Updated By Lisa Guerin
If you owe debts you can't repay, you are probably facing debt collection efforts from creditors. You may be the target of phone calls and letters from collection agencies, or even lawsuits filed by creditors to whom you owe money. Of all the consequences of owing money, however, one of the most significant is wage garnishment: a court order that directs your employer to take money right out of your paycheck and send it to a creditor.
For those who are struggling to get by, wage garnishments lead to deeper financial problems. In fact, a wage garnishment can be the final straw that pushes a debtor into bankruptcy. Once a debtor files for bankruptcy, however, there's some good news: A legal protection called the automatic stay goes into effect immediately, which stops most wage garnishments and prevents creditors from seeking new garnishments while the bankruptcy case is proceeding.
How Wage Garnishments Work
A wage garnishment is a court order requiring an employer to withhold a set amount of an employee's pay and send it to the person or institution named in the order. Garnishments for certain types of debts are issued automatically. For example, since 1988, all child support orders include an automatic wage withholding order. If you owe back taxes, the IRS can garnish your wages. Student loan defaults may also result in a wage garnishment by the Department of Education or any agency trying to collect the loan on its behalf.
Unless you owe child support, back taxes, or defaulted student loans, however, a creditor must file and win a lawsuit against you and get a court order requiring you to pay the debt. With this court order in hand, the creditor can seek a wage garnishment.
There are legal limits on how much of an employee's wages may be taken to satisfy particular debts. For court judgments, the maximum is 25% of the employee's disposable earnings (this is the federal limit; some states set a lower percentage). Up to 15% of an employee's pay may be garnished for student loan debt. For child support and tax debts, a much higher percentage may be taken.
How the Automatic Stay Can Help
The moment a debtor files for bankruptcy, the automatic stay goes into effect. The automatic stay stops most types of debt collection efforts immediately, including wage garnishments. By stopping all debt collection activity, the automatic stay gives debtors a bit of a break from the financial crisis that drove them to bankruptcy. It also gives the power over a debtor's financial affairs to the bankruptcy court, rather than leaving it to the persistence of individual creditors. The stay ensures that the court will decide which property the debtor gets to keep, which property the debtor will have to give up, and which creditors (if any) are entitled to repayment.
If the debt that led to the wage garnishment will be wiped out in bankruptcy, filing for bankruptcy will stop the garnishment permanently. For these debts, which include credit card bills, medical bills, and court judgments, the automatic stay will stop wage garnishments -- and, because those debts will likely be wiped out in bankruptcy, that will solve the problem once and for all. Those who file for Chapter 7 bankruptcy can get these debts discharged at the end of their case; Chapter 13 filers can include these debts in their repayment plan, rather than facing wage garnishments.
However, not all debts may be discharged. For some of these debts, including back taxes, filing for bankruptcy will temporarily stop collection efforts, including through wage garnishment. Once the bankruptcy case is over, however, you will still owe these debts -- and the automatic stay will no longer protect you from efforts to collect them. If you owe child support, filing for bankruptcy won't affect an existing wage garnishment. And, because child support obligations aren't wiped out in bankruptcy, the garnishment will continue before, during, and after a bankruptcy case, just as if you had never filed for bankruptcy. (Because bankruptcy will discharge many other types of debts, however, at least you should be left with more money to pay those debts that survive bankruptcy.)
Learn more about what bankruptcy can do in our section on the automatic stay.
If your wages have been garnished and you are facing mounting debt, filing for bankruptcy may be a good choice. Because not all debts are discharged in bankruptcy, however, you may want to talk to an experienced bankruptcy attorney to review your options and make sure the benefits of filing outweigh the downsides.