What Funds are Exempt from Wage Garnishment? How to Protect Yourself

Is a debt collector threatening you with a wage garnishment, or are you facing a wage garnishment order? Know what can and can’t be taken from your bank account.  

Get debt relief before your wages are garnished.

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How to protect money from wage garnishment efforts

Under federal law, most federal benefits are protected by garnishment exemptions and cannot be touched by debt collectors. Wage garnishment is subject to the types of income a consumer is being paid. The Department of Treasury rule requires banks to automatically protect certain federal benefits from being frozen or garnished if they are directly deposited into your account.

Public benefits include:

  • Social Security benefits Income (SSI)
  • Supplemental Security Income
  • Veterans benefits
  • Federal Railroad Retirement benefits
  • Unemployment compensation
  • Sick pay
  • Child support
  • Civil Service Retirement System benefits
  • Disability benefits
  • Federal Employee Retirement System pay
  • Military annuities and survivor benefits
  • Federal student aid
  • Financial assistance from the Federal Emergency Management Agency (FEMA)

These funds must be directly deposited into your bank account or onto a prepaid card to be considered exempt income.

Your financial institution should have protections that automatically protect up to two months-worth of benefits.

There are four ways to open a bank account protected from creditors. Use an exempt bank account, use state laws that don’t allow bank account garnishments, open an offshore bank account, and maintain an account with only exempt funds.

How much of my income can be garnished?

The maximum is 25% of your disposable earnings or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage (currently $7.25 an hour) can be garnished. Anything above that is off-limits. 

Whether you work full-time or part-time, wage garnishments can still be applied. 

Can public assistance funds be garnished? 

If you have unpaid private debts that are subject to a court order, creditors could garnish any government stimulus checks.

The American Rescue Plan Act did not protect the one-time direct payments for people in those circumstances. Some states have stepped in to enforce their rules so creditors cannot take the money.

Federal law protects or “exempts” certain funds or benefits from garnishment. Federally exempt benefits include:

  • Social Security benefits
  • Supplemental Security Income (SSI) benefits
  • Veteran’s benefits
  • Civil service and federal retirement and disability benefits
  • Servicemember pay
  • Military annuities and survivor benefits
  • Federal student aid
  • Railroad retirement benefits
  • Financial assistance from the Federal Emergency Management Agency (FEMA)
  • Welfare and public assistance funds are protected under federal law from being garnished. 

Certain federal benefits, such as Social Security, SSI, and Veterans Assistance, have additional protections under federal law when those funds are deposited into a bank account or onto a prepaid card. 

These federal benefits remain exempt from garnishment when directly deposited into your bank account. You may have to go to court to assert that protection.  

Remember that creditors can still garnish some of these benefits if your debt is related to federal taxes, federal student loans, or child support.

Wage garnishment and taxes 

Although it may feel like income lost since your wages are being garnished, all garnished wages are still considered taxable income. You will still be required to pay income taxes on the total amount on your income as though your wages are not being garnished. 

Can wage garnishments be taken from a savings account? 

Yes, creditors can garnish a savings account. A bank account garnishment makes no distinction between checking accounts, savings accounts, money-market accounts, online savings accounts, savings bonds, or CDs. They are all fair game. This includes your Venmo, Paypal and CashApp accounts, particularly if they’re listed on your credit reports.
Don’t rule out safe deposit boxes, promissory notes, and other financial accounts subject to creditor garnishment judgments. Generally, a judgment creditor cannot levy or garnish anything until the creditor has filed a lawsuit, served the debtor, and obtained a judgment.

Pro tip: If creditors aren’t aware that your Venmo, Paypal and/or CashApp accounts exist, they won’t be able to request wage garnishment. If you’re concerned, don’t apply for credit cards affiliated with these accounts or use them to make payments on Buy Now, Pay Later plans. For example, your credit reports often list Paypal’s Pay in Four plans because they’re funded through Synchrony Bank. If you know that these accounts already appear on your credit reports, unlink them from your bank accounts.

When can creditors garnish your wages?

Wage garnishment is a legal procedure where an employer must withhold a portion of an employee’s wages to pay an outstanding debt. Wage garnishment is a result of legal proceedings where a person’s earnings are required by court order to be withheld by an employer for the payment of a debt to a creditor. That amount taken is sent to the creditor instead of paying the employee.

Child support, back taxes, and consumer debt are common reasons for wage garnishment. Creditors can sometimes force child support, student loans, and back taxes without a court order.

The court will notify your bank and your employer if you lose your case. Within 5-30 days, the garnishment will begin and cease when all the debt and court fees are paid in full.

READ MORE: How to deal with debt collectors when you can’t pay

Most wages won’t be garnished until you’ve been to court

Consumers must pay attention to court dates and appointments when facing wage garnishment. 

You must have received a court order in order to have a garnishment order awarded against you. In this case, you would then be referred to as the judgment debtor, and your creditor would be referred to as the judgment creditor.

The garnishment order requirement does not apply to garnishments by the IRS or federal government.

READ MORE: States where you can go to jail for unpaid debts

The long-term impact of wage garnishment 

If your wages are being garnished, it can impact your financial situation in other ways, including:

  • It can negatively impact your credit score
  • You could face adverse mental health effects from reduced income
  • There are tax implications: although your wages are being garnished, it is still considered taxable income that you received, so garnishment will affect what you owe in taxes. 
  • It will negatively affect your credit history since it will remain on your credit report for seven years since it is a matter of public record. This could lower your score by up to 150 points.

READ MORE: How are credit scores calculated

Bankruptcy halts wage garnishments 

Generally, when bankruptcy is filed, wage garnishments are stopped. That’s because as soon as bankruptcy is filed, an automatic stay goes into place, and all garnishment orders are frozen at that time. The automatic stay basically deems your disposable income during bankruptcy exempt.

READ MORE: Best ways to consolidate your credit cards

Know your state laws 

The following states do not allow wage garnishment for the collection of unsecured debts:

  • North Carolina
  • South Carolina
  • Pennsylvania
  • Texas

You should also ensure that the statute of limitations has not passed on any garnishments being rendered against you. 

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

Next steps after a wage garnishment order

  • Negotiate: Talk with the creditor and see if you can reach some payment plan
  • File a claim of exemption: This can halt garnishment for a short period. 
  • Challenge the garnishment ruling: Review all documents to ensure the debt is yours. Submit a debt verification letter.
  • Try debt consolidation: This can include personal loans or balance transfer credit cards.
  • Credit counseling or Debt Management Plan (DMP): A nonprofit credit counseling agency will help set up a plan to address your debt issues for a small fee.
  • File for bankruptcy: There are two different types of consumer bankruptcy, Chapter 7 and Chapter 13. Be sure so consult an attorney to determine which is best for you.

READ MORE: Pros and cons of filing for bankruptcy

The bottom line 

Wage garnishment is stressful, and the consequences of wage garnishment can vary depending on the situation. Many people already have trouble paying for necessities like food and housing, which is worse when creditors are garnishing them. If you are threatened with wage garnishment, contact a wage garnishment attorney as soon as possible to help protect your rights.

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