About 91% of payday loans go to borrowers stuck in a cycle of debt. Eventually, many of them will struggle or fail to pay. They’ll then be vulnerable to aggressive collection attempts from their lenders. Victims of predatory lending don’t always know their rights, and may wonder: Can a payday lender garnish your wages?
It’s possible, but it won’t happen immediately. Payday lenders have to go through a lengthy process first. Borrowers might be able to prevent wage garnishment, even if they do fail to pay their debts at some point. Here’s what wage garnishment is, how it works for payday lenders, and how to prevent it from happening.
What is wage garnishment?
Wage garnishment is a procedure in which an employer withholds part of their employee’s earnings and pays it directly to the creditor demanding it. It’s one of the most definitive ways for a creditor to collect.
Some common sources of wage garnishment are:
- Consumer loans and credit card debt
- Tax and medical debts
- Alimony and child support
Protective laws prevent employers from firing someone for the first of their debts that becomes subject to wage garnishment. That’s even if there are multiple garnishments against the same debt. Unfortunately, those protections don’t extend to a second account.
For example, it’s not a firable offense for someone to go through wage garnishment for their child support, even if happens multiple times. But if that person’s credit card provider garnishes their wages too, they may lose their employment.
To initiate the garnishment process, most creditors need to file a lawsuit against a borrower for failing to pay their debt. If the court rules in favor of the creditor and orders a wage garnishment, the creditor can use it to collect.
But there are exceptions to the court order rule. People who fail to pay federal student loan debts, child support, or tax debts may be subject to wage garnishment without a legal proceeding. Both the Department of Education and the IRS can bypass the courts.
Can a payday lender garnish wages?
If a borrower fails to pay back their payday loans, their payday lender can pursue a wage garnishment to collect the balance.
Before they can do so, they’ll need to sue the borrower, take them to court, and receive a court order. Don’t think that they won’t bother to sue just because payday loans have small principal balances. The penalties and interest can quickly make the debt worth pursuing.
If a lender does decide to sue, you’ll receive a court summons. It’s important to show up on the appointed court date. Failure to respond to a court order might result in the issuance of a warrant and eventual arrest.
Some state laws ban wage garnishment
Four states — Pennsylvania, North Carolina, South Carolina, and Texas — do not allow wage garnishment at all except for IRS and tax-related debt, child support, federally guaranteed student loans, and court-ordered fines or restitution.
Wage garnishment exemptions
According to the Consumer Financial Protection Bureau (CFPB), other states have limits or “exemptions” that apply to bank account and wage garnishments, usually to make sure you have something left to live on. You can check your state laws here.
And if a debt collector threatens wage garnishment for any wages that cannot legally be garnished, that’s a violation of federal law under the Fair Debt Collection Practices Act (FDCPA). You should report that debt collector immediately to the Federal Trade Commission, CFBP or your state attorney general’s office.
How much money can payday lenders take?
Fortunately, there is a limit to how much a lender, including payday lenders, can take from a debtor through wage garnishment. They’re not allowed to take so much of a person’s wages that they can’t support themselves and end up on the street.
The most a payday lender can take from a borrower is the lesser of:
- 25% of the borrower’s disposable income
- The amount that their income exceeds 30 times the federal minimum wage
Disposable income is equal to gross income minus required deductions, like taxes and Social Security. Voluntary contributions don’t factor into the calculation.
The limits are the same for most other debts, except for:
- Federal student loans and tax debts: 15% of disposable income
- Child support and alimony: 60% of disposable income (50% if they’re supporting another child or spouse)
Here’s an example of how this would work in practice:
Tom has $500 of disposable income each week. 25% of those weekly earnings would be $125. Currently, the federal minimum wage is $7.25 an hour. Thirty times $7.25 is $217.50, and $500 minus $217.50 is $282.50.
The first option is the lesser of the two, so a payday lender would only be able to collect $125 from Tom each week. If he made $217.50 a week, garnishment would be illegal.
What happens when you don’t repay your loan?
A payday lender can garnish wages, but it won’t happen overnight. It’s the final step in a long and complicated process that starts with a failure to pay. Here’s how it usually goes:
- Borrower fails to pay: Payday loans are much more expensive than other forms of debt. The exorbitant fees make it difficult for borrowers to keep up, especially with repeated use. In fact, more than 90% of payday loan borrowers have said they regret taking out a payday loan.
- Payday lender attempts to collect: Borrowers usually have to give payday lenders the ability to debit their bank account directly or cash in a post-dated check. Upon failure to pay, they’ll do so immediately.
- Debtholder demands the remaining balance: If a balance remains after the initial attempts to collect, the lender or a debt collection agency will pressure the borrower to pay. That usually includes aggressive or threatening calls.
- Debtholder files a lawsuit: If the borrower is still unable to pay, the lender or debt collector may file a lawsuit against them. It’s important to note that it will be a civil lawsuit, not a criminal one. It is not a felony. You will not go to jail for not repaying payday loans. You could, however, be arrested for ignoring your court summons.
- Judge orders wage garnishment: If the borrower can’t defend themselves or fails to show up to court, the judge will side with the lender. They may order various levies or garnishments, including wage garnishment.
- Debtholder submits the court order: Once the debtholder receives a court order, they’ll submit it to the local sheriff. There may be a short waiting period during this phase.
- Employer withholds as needed: The sheriff will serve the wage garnishment order to the borrower’s employer, who will withhold the proper amounts to pay the debtholder.
The wage garnishment will continue until the debt is gone, unless the employee clears the debt using some form of debt relief.
How to avoid wage garnishment
Here are a few steps you can take to help you get your payments under control:
Debt consolidation usually involves qualifying for one bigger loan — ideally at a lower interest rate — and using the loan funds to pay off your higher-interest loans, leaving you with one more manageable monthly payment. There are even debt consolidation loan options for people who have fair credit or bad credit.
There are a lot of bad actors out there who want to take advantage of someone looking to consolidate their debt. Make sure you thoroughly research each company you hope to work with before you send in your application.
Debt management plan
A debt management plan (or DMP) is just what it sounds like — a plan to help you manage your debt.
DMPs are usually developed by a nonprofit credit counselor, making them a relatively low-cost option. Credit counseling will help you use your existing assets — like home equity or retirement savings — to consolidate your debts. If you don’t have any assets, your credit counselor will work with your lenders to settle your debts, try to find you the lowest rates, etc., then manage your payments on your behalf.
Debt settlement is an option if you know you can’t afford to pay the total amount you owe. Instead, you contact your lender and try to come up with a total amount due that you both can live with (and that is less than what you currently owe). You can also hire a professional debt settlement company, which will negotiate with your creditors on your behalf and set up a repayment plan. Then you will pay the debt settlement company directly.
Payday Alternative Loan
Payday Alternative Loans (PALs) are similar to payday loans because they’re short-term loans for a relatively small amount of money, but there’s one key difference — PALs are administered through federal credit unions, making them much more affordable.
Unlike a payday loan that must be paid in full by your next payday, PALs are installment loans where you’ll have a payment plan. You might make payments every month or every other week over a specific loan term. There are no rollovers allowed and loans are repaid over about one to six months.
Peer-to-peer loans are available through online platforms, such as Lending Club and Prosper, that match potential borrowers with investors willing to issue loans. Or you can bypass the loan platforms altogether and ask a peer on Reddit for a loan. The r/borrow subreddit allows Reddit members with a certain amount of account history to post loan requests that are then funded by fellow Redditors. You will agree to a repayment timetable and amount in advance before the loan is funded. This can be a simple and affordable way to get yourself out of a hole without having to turn to friends and family for help. You get an immediate solution to your problems, and your investor will make some money based on your agreed-upon repayment total.
When things go drastically off track with your finances, sometimes bankruptcy can offer a fresh start. But bankruptcy isn’t a free solution, and there will be long-term financial ramifications. If you’re seriously considering this as an option, get legal advice first.
Watch this video to learn more about how to prevent wages from being garnished:
The bottom line
The best way to avoid wage garnishment is, of course, to make payments on time whenever possible. Try not to take out loans that will end up being unaffordable, even if it’s an emergency. That only ever delays problems for the length of the loan and damages credit scores.
After a failure to pay, the best way to avoid wage garnishment is to contact the lender and try to negotiate. They’d usually rather not deal with the hassle or costs of a lawsuit. If a borrower can make them a better offer, they might take the deal.
Yes, they can and will. But before a facility or doctor can take your wages, they have to sue you and win the case.
In most cases, you won’t lose your home or car during your bankruptcy case if your equity in the said property is fully exempt. But if you don’t make your payments on that debt, you may face foreclosure and the creditor may be able to take and sell your home or the property.
Yes, there are online lenders that offer loans for borrowers with bad credit. Your loan terms will be less generous and you’ll pay a higher interest rate than a borrower with good credit. Before you apply, check your credit reports at annualcreditreport.com and fix any errors you find, which can add a few points to your credit score. Also consider applying for a secured loan, which is more accessible to applicants with bad credit because they reduce the lender’s risk.
If you need money fast, your options can be limited. Payday loans are high-interest, small-dollar loans that must be repaid from your next paycheck. Cash advance apps — like Dave or Earnin — offer small loans that you repay with your next paycheck, but these apps don’t charge interest. Instead, they request that you tip them, and some charge a small monthly membership fee. This can make them a more-affordable option.