Understanding the perils of garnishment

"Ignore the IRS and your wages will be garnished," Rosenberg says. "They know where you live, where you work and where your bank account is."

The IRS isn't alone in collecting past-due debts this way. State governments, private creditors or an ex-spouse demanding alimony or child support can all request garnishment of your pay. In addition to garnishing for taxes, federal and state governments can seek to attach wages if a person defaults on government-backed student or business loans.

While the different branches of government don't need a court order to get a piece of your paycheck, other third parties must petition the court for redress.

And government creditors can garnish more than your paycheck. If you receive veteran's benefits, Social Security or other government money, federal and state agencies can collect from those funds as well.

They can't take it all Losing any income is never easy, but there are garnishment limits.

Title III of the Consumer Credit Protection Act caps the amount of wages that can be taken from an owing worker's paycheck. This leaves the employee some income and prevents creditors from taking excessive amounts to speed up debt repayment.

The garnishment level is based on an employee's disposable earnings. This is the amount left over after legally required deductions have been made for federal, state and local taxes, Social Security, unemployment insurance and state employee retirement systems.

What doesn't go into the equation are other voluntary deductions, such as for union dues, health and life insurance, contributions to charitable causes, purchases of savings bonds, and payments to employers for payroll advances or purchases of merchandise. These amounts may not be subtracted from gross earnings when calculating disposable earnings.

When the disposable income amounts is determined, the maximum amount that can be garnished in any pay period may not exceed the lesser of two figures:

• 25 percent of the employee's disposable earnings or
  
  
• the amount by which an employee's disposable earnings for the workweek are greater than 30 times the federal minimum wage.

Under the first scenario, a worker who clears $500 a week would face a garnishment limit of $125. Under the second, 30 times the current minimum wage of $5.15 an hour comes to $154.50, meaning wages up to $345.50 can be garnished. However, thanks to the key phrase "lesser of," this owing worker will only face the loss of $125 from each paycheck.

Exceptions to the rule The rules change, however, when it comes to child support and alimony.

Garnishment law, administered by the Wage and Hour Division of the Department of Labor's Employment Standards Administration, allows up to 50 percent of a worker's disposable earnings to be garnished, if the worker is supporting another spouse or child. If there is no second family to be taken care of, up to 60 percent can be taken. An additional 5 percent may be garnished for support payments more than 12 weeks in arrears.

Debtors should keep in mind that the law's limits do not cover "voluntary wage assignments." These are cases where you work out a pay arrangement with the IRS or other creditor.

Garnishment restrictions also do not apply to bankruptcy court orders and debts due for federal or state taxes. If you fall afoul of Uncle Sam, he can take out as much as he wants from your daily wages.

And if a state wage garnishment law differs from the federal law, the law that produces the smaller garnishment amount must be followed.

Reducing the take If your wages are being garnished, you may be able to lower the amount taken out of your paycheck, says Hillary Arrow Booth, partner with Gardner & Booth, a Los Angeles law firm.

You need to make the case that the figure listed in the garnishment order is not enough to support yourself and your dependents. A salesperson, for example, may need a clothing allowance to continue working.

While it may be possible to whittle away at the garnishment, Booth says to remember that if your creditor is seeking repayment for a life necessity, such as chemotherapy, that debt takes precedence over current or future life necessities.

Garnishment law limitations also extend beyond dollars. Title III protects an employee from being fired in some instances because of the debt collection process.

"You cannot be fired in retaliation for a garnishment or because it's a pain for the employer," says Booth.

The protection, however, is not absolute. While an employee cannot be dismissed for one garnishment, the law does not prohibit discharge if the employee's earnings have been garnished for second or subsequent debts.

Avoiding the paycheck bite Of course, the best thing to do is to avoid garnishment altogether.

When it comes to taxes owed, you're much better off negotiating payment terms than having Uncle Sam or a state revenue office picking at your paycheck. Just communicating with tax officials sometimes can be enough to forestall garnishment.

According to Rosenberg, the IRS will give you 20 days' notice before garnishing your wages. Use this time, she recommends, to "call up the IRS, apologize, beg for mercy and ask them for a little more time to sort out the program."

The same holds true for creditors, who generally find it's a hassle to go to court to get an order to garnish wages. Creditors, too, must give some warning before they start collecting. It varies by state, but any lead time allows you an opportunity to call and explain your circumstances, or if you truly believe you do not owe the money, prove your innocence. Provided you act in good faith, most creditors will bend over backward to work out an installment payment plan.

"From a creditor's perspective, the garnishment is a pain in the neck," Booth says. "They get little dribs and drabs of their money back, and it's a lot of work to put in place. Very often creditors seek garnishment simply as a way to get the attention of the debtor. They'd be better off and so will you if you negotiate a voluntary pay plan."

When you can work out a payment agreement, get a copy. Make sure that you understand the terms and that the arrangement is something you can live with and abide by. For example, if you agree to an automatic payment from your bank account, choose a time in the month when you'll have sufficient funds.

And remember, if you mess up this second chance and quit paying on the installment plan, you'll quickly find yourself again facing garnishment proceedings.

"Don't make a payment," warns Rosenberg, "and they're going to attach your bank account."