’s performance. It also helps them create policies that benefit the consumer and the economy as a whole.
A household’s disposable income is a household’s money after all federal, state, and local taxes have been withheld. It includes earnings plus unemployment benefits and capital income.
Employers are required to deduct taxes, as well as Social Security, from employee wages. They must also deduct withholdings for employee retirement systems.
Although taxes and Social Security are legally mandated deductions, other voluntary deductions, such as an employee savings plan, a pension plan, life insurance, and medical insurance, can be made. These non-mandated deductions are part of disposable income and can be garnished but not taken directly out of a paycheck.
When a court imposes a garnishment order, the actual amount is limited to a percentage of a worker’s disposable income. It is done by exempting some additional earnings from total wages and subtracting other deductions, as outlined in the garnishment order.
The federal formula that calculates disposable income has been built into the Payroll system, but many states have their own. Therefore, to ensure that the correct wages and earnings are excluded from disposable income when calculating garnishments, it’s essential to set up a specific disposable income definition in BambooHR.
Court Orders
Creditors who aren’t able to collect on their debt through other means can often get a court order to garnish their wages. It can happen for unpaid back taxes, student loans, alimony, or child support.
How garnishments payroll works can help creditors recoup some of their money and prevent you from falling into a downward spiral of debt and financial hardship. However, there are limitations to how much can be garnished.
A creditor must file a lawsuit and get a judgment against you before they can withhold a portion of your income. It is called a garnishment order and can be enforced through your employer.
The court must also give you a certain amount of time to respond to the order. Usually, you’ll receive a statutory response form, which you must return within that time frame.
If you have a good defense, like that the debt has been paid off, that you’re bankrupt, or that you’re on a payment plan, you can object to the garnishment.
Alternatively, you can request that the court modify the order to make it less burdensome.
The garnishment order will include a list of exemptions to protect your paycheck from being taken.
Limits On Garnishments
A means for creditors to collect payment is through wage garnishments. They work by getting a court order to send a certain amount of an employee’s wages directly to the creditor.
In most cases, this can occur only after a creditor wins a lawsuit in court and obtains a judgment.
There are limits to how much a creditor can garnish depending on the type of debt. State and federal laws impose this cap. This limit is set by federal and state law.
For consumer (non-government) creditors, the maximum limit is 25% of an employee’s disposable earnings – the amount of an employee’s pay after legally required deductions are taken.
Some government creditors and domestic situations – such as child support orders or alimony payments – are not subject to this limitation. In addition, bankruptcy payroll deduction orders are not subject to this limit.
If you have a creditor who wants to garnish your wages, you should object immediately to the order. It can prevent the creditor from using your wages to pay their debts and may even prevent you from having your paycheck garnished at all.
Legal Requirements
Employers must legally withhold a percentage of their employees’ income as payment to creditors through wage garnishment. However, the amount withheld depends on the type of debt and federal and state laws governing garnishments.
Most court or government-issued garnishment orders for creditors direct the employer to deduct a specific portion of an employee’s wages. The order will include detailed instructions for the employer, including when to start and stop withholding and where to send funds.
Generally, any creditor can request a wage garnishment, including debt collectors and creditors, banks, auto lenders, government agencies, and taxing authorities. But some creditors must file a lawsuit and get a judgment before they can garnish an employee’s wages.
Federal law limits the total amount of disposable earnings that can be garnished to 30 times an employee’s minimum wage, while state garnishment rules vary. Depending on the creditor and debt, garnishment limits may be higher or lower than the federal limit.