When you take out a payday loan, you’re generally given two weeks to repay that loan in full. While you may have every intention of fulfilling this agreement, it only takes one emergency expense to thwart your plans. Instead of opting to rollover the payday loan, incurring additional fees that increase your debt, you may decide to simply forgo the loan repayment. Unfortunately, this action can lead to some unpleasant consequences, such as wage garnishment.
What is wage garnishment?
According to NOLO, wage garnishment is when an employer withholds a set amount of money from a person’s paycheck as directed by an order issued through the court system. That money is then sent directly to the individual or company listed on the court order to whom the debt is owed. The wage garnishment expires only after the debt has been fully satisfied.
Can a payday lender garnish wages?
One of the most common questions asked by individuals who discover they can’t make their payday loan payment is “can they garnish your wages for a payday loan?” The answer is yes and no. The lender themselves cannot go to your employer and request a wage garnishment. The lender can, however, sue you in a court of law and request the judge grant a wage garnishment to recoup the amount owed.
If you neglect to make an appearance at the court hearing, the judge will likely grant the wage garnishment request. Even if you do show up to court, there is still a chance the judge will side with the lender. Either way, a wage garnishment can only happen if there is an order from the court. The Consumer Financial Protection Bureau (CFPB) recommends seeking legal advice if a lender threatens to illegally garnish your wages as a way to get you to pay up.
What happens when you don’t repay?
When you default on your payday loan, you can expect the following things to happen:
- The lender will attempt to cash your post-dated check or make an automatic withdrawal from your bank account, as agreed upon when you took out the loan. This will cause you to incur a nonsufficient funds (NSF) fee. If the lender makes multiple attempts, your bank may charge you the NSF fee multiple times.
- The lender will contact you, as well as anyone you listed on your application as a reference in an attempt to make arrangements to collect the debt.
- After approximately 60 days have past with no payment, the lender will send your case to a collection agency. Collection agents, who are often quite aggressive, will then begin calling you and your contacts.
- The collection agency will report the debt to the three major credit bureaus (Experian, TransUnion, and Equifax). Your credit score will take a hit, which could affect your ability to qualify for a mortgage or a future car loan.
- If the collection agency is unable to get ahold of you or unable to make arrangements for payments to be made, they will sue you in a court of law. At the court hearing, the collection agency will request the judge grant them a wage garnishment order.
- Once granted, the collection agency will serve the wage garnishment order to your employer, who will then withhold the required funds from your weekly paychecks until the debt has been satisfied.
How much can lenders take from your wages?
Title III of the Consumer Credit Protection Act actually puts protections in place for employees who have a wage garnishment order against them, including the amount of money that can be withheld from each weekly paycheck. The courts must look at the following two figures and use the lesser amount:
- 25% of the employee’s disposable earnings.
- The amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage.
Example: (1) If your disposable earnings are $300 then 25% of that amount is $72.50. (2) Since $7.25 x 30 = $217.50, disposable earnings of $300 – $217.50 = $82.50. The lesser of the two figures is $72.50, so that is the amount that would be garnished from your weekly paycheck.
It’s important to note that some states actually have wage garnishment laws with limits that are lower than that of the laws set by the federal government. If you’d like to quickly check the limits in your specific state, NOLO has compiled a State Wage Garnishment Laws page that you can utilize.
Another fact you’ll want to take note of is that Title III prohibits employers from firing employees who are subject to wage garnishment. This protection only exists for the first wage garnishment order. If a second order is issued for another debt, the employer can legally let the employee go.
How to avoid wage garnishment
If you find that you are unable to repay your payday loan when it comes due, there are some steps you can take to avoid having your wages garnished.
- Start negotiating. The worst thing you can do is ignore the payday lender or the collection agency the payday lender is using. Most of the time, you can negotiate with the company to accept a lesser amount over a designated period of time. Be honest with the lender about what you can afford to pay.
- Check with local charitable organizations to get some temporary help with rent, utilities, and groceries. This will free up some money that you can use to pay off the payday loan.
- Set up an appointment with a non-profit credit counseling service. Start with your bank or credit union, as they often offer this service to their members completely free of charge. They can help you create a debt repayment plan, as well as speak to your debtors on your behalf.
- Attend every court hearing, should your case have escalated that far. Ask the judge to consider a repayment plan that you can afford in lieu of wage garnishment. If the judge sees you have a solid plan, he or she may be more likely to grant your request.