What wages can a creditor garnish and how can they be protected?
The portion of your paycheck a creditor can garnish is limited by both
federal and state laws. As with any other state exemption, each state
set its own wage protection limitations. Some states completely exempt
wages from creditor garnishment, particularly those earned by the ‘head-of-the-household’.
New York, for example, shelters 90 percent of a debtor’s net wages.
Only 10 percent in aggregate can be claimed by a debtor’s creditors.
But as with the homestead laws, to protect your wages, you must follow
your state laws. For instance, your state may require that you segregate
your wages in a ‘wage exemption’ or ‘wage earner’
account. Wages commingled with unprotected funds lose their protection.
Your wages are also protected under federal law. The federal Consumer
Credit Protection Act (CCPA) limits wage garnishment to the lesser of:
1) 25 percent of the debtor’s disposable income per week (disposable income is the net paycheck after deducting federal and state withholding and FICA
taxes); or 2) the amount by which a weekly disposable income exceeds 30
times the federal minimum hourly wage. Nor can exempt or protected wages
be garnished by your creditor once you receive it, provided you keep the
wages segregated from your non-wage funds. However, commissions, royalties,
rents, fees and other forms of income may not fall within the wage exemption
One option to shelter your wages is to form a corporation and direct your
wages to the corporation. For tax purposes, you can withdraw the money
as loans. This simple strategy is sometimes used by debtors to temporarily
shield non-exempt wages from creditors; however it isn’t a practical
long-term solution. Moreover, your employer must be willing to treat your
corporation as an independent contractor, and, understandably, few employers
will agree to this. Another wage protection strategy is to make a prior
wage assignment to a ‘friendlier’ creditor who then periodically
‘loans’ you money. Wage assignments must be in writing and
in effect prior tothe creditor’s garnishment. As a practical matter, wage garnishments
are usually not a prolonged problem. Most debtors under a wage garnishment,
settle their case, file bankruptcy, or simply stop working.
There are several exceptions to the wage exemption laws. For instance,
the Child Support Enforcement Act of 1975 overrides federal and state
income exemptions for purposes of allowing a spouse to enforce alimony
or child support orders. Alimony and child support payments are generally
not exempt from garnishment by either the payer’s or recipient’s
creditors. Support payments in some states have a limited exemption. Another
exception is an IRS wage garnishment.