Debt stinks. There’s no getting around it. Whether you owe on a mortgage, a car payment, a credit card, student loan, or other obligations, paying a creditor is never fun. It’s even less fun when you don’t have the ability to pay. Under some circumstances, if you owe and you fail to pay, your wages can be garnished.
Garnishment is a legal term for the process of having part of your paycheck seized by court order for the payment of a debt. If you are subject to garnishment, your employer is notified and must, by law, withhold some of your earnings in order to satisfy your obligations. The amount that is subject to garnish is limited by law: under Title III of the Consumer Credit Protection Act, the garnishment can’t be excessive.
A garnishment is generally levied against your entire earnings. In other words, it’s not just your after-tax salary that can be seized. A garnishment on your earnings would generally mean attachment on wages, salaries, commissions, and bonuses, as well as your pension or retirement plan.
While garnishment can be used to satisfy a number of debts, common reasons for garnishment include unpaid local, state, and federal taxes, child support or alimony, student loans, and private creditors (you can also be subject to offset). Most creditors have to go to court and get approval before they can garnish but some government obligations – like monies owed to IRS – don’t require a court order.
And here’s the worst part: when your wages are garnished, that money isn’t considered tax-free, even if it never lands in your pocket. If your wages are garnished in order to pay your debts, the amount that is garnished is considered received by you for federal income tax purposes. That means that the amount garnished is considered income and is reportable as wages on your federal income tax return. The result is that you’ll be taxed on income that you never physically received – it’s considered constructively received and thus, fully taxable.
What’s the best way to avoid a garnishment? Pay attention to debtors – especially those government authorities. Open your mail. If you can’t pay obligations that are outstanding, consult with your tax professional for advice on how to structure your payments. It may be that you can make lower payments each month or submit an offer to pay less (though be careful since, depending on the kind of debt, a partial discharge may also be taxable).
Whatever you do, don’t ignore those pleas for payment: it’s an open invitation to your creditors to collect.
