A payday loan seems like an easy solution. You get money fast, with no credit check. All you need is a bank account and a source of income. You solve your short-term financial problem and you’ll pay it back as soon as you get your check… or that’s the plan, anyway.
Things don’t always go as planned. A sudden expense at the wrong time, and you can’t pay the loan back on schedule. Rolling the loan over means more interest. But what if you just don’t pay? That’s an option, but it can have consequences, including wage garnishment.
What is Wage Garnishment?
The Consumer Financial Protection Bureau (CFPB) says: “A wage or bank account garnishment occurs when a creditor takes a portion of your paycheck or money from your bank account to collect a debt”.
Can a Payday Lender Garnish Wages?
A lender cannot go directly to your employer and request a wage garnishment. Only a court can order a garnishment for a payday loan.
If you fail to pay a debt, the lender can sue you. If you fail to appear to defend yourself, the judge will probably rule in favor of the lender and issue a garnishment order. Even if you do appear, the judge may rule in favor of the lender.
They may sell your account to a collection agency, which can also sue you.
A lender or collection agency cannot threaten to garnish your wages without a court order. If a lender or collector makes this threat, seek legal advice.
What Happens If You Don’t Pay?
If the due date for your loan arrives and you fail to pay, several things will happen.
The lender will try to cash your postdated check or make a debit from your bank account, as specified in the loan agreement. If your account balance won’t cover the payment the bank will reject the request and charge you an insufficient funds fee (NSF).
The lender may make multiple attempts to cash the check or debit your account. You’ll pay a fee each time.
The lender will contact you, as well as anyone you listed on your application as a reference in an attempt to collect the debt. The lender will be very persistent.
After 60 days or so, the lender may send your case to a debt collector. Collection agents will then make annoying collection calls, harassing you and sometimes your friends and employers.
The debt collection agency will report the debt to the three major credit bureaus. Your credit score will drop, which could affect your ability to qualify for a mortgage or car loan in the future.
If you continue to avoid the collection agency, they will take you to court. They will ask the judge for a wage garnishment order.
If the judge issues the order, the collection agency will serve the wage garnishment order to your employer, who will withhold the funds from your paychecks until the debt is satisfied.
Don’t assume that a lender or collector won’t sue over a small amount. Payday lenders and debt collectors routinely file lawsuits over small debts.
How Much Can Creditors Take From Your Wages?
Title III of the Consumer Credit Protection Act sets the maximum amount that can be garnished at the lesser of two figures.
- 25% of the employee’s disposable earnings.
- The amount by which an employee’s disposable weekly earnings are greater than 30 times the federal minimum wage.
For example, since the federal minimum wage is $7.25/hr and 7.25 x 30 is $217.50, if your weekly wage is $217.50 or less there can be no garnishment from your wages.
If your disposable earnings are $300. then 25% of that amount is $72.50. 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.
Employers are not allowed to fire an employee over a single wage garnishment. This protection is revoked if an employee has two or more wage garnishments.
Some State Laws Ban Wage Garnishment
States cannot allow creditors to garnish more than federal law allows but they can apply laws with greater restrictions on garnishment.
Four states — Pennsylvania, North Carolina, South Carolina, and Texas — have banned wage garnishment altogether. A number of other states suspended garnishment during the COVID-19 pandemic. Many of these states are now relaxing these suspensions.
Many states have restrictions on wage garnishment that are tighter than those allowed by federal law. Check your state’s wage garnishment laws to see what restrictions apply in your area.
Wage Garnishment Exemptions
Some forms of income cannot be garnished for debt payments.
- Child support that you are receiving
- Federal student loans
- Supplemental Security Income (SSI) benefits
- State disability benefits
- State welfare payments (TANF)
- Federal veteran’s benefits
Disability payments, Social Security benefits, and retirement benefits cannot be garnished for debt payments, but they can be garnished for child support, alimony, or federal tax debt.
These forms of income cannot be garnished, but they can be withdrawn from your account by a lender if you gave the lender authorization.
How to Avoid Wage Garnishment
Don’t sit and wait for the lender to sue you or sell your debt to a collection agency. This is not a problem you can hide from. Here’s what you can do.
Ask about an Extended Payment Plan (EPP). Some states require lenders to offer Extended Payment Plans, which allow you to pay in installments without further fees or interest. You will have to apply the day before your loan is due.
Work out a payment plan with your creditor. Even if the lender doesn’t offer an EPP, 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.
See a nonprofit credit counseling service. Your bank or credit union may offer this service free of charge. They can help you create a debt repayment plan and negotiate with your creditors.
If you are sued, attend every court hearing. Ask the judge to consider a repayment plan that you can afford instead of wage garnishment.
You cannot be arrested or jailed for failure to pay a debt, but you can be arrested and jailed for contempt of court if you fail to attend hearings or follow court orders. Always respond to messages, appear on schedule, and comply with court orders!
Other Ways to Get Out of Payday Loan Debt
There are other ways to resolve a payday loan or avoid using payday loans in the first place.
Read more: How to Get Out of Payday Loan Debt for Good.
A personal loan can be an alternative to a payday loan. It can also help you pay off your payday loans and replace them with a longer-term loan with lower monthly payments and a lower interest rate.
Many people turn to payday loans because they think they won’t qualify for a personal loan, That’s not always the case. Upstart will lend to people with no credit or bad credit, and Upgrade will lend to borrowers with credit scores as low as 550.
Many local banks and credit unions also offer loan products designed to help customers avoid or escape the payday loan trap.
Payday Loan Consolidation
Payday loan consolidation involves replacing several old loans with a single new loan. You simplify your monthly payments, making it less likely that you’ll forget one, and you can often get a new loan at a lower interest rate.
Personal loans are often used for debt consolidation and many banks, credit unions, and online lenders offer loans specifically for debt consolidation.
Nonprofit credit counselors offer debt consolidation without a loan, in the form of a debt management plan. You will make a single monthly payment to the counseling service. They will pay your creditors and negotiate for better terms.
Debt settlement involves negotiating with creditors to reduce debts or improve the terms. You can do this yourself. There are also companies who will take on the job for you. Some will combine settlement with consolidation.
Be careful when selecting a settlement company or a credit counselor. Debt relief and credit repair scams are rampant, but there are still some legitimate players. Check customer reviews and the company’s reputation.
Bankruptcy can discharge most unsecured debts, including payday loans, credit card debt, and medical debt. Your credit will suffer but most people who are in a position to file for bankruptcy have badly damaged credit already.
In the simplest form, most payday loan borrowers will qualify for Chapter 7 bankruptcy. It is possible to lose assets during the Chapter 7 process, but if you don’t have significant assets to begin with, this will be less of a threat.
Bankruptcy is a complex process that may require legal assistance. If you can’t afford a lawyer, consider trying Upsolve, a free app that prepares filing forms for simple Chapter 7 bankruptcies.
Are your wages being garnished? Here are some tips on how to end it:
The Bottom Line
A payday loan agreement is a contract. It’s unfair and exploitative, but it’s still legal. If you fail to pay, the lender or a debt collector can sue you. If the judge rules against you they can garnish your wages, subject to legal limits.
You can avoid that outcome. Don’t try to run or hide. Negotiate with your lender and consider debt consolidation or settlement. Avoid new payday loans: that just puts you deeper into the trap. If you are sued, appear when instructed and offer a payment plan.
You can escape from payday loan debt without wage garnishment. It’s not easy, but it’s possible!
Wages can be garnished for medical bills with a court order. A medical provider or collection agency can take you to court over unpaid bills. If the court rules in their favor they can garnish your wages.
If you fail to pay federal student loans the government can garnish up to 15% of your wages. Unlike private creditors, they can do it without a court order.
The government has paused all garnishments through May 1, 2022, as part of their COVID-19 relief program. Garnishments may resume after that date unless the suspension is extended.
Check your paycheck’s deductions for “Miscellaneous” or “other” deductions. If you aren’t sure or if you are paid by direct transfer, ask your employer’s payroll or HR department if they have received a garnishment order.