Be Careful Who You Owe: Here's Who Can Garnish Your Wages

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Benjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes." Nowadays, some people would want to update that famous quote to include "debt."

From student loans to alimony, there are several instances in which your employer must withhold a certain amount from your wages and send it to your creditor. Let's review which creditors can do this, and when they are legally allowed to claim part of your hard-earned dollars.

1. Issuers of Student Loans

With the average student loan for Class of 2016 graduates at $37,172 (up 12.64% from two years earlier), many Americans entering the workforce may feel like the main character in "Game of Loans" (Interest is coming!). Since one estimate claims that 76% of Americans are living paycheck to paycheck, you could assume that it's just a matter of time until some of them start missing some monthly payments on their student loans.

After failing to make payments for 270 days, your federal student loan is considered to be in default. The period is 330 days for Federal Family Education Loan (FFEL) Program loans. The consequences of student loan default are very severe, including:

• Losing eligibility for additional federal student aid;
   
• Damaging your credit history;
   
• Having the federal government request your employer to withhold up to 10% from your paycheck to pay back a federal student loan;
   
• Having up to 100% of your federal tax refunds seized through the Treasury Offset Program; and
   
• Having authorized state guarantee agencies take up a portion of your state income tax refund.

Uncle Sam is legally allowed to withhold not only your paycheck, but also your tax refund! To prevent your student loan from being considered in default, stay in constant communication with your student loan issuer. If you are planning to miss any payments, read the fine print of your loan agreement to minimize consequences. If you're going into default, talk with your student loan officer in advance to discuss alternatives to wage garnishment, including consolidating your federal education student loans.

2. Internal Revenue Service (IRS)

When the taxman cometh and you don't answer his call, he'll seize part of your wages each pay period and send it to the IRS to cover your unpaid back taxes. Unlike other creditors, the federal government doesn't require a court order to levy your wages.

Once your employer receives a notice for wage garnishment (usually Form 668–W (ICS) or 668-W (C) DO) from the IRS, your employer must return a Statement of Exemptions and Filing Status to complete and return within three days. It's critical that your employer submits this form on time because it may help you to exempt part of your wages from garnishment according to the schedule of its Publication 1494.

For example, if you file your return as married and joint, and are able to claim four exemptions, you can exempt $951.92 from garnishment. If were to not return the statement in three days, your exempt amount is figured as if you were married filing separately with one exemption ($640.38).

Keep in mind that other income sources, including one-time bonuses, wages from additional employers, and commissions, may be levied at 100%. Besides when you pay back the remaining balance in full, the IRS will stop withholding part of your wages when you make other arrangements to pay your overdue taxes, including setting up an installment agreement, payment extension, or offer in compromise.

3. Spouse Demanding Child Support or Alimony

Love and marriage go together like a horse and carriage, until your spouse calls its quits and obtains a court order to automatically withhold child support or alimony moneys from your paycheck.

The Federal Wage Garnishment Law sets the following limits on wage garnishment on your paycheck for child support and alimony:

• Up to 50% of your disposable earnings if you're supporting another spouse or child;
   
• Up to 60% of your disposable earnings if you're not supporting another spouse or child; and
   
• An additional 5% for support payments more than 12 weeks in arrears.

4. Other Creditors With Court Orders Against You

Last but not least, private creditors, including credit card companies and health care institutions, and federal agencies other than the IRS, can obtain a court order to start garnishing your wages. Without a court order, "take it all" threats from pushy reps from creditors are absolutely empty. (See also: 4 Annoying Things Bill Collectors Can't Do — And How to Stop Them)

The Debt Collection Improvement Act of 1996 authorizes federal agencies and collection agencies under contract to garnish up to 15% of disposable earnings to repay defaulted debts to the U.S. government. For private creditors, the Act sets a limit on wage garnishment of up to 25% of disposable earnings or up to the amount that your earnings are greater than 30 times the federal minimum hourly wage, whichever is lower. In case of economic hardship, you may be subject to lower limits for potential wage garnishment.

Besides garnishing your wages, some creditors with a court order may want to go after your personal assets. Depending on your state of residence, you may be eligible for protection exemptions on vehicles and real estate property. For example, states New Mexico and Hawaii have collection exemptions on motor vehicles of $4,000 and $2,575, respectively. Contact your State Labor Office for more details.

The Bottom Line: Inform Yourself!

Wage garnishment is scary. Fortunately, there are several steps you can take to minimize how much can be seized from your paycheck. For additional information, visit the Wage and Hour Division website from the U.S. Department of Labor or call its toll-free helpline 1-866-4-USWAGE (1-866-487-9243), available 8 a.m. to 5 p.m. in your time zone. Also, you can find the contact information of your State Labor Officefor specifics on the rules in your state.