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 it’s 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, 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.
How Much 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?
A payday lender can garnish wages, but it doesn’t happen overnight. It’s the last 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.
- 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.
- 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
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.