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 definition.

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.