Payday Loans and Wage Garnishment: What You Need to Know
Inside Subprime: Nov 30, 2018
By Ben Moore
Wage garnishment sounds scary because it is. Imagine that you’re having trouble repaying a debt. A court orders that your employer pull money from your paycheck and give it to whomever you owe the money. (Yes, they can do that.) You’re working just as hard, but taking home less each month. And you have to suffer the embarrassment of a court contacting your employer.
Wage garnishment could come into effect for a variety of debts owed, including child support, back taxes, and personal loans, such as payday loans. However, payday lenders must first get a court order before they can begin garnishing wages, which is typically a last resort in the collections process.
Once a payday loan goes into default status, payday lenders won’t waste any time coming after the money that is due. If a lender’s automatic withdrawals from a borrower’s account do not go through due to a lack of sufficient funds, the loan provider might break the debit charges down into smaller increments to take whatever funds from the account that they can. Any attempts to collect payment from the bank account could result in overdraft fees if the account balance is too low, and could possibly cause other pre-existing charges to fail, causing additional fees.
Once a payday loan firm sends your debt to a collections agency, the risk escalates. Collections agencies have the ability to issue a court summons if the borrower is not paying back the loan. In fact, nearly all lawsuits against consumers are for small amounts. Lenders typically win because most borrowers do not show up to their court date. The judge will enter a summary judgment, which will allow the court to begin collecting the debt on behalf of the lender or collections agency. Depending on the state, this could mean bank account levies and wage garnishment.
Federal law limits how much can be garnished from your paycheck. The amount that can be garnished is limited to 25 percent of the borrower’s disposable earnings, or what is left after mandatory deductions, or the amount by which your weekly wages exceed thirty times the minimum wage, whichever is lower. However, some states will set a lower percentage limit, thereby protecting more of the debtor’s wages. For example, in the state of Massachusetts, most judgement creditors can only garnish up to 15 percent of the debtor’s’ wages. (The full list of wage garnishment laws by state can be seen here>)
Borrower’s have rights when it comes to the wage garnishment process, but it is the responsibility of the borrower to be aware of and exercise these rights. The borrower has the right to be legally notified of the wage garnishment, and the borrower can file a dispute if the notice has inaccurate information or the debt owed is incorrect. Social security and veterans benefits are exempt from wage garnishment, but these could be seized once they reach a bank account. Also, a borrower cannot be fired for having one wage garnishment, but this protection is lost if a borrower incurs more than one garnishment.