Can Payday Lenders Garnish Wages? Here's What You Need to Know

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Debt collectors will say almost anything in an effort to get you to make a payment. One threat that’s commonly made is wage garnishment. But can your payday lender really garnish your wages?

Your wages could be garnished if you fail to repay your payday loan

Payday lenders cannot directly garnish your wages. But they can sue you and request that a judge order wage garnishment. Before your wages are garnished, you should receive an order to appear in court. If you show up at your scheduled court date, you may be able to avoid a wage garnishment order. 

First, your payday lender or debt collection agency will need to file a lawsuit, and you’ll get a court summons. At that point, it’s important that you learn your rights and attend your scheduled court appearance.

If a judge orders wage garnishment, the amount will be limited. Creditors aren’t allowed to garnish wages to the extent that borrowers don’t have enough money left to support themselves. 

READ MORE: Can payday lenders take you to court?

Pro tip: If you get a summons to appear in court, don’t ignore it.

Stuck in payday debt?

DebtHammer may be able to help.

How wage garnishment works

Wage garnishment is when a judge orders your employer to hold back a predetermined portion of your paycheck to repay your debts.

Bank garnishment is what it’s called when the court orders your bank or credit union to garnish your accounts. When bank garnishment is ordered, your bank or credit union holds a specified amount of money to repay the payday lender or debt collection agency. 

Some state laws restrict the amount of money that can be garnished. Each state has different restrictions, exemptions and garnishment procedures. Most states permit wage garnishment although there are four — Pennsylvania, North Carolina, South Carolina, and Texas — that 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.

Some common sources of wage garnishment are:

  • Consumer loans and credit card debt
  • Tax and medical debts
  • Alimony and child support

Laws prevent employers from firing someone for the first of their debts that become 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 happens multiple times. But if that person’s credit card provider also garnishes their wages, job protection laws no longer apply.

READ MORE: Learn the risks of tribal payday loans and lenders

Pro tip: A payday lender or debt collector may threaten wage garnishment even if they don’t have a court order. If this happens, contact a local legal aid group or your state attorney general’s office.

Wage garnishment exemptions

According to the Consumer Financial Protection Bureau (CFPB), other states have limits or “exemptions” that apply to bank accounts and wage garnishments, usually to ensure you have something left to live on.

How does a payday lender garnish wages?

To garnish wages for unpaid debts, lenders must sue the borrower, take them to court, and receive a court order mandating wage garnishment. 

If a lender decides to sue, you’ll receive a court summons. It’s important to show up on the appointed court date. If you fail to respond to a court order, wage garnishment will only be one of your problems. You also could end up with a warrant for your arrest and face jail time.

Pro tip: Don’t assume 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.

READ MORE: Will you go to jail for failing to repay a payday loan?

Step by step: Path to wage garnishment

A payday lender can garnish wages, but it’s the final step in a long and complicated process that starts with a failure to pay. Here’s a step-by-step guide to how the process usually plays out:

  • 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 can still not 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.
  • Case is heard before a judge: You will appear in court (you won’t necessarily need a payday loan lawyer, most clients represent themselves) and explain to the judge why you cannot repay your debt. Bring as much documentation as possible.
  • 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.
  • A 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.

Pro tip: There are some key 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.

READ MORE: Is not paying a payday loan a felony?

Don’t avoid your lender

Mike, a student loan borrower, defaulted on a student loan, started a career in a different field and eventually relocated for a new job. After securing the new job, he contacted his lender to try to negotiate a settlement, but the lender refused.

When Mike started his new job, he learned his wages were being garnished. Because his lender did not have the new address, the borrower did not receive the court summons, and had no idea he was being sued or that wage garnishment had been ordered. 

Now Mike’s lender has no incentive to settle, since the wage garnishment means they’ll get repaid the total amount Mike owes. The only way out is for Mike to file for bankruptcy.

This is a good example of why it’s so important to notify your lender if you relocate, and why you need to always appear on your scheduled court date. Don’t believe your lender will simply drop the issue just because they no longer have your address.

READ MORE: What happens if you close your bank account and default on your payday loan

Pro tip: If you’re being threatened with a lawsuit, now is the time to contact a debt settlement company or to attempt to negotiate a settlement on your own. Do not wait until you’ve gotten an order to appear in court. At that point, the lender has no incentive to negotiate a settlement. If a judge orders wage garnishment, your options are narrowed to repaying your debt in full (either through the garnishment or in a lump sum) or filing for bankruptcy.

Wage garnishment exemptions

According to the Consumer Financial Protection Bureau (CFPB), some states have limits or “exemptions” that apply to bank accounts 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 violates federal law under the Fair Debt Collection Practices Act (FDCPA). You should report that debt collector immediately to the Federal Trade Commission, CFPB or your state attorney general’s office.

READ MORE: Which funds are exempt from wage garnishment?

Wage garnishment limits

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 equals 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)

Learn more about federal wage garnishment rules and limits.

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.

READ MORE: How to open a bank account no creditor can touch

Is your payday lender threatening to garnish your wages?

DebtHammer may be able to help.

How to avoid wage garnishment

The simplest way to avoid wage garnishment is to get your debt under control. In the case of payday loans, you have a few options:

  • Payday Alternative Loans: Federal credit unions offer these as an alternative to high-interest short-term payday loans. You can get a loan ranging from $1,000 to $2,000 and the interest rate is capped at 28%. These loans do not have to be repaid in full from your next paycheck. 
  • Debt consolidation loans: Debt consolidation usually involves qualifying for one bigger loan — ideally at a lower interest rate. There are even debt consolidation loan options for people with fair credit or bad credit. 
  • Debt Management Plan: 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., and then manage your payments on your behalf.
  • Debt settlement: This is your best 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 (which is less than what you currently owe). You can also hire a professional debt settlement company to negotiate with your creditors on your behalf and set up a repayment plan.

One final option: Bankruptcy

When things go drastically off track with your finances, sometimes bankruptcy can offer a fresh start. If you’re struggling to the extent that you simply can’t repay your $500 payday loan, bankruptcy could be a viable option to fix your financial situation and give you a fresh start.

There are two types: Chapter 7 and Chapter 13. 

  • Chapter 7 bankruptcy requires passing a means test, so you must ensure you’re eligible. That total varies by state.
  • Chapter 13 bankruptcy involves establishing a repayment plan with a bankruptcy trustee. You will end up repaying most of your debts over five years.

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.

READ MORE: Cheap ways to file for bankruptcy

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.

FAQs

Can hospitals garnish your wages for medical bills?

Yes, they can and will. But before a facility or doctor can take your wages, they have to sue you and win the case.

What will happen to my home or car if I file for bankruptcy?

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.

Can I get a debt consolidation loan with bad credit?

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.

What is a cash advance app, and how are they better than payday loans?

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.

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