Loan Defaulting and Wage Garnishing
Failure to repay a loan may affect more than your credit rating. If you do not make your loan payments for a certain period of time, your creditor may file a lawsuit to have your wages garnished. If the state court confirms that you owe the money, a judgment may be filed to have your payments deducted directly from your wages until the loan has been paid off. Fortunately, you can avoid wage garnishment and also avoid loan fees if you attempt to resolve an unpaid debt before the creditor chooses this final resort.
The Process of Garnishment
Wage garnishment is usually a creditor's final step in attempting to collect on an unpaid loan. If you borrow money and cannot pay it back, a lender may sell your debt to a collection agency. The collection agency will attempt to contact you, often by calling you persistently at home and at work, until you agree to make payments on the loan.
If the collection agency is unable to collect the money that you owe, the agency may file a lawsuit with a court. If the court rules against you in the lawsuit, you may be ordered to pay off the loan through wage garnishment. Depending on the laws in your state, your available resources and the extent of the garnishment, your personal property or funds in your bank accounts may be garnished in addition to or instead of your wages.
After a judgment has been rendered, you have the right to appeal the amount of the garnishment. The court may decide to reduce the amount if you are unable to pay due to financial hardship, or if the amount of the garnishment would prevent you and your family from meeting your basic needs. Once the amount has been settled, a percentage of your wages will be deducted from your paycheck. Wage garnishment happens most frequently with debts such as unpaid student loans, taxes or child support, but a court may issue a judgment for unpaid credit card debt, as well.
The US Department of Labor limits the percentage of wages that may be garnished in order to leave the debtor with enough money to cover basic living expenses. Certain funds are exempt from garnishment, including the money that is owed for federal, state and local taxes, unemployment and Social security and state retirement system payments. However, the money you pay for benefits like health insurance is not exempt.
Avoiding Wage Garnishment
The best way to avoid wage garnishment is to address an unpaid debt as soon as you have difficulty making payments. If you have a personal problem that may interfere with your loan repayment, such as unemployment or a divorce, talk with your creditors or a credit card counseling agency immediately. By working with a reliable agency, you can prevent many of the consequences of defaulting on a loan, including bankruptcy or wage garnishment.
A manageable repayment plan may help you avoid wage garnishment. Try to arrange a payment plan before the loan is sent to a collection agency. Most creditors prefer to resolve a debt rather than send the loan to collections. Although it's tempting to ignore collection notices and phone calls, you may be missing important information about the status of your debt and how it will be handled.
If you receive notices threatening legal action, contact a credit counseling agency or attorney immediately. As a consumer, you have rights under the Consumer Credit Protection Act. Talk with a trusted credit counselor to find a practical solution to your financial dilemma before loan defaulting leads to wage garnishing.
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State Guides to Credit Card Laws
- North Carolina
- West Virginia