How to Protect Wages and Benefits from Creditors

Why Attorneys Need to Know About Wage Garnishment and Bank Account Seizures

With the explosion of creditor and debt buyer-initiated collection lawsuits, there is a parallel dramatic increase in judgment creditors garnishing consumer wages and seizing bank accounts. This article explains how to evaluate and minimize a consumer’s exposure to such post-judgment creditor remedies and describes federal protections and also state protections in each of the fifty states.

It is just as important to understand a client’s exposure to wage garnishment and bank account seizure when representing a client who is not yet subject to post-judgment remedies, but who has recently been sued or who may be sued. The client’s exposure to post-judgment remedies will affect not only the size of any possible settlement (or even the client’s reason to offer any settlement), but also will affect the resources that should be devoted to the defense of a collection action.

Apart from any pending collection lawsuit, clients should also be advised about which of their debts to pay first. Knowing whether wages or benefits will eventually be lost if a particular unsecured creditor is not paid is an essential factor in determining the priority that such a debt should be given in relation to a client’s other financial obligations.

Other than student loan debts, almost all unsecured consumer debt can be eliminated in bankruptcy. But an analysis of the risk the client faces from unpaid, unsecured debts plays an important role in deciding whether to file bankruptcy. Filing for bankruptcy too soon—before there is a real need—is not only expensive and time-consuming, but it can also deprive the consumer of bankruptcy protection when new debts arise in the future.

This article provides a summary of federal and state law protections and provides a number of practice tips. Far more detail on protecting a client’s wages, public benefits, and bank accounts, as well as other personal and real property is provided in the resources listed at the end of this article.

State Law Often Is Key to Protecting Wages from Garnishment

A creditor that obtains a judgment on a debt can garnish the consumer’s wages, meaning that it can obtain an order requiring the consumer’s employer to send a portion of the consumer’s wages directly to it. Federal law protects from garnishment 75% of a consumer’s disposable earnings or 30 times the federal minimum wage ($217.50 per week), whichever is greater. The creditor can seize the balance.

Disposable earnings are the employee’s earnings after deduction of amounts required by law to be withheld. Amounts withheld include federal, state, and local taxes, Social Security, and contributions to other governmental retirement programs that are required by law. See NCLC’s Collection Actions § 14.2.1 for more on the definition of “disposable wages,” what income is protected, the treatment of multiple wage garnishment orders, and all other aspects of the federal wage garnishment protections.

These federal protections provide a baseline of protected wages, and most states provide significant additional protections from wage garnishment. With few exceptions, all wages are fully protected from garnishment in four states: North Carolina, Pennsylvania, South Carolina, and Texas. However, judgment creditors sometimes seek to evade these protections by serving the wage garnishment order on the consumer’s employer’s office in another state. For example, if a Texas debtor worked for a Texas employer that also had an office in Oklahoma, the judgment creditor might serve the wage garnishment order on the Oklahoma office, seeking to take advantage of Oklahoma’s lesser protection of wages. See NCLC’s Collection Actions § 13.3.8.

Ten states protect both a higher percentage of wages and a higher amount per week than federal law requires:

• California, which protects 40 times the state, federal, or local minimum wage and allows garnishment of just 50% of the debtor’s wages in excess of that amount;
• Colorado (80% or 40 times the state minimum wage of $11.10);
• Illinois (85% or 35 times the federal minimum wage or the state minimum wage of $8.25);
• Massachusetts (85% or 50 times the state minimum wage of $12);
• Nevada (82% or 50 times the federal minimum wage);
• New York (90% or 30 times the federal minimum wage or the state minimum wage, which ranges from $11.10 to $15));
• South Dakota (80% or 40 times the federal minimum wage or the state minimum wage of $9.10, plus $25 per dependent);
• Vermont (85% or 40 times the federal minimum wage);
• Washington (80% or 35 times the state minimum wage of $12); and
• West Virginia (80% or 50 times the federal minimum wage).

Protecting a higher multiple of the minimum wage—a higher flat amount—means that more low-income debtors will have all their wages protected. Protecting a higher percentage of the debtor’s earnings benefits workers at all income levels.

Thirteen jurisdictions protect a higher flat amount per week, but do not protect a higher percentage of wages than the federal minimum. These states are:

• Alaska ($743 a week if the debtor is the household’s sole support);
• Connecticut ($404);
• District of Columbia ($560);
• Iowa ($290);
• Maine ($440);
• Minnesota ($290);
• New Hampshire ($362.50);
• New Mexico ($290);
• North Dakota ($290 plus $20 per dependent);
• Oregon ($254);
• Tennessee ($217.50 plus $2.50 per child);
• Wisconsin (the federal poverty amount); and
• Virginia ($290 plus extra for children in low income families).

Six states protect a higher percentage of wages than federal law requires but not a higher flat amount:

• Delaware (85%);
• Hawaii (protects 95% of first $100, 90% of next $100, 80% of remainder);
• New Jersey (90% of wages if the debtor is under 250% of poverty);
• Missouri (90%);
• Nebraska (85%); and
• Virgin Islands (90%).

Nineteen jurisdictions do not offer protections greater than the federal minimum: Alabama, Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Montana, Ohio, Oklahoma, Puerto Rico, Rhode Island, Utah, and Wyoming.

Seven jurisdictions provide for hardship exemptions in addition to the percentage or dollar amount protections. How these exemptions work will vary by state, but consumers should seek this protection where applicable in Arizona, California, Colorado, District of Columbia, Indiana, Oklahoma, and Wisconsin. In addition, New York, Minnesota, and Rhode Island provide exemptions for debtors based on receipt of or, in Minnesota and New York, eligibility for public assistance. For more detail on hardship exemptions, see NCLC’s Collection Actions § 14.2.3.3.

For a more comprehensive analysis of state restrictions on wage garnishment, state remedies, and the relationship between federal and state exemptions, see generally NCLC’s Collection Actions § 14.2.3 and Appendix G. See also NCLC’s No Fresh Start in 2019: How States Still Allow Debt Collectors to Push Families Into Poverty (Nov. 2019).

Tips to Limit Wage Garnishment

Make sure the consumer is adequately withholding taxes. If not enough taxes are withheld, not only is there a tax liability at the end of the year, but an additional amount will be garnished from the consumer’s paycheck.

Federal and state wage garnishment limits apply to the cumulative amount of all garnishments sought by multiple creditors in a given pay period. For example, if the consumer’s wages are being withheld to pay child support, the amount withheld reduces dollar for dollar the maximum amount that can go to other creditors. Where a consumer is obligated to pay child support, if that obligation is paid through a payroll deduction rather than voluntarily, the consumer is protected from a judgment creditor’s garnishment. See NCLC’s Collection Actions § 14.2.1.5.5.

Wage Assignments Are Illegal

Creditors may seek to avoid state and federal protections from wage garnishment and even the necessity to obtain a court judgment by asking the consumer as part of the initial credit agreement to sign a wage assignment. A wage assignment instructs the consumer’s employer to send a portion of the consumer’s pay to the creditor each pay period. Courts have held that the federal law that limits the amount of a wage garnishment protection does not apply to wage assignments. See NCLC’s Collection Actions § 14.2.1.2.

The Federal Trade Commission’s Credit Practices Rule prohibits wage assignments in connection with the extension of credit to consumers in or affecting commerce. 16 C.F.R. § 444.2(a)(3). Only three exceptions are allowed: if the assignment is by its terms revocable at will by the debtor; if the assignment is a payroll deduction plan that commences at the time of the transaction; or if the assignment is of wages already earned at the time the consumer entered into the wage assignment.

If a consumer has entered into a wage assignment with a creditor, such as a payday lender, the consumer should immediately revoke the assignment. If the assignment is irrevocable and does not fall into one of the other exceptions, then this is a violation of the FTC rule. While there is no direct private right of action for a violation of an FTC rule, a rule violation should be an unfair or deceptive practice under a state UDAP statute, leading to strong private remedies. For more detail on wage assignments and remedies, see NCLC’s Collection Actions § 14.2.5.

Federal Student Loan Wage Garnishment Is a Different Animal

Federal law allows administrative wage garnishment—a garnishment issued by a federal agency rather than a court, and without any court judgment—to collect student loan debts and other federal debts. Up to fifteen percent of the borrower’s disposable wages can be seized through a single administrative wage garnishment order. State law wage garnishment protections do not apply, but federal protections do apply.

The general federal limit on wage garnishment applies to these administrative student loan garnishments. See 34 C.F.R. § 34.19(b). Thus a minimum of 30 times the federal minimum wage—$217.50 a week—of disposable earnings is fully protected. In addition, the 15% federal student loan garnishment counts toward the 25% federal wage garnishment limit, so that a second garnishment by a private creditor could only seize 10% of the debtor’s income.

Student loan borrowers can also object to the administrative garnishment on the basis of financial hardship. See NCLC’s Student Loan Law § 9.3.2.3.4. If they instead enter into a rehabilitation plan, garnishment stops after the borrower makes five payments. See NCLC’s Student Loan Law § 9.3.2.4.

Student loan borrowers can also head off garnishment by entering into a repayment plan or consolidating their loans before the garnishment begins. Consolidation means that the loan is no longer in default and thus is not subject to garnishment. But consolidation is not allowed once the garnishment order has been entered. See NCLC’s Student Loan Law § 9.3.2.4.2.

The United States, but Not Private Creditors, Can Offset Debts Against Social Security and Certain Other Federal Benefits

Federal law protects Social Security, SSI, VA benefits, and certain other federal benefits against garnishment for ordinary non-federal debt. In other words, an ordinary judgment creditor cannot require the Social Security Administration or the Department of Veterans Affairs to withhold any portion of a debtor’s benefits to pay a judgment debt.

On the other hand, the United States can offset debts owed to it against certain federal benefit payments. The United States can seize only that portion of a monthly benefit payment that is in excess of $750, and the maximum seizure is 15% of a monthly benefit payment. See NCLC’s Student Loan Law § 9.4.2.

Offset is allowed for Social Security benefits, Black Lung Part B benefits, and some railroad retirement benefits. Offset is not allowed for many other federal benefits, including Supplemental Security Income (SSI), VA benefits, benefits under the Higher Education Act, and Black Lung Part C benefits.

Federal regulations require the debtor to be given advance notice and an opportunity for administrative review before the offset occurs. In the case of student loans, the borrower can also apply for a hardship reduction of the amount offset. See NCLC’s Student Loan Law § 9.4.3.2.

Protecting Benefits from Seizure Once Deposited in a Consumer’s Bank Account

While federal and state benefit payments are exempt from garnishment by private judgment creditors while in the hands of the disbursing agency, the benefit’s exempt status becomes murky once deposited in a bank account. A bank that receives a garnishment order from a judgment creditor may freeze all funds in the account, whether the funds are exempt or not. The usual rule is that the consumer bears the burden of proving that certain funds are exempt, and failure to do so will result in the funds being sent to the judgment creditor.

Fortunately for consumers, an important U.S. Treasury rule requires banks to protect any Social Security, SSI, VA, or certain other federal benefits that were directly deposited into a consumer’s bank account within the preceding two months. 31 C.F.R. § 212. For a thorough analysis of the Treasury rule, see NCLC’s Collection Actions § 14.5.4.

The Treasury rule only protects two months of Social Security, SSI, or VA benefits. If the consumer has accumulated more than two months of benefits in the account, the rule does not apply to the excess. Nor does the rule apply to state benefits or to benefit payments paid by check as opposed to direct deposit. In all of these cases, the benefits may still be exempt, but the bank is not required to protect them. The consumer has the burden of proving the exemption, and in the meantime the bank will freeze the account.

Another way to protect Social Security, SSI, and VA benefits from seizure is to have them deposited directly from the Treasury to a Direct Express prepaid card. Funds deposited onto Direct Express cards are completely exempt from garnishment by judgment creditors. The consumer then uses the card like any debit card to obtain cash or to make purchases. The card is provided by a private bank under contract with the United States. To sign up for a Direct Express card, call 1-800-3333-1795 or visit www.usdirectexpress.com. See NCLC’s Collection Actions § 14.5.5.2.

If the consumer retains exempt funds in a bank account not protected by the U.S. Treasury Rule, one option is to create two accounts, one account holding only exempt funds. This makes it easier for the consumer to prove that funds in one of the accounts are exempt from seizure, because it eliminates the complications caused by commingling of exempt funds with non-exempt funds. If the consumer opens two accounts, the consumer should first spend down funds from the non-exempt account before using the exempt funds.

State Law Protecting Wages Once Deposited in a Bank Account

Unless funds are exempt, judgment creditors can seize funds from a consumer’s bank account to pay a judgment against the consumer. While federal and state laws protect wages before they are distributed to the consumer, the wages may be subject to seizure once deposited in the consumer’s bank account, absent state law to the contrary. For a detailed description of applicable law protecting wages and benefits deposited in a bank account, see NCLC’s Collection Actions § 14.5. See also NCLC’s No Fresh Start in 2019: How States Still Allow Debt Collectors to Push Families into Poverty (Nov. 2019). This article provides a summary of state law exemptions protecting bank accounts from judgment creditors. Additional or different exemptions may apply in a bankruptcy proceeding.

A key distinction is whether an exemption for funds in the consumer’s bank account is self-executing or whether the consumer must take affirmative action to present the exemption. If an exemption is self-executing, the bank will protect the funds without the consumer having to claim an exemption, so there will not be a period of time when the account is frozen.

Some state exemptions are self-executing. For example, New York’s exemption of $2,664 to $3,600 (depending on the applicable state minimum wage) in the consumer’s bank account is self-executing. The consumer need take no action to protect the funds and they are not subject to a bank freeze. Effective September 1, 2020, the same will be the case in California with a $1724 exemption.

An example of an exemption that is not self-executing is a wildcard exemption that allows the consumer to designate the property to which the wildcard dollar exemption applies. To make a wildcard exemption effective, the consumer must affirmatively initiate a process to apply the exemption to the consumer’s bank account, and the account may be frozen until the process is successfully completed.

About two-thirds of the states give debtors a wildcard exemption that can be applied to property of the debtor’s choice. In fifteen states—Alabama, District of Columbia, Florida, Illinois, Maryland, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, South Dakota, Tennessee, Virginia, and Washington—it appears that the consumer can apply the wildcard exemption to a bank account. In some of these states the exemption law explicitly allows the wildcard to be so applied, and in others the exemption law is ambiguous but there are cases in which courts have allowed the wildcard to be used to protect a bank account. Of course, consumers may prefer to apply the wildcard exemption to protect the consumer’s car or other property instead of or in addition to the bank account.

In a number of states, the exemption law explicitly provides that the wage garnishment exemption continues after the wages are deposited into a bank account, and in other states courts have interpreted the statute to protect deposited wages. All in all, it appears that deposited wages continue to be exempt in thirteen jurisdictions: California, Colorado, Connecticut, Florida, Idaho, Iowa, Minnesota, Montana, Nebraska, North Carolina, Oklahoma, Oregon, and Puerto Rico. This protection is not self-executing, however. The bank does not know the dollar amount of the consumer’s wages that are exempt from seizure, and the consumer must prove this amount. In addition, the exempt portion of wages will be commingled in the account with the non-exempt portion of wages and other non-exempt deposits. Issues will arise as to whether the withdrawals from the account were of exempt or non-exempt funds, affecting the exempt status of funds left in the account. The whole account may be frozen in the interim.

Thirteen states follow a third approach to exempt a certain dollar amount in the consumer’s bank account no matter their source:

• Alaska ($2,970 under certain conditions);
• Arizona ($300);
• California ($1,724 effective Sept. 1, 2020);
• Indiana ($350);
• Massachusetts ($2,500);
• New York ($2,664–$3,600);
• North Dakota ($3,000);
• Ohio ($500);
• Puerto Rico ($400);
• South Carolina ($6,100);
• Vermont ($700);
• West Virginia ($1,100); and
• Wisconsin ($5,000).

Whether such an exemption is self-executing or not will depend on state law and practice.

Practice Tips for Dealing with Bank Account Freezes and Seizures

Often a bank account will be in the name of two individuals. If there is a judgment against one of the account holders but not against the other, a bank account garnishment could result in seizure of funds belonging to the non-debtor, not just the debtor’s funds. Even if state law provides that a portion of a joint account is exempt from seizure for the other joint-owner’s debts, the whole account may be frozen until a determination is made as to what part belongs to each joint account holder. Where one of two account holders owes a judgment debt, consider splitting the joint account into two accounts and keeping all of the non-debtor’s funds in the account that is solely in the non-debtor’s name. Paying expenses first from the account that is in the judgment debtor’s name will reduce the balance in that account and minimize the amount that is vulnerable to garnishment.

Judgment creditors may seek to seize any bank account with the consumer’s name on it, even if the funds in the account do not belong to the consumer. Consumers who have or expect to have a judgment entered against them should remove their names from any account that holds someone else’s money (for example, accounts containing funds owned by another family member, such as an elderly parent or a child). If the owner of the funds needs the consumer to manage the account, a power of attorney should be used or the account should be clearly designated as a trust.

Consumers may also be able to limit the risk of seizure of their funds by placing the funds on a prepaid card instead of in a bank account or, if available from their employer, receiving wages on a payroll card. Funds in prepaid and payroll card accounts may be subject to seizure, but as a practical matter judgment creditors are far less likely to seize these types of accounts. Employers increasingly offer employees the option to have wages deposited in payroll card account, and this may be a good choice, but be sure to check the fees and understand how to avoid them, especially by using only ATMs in the card’s network.

Watch out because prepaid cards (and bank accounts) can have high fees or other disadvantages. Avoid prepaid cards, debit cards, or “checkless checking” accounts offered by payday lenders and check cashers, which may have high fees or even overdraft fees. The overdraft “protection” these accounts may offer is really just permission to charge fees and to push people into a cycle of debt. Safe accounts are never a vehicle for borrowing, but only for the storing and spending of money that the consumer already has.

Consumers can also avoid seizure of their funds by placing the funds on a prepaid card instead of in a bank account. It is true that prepaid cards are linked to a bank account, and that account may be subject to seizure, but as a practical matter judgment creditors are far less likely to seize accounts linked to prepaid cards. Employers increasingly offer employees the option of having wages deposited in a special employee prepaid card, and this may be a good choice. Watch out because prepaid cards can have high fees or other disadvantages, but so do many bank accounts. Avoid prepaid cards that allow for high overdraft fees. Prepaid cards should never be a vehicle for borrowing, but only for the storing and spending of money that the consumer already has.

Seizure can also be avoided by opting out of direct deposit payments to a bank account and receiving paper checks. Paper checks do have a greater risk of theft and loss. Paper checks also will have to be cashed. Avoid expensive check cashers. Look for local stores or friends or relatives to cash a check without high fees. Checks from a major employer in a community are safe bets to cash. Even if the consumer must pay a fee to cash a check, that may be better than having the check deposited and then seized in its entirety or at least frozen.

Resources for More Information

• NCLC’s Collection Actions Appendix G and also NCLC’s Consumer Bankruptcy Law and Practice Appendix J provide detailed state-by-state summaries of each state’s exemption laws that apply to wages, homestead, tangible personal property, benefits, retirement plans, other intangibles, and tax refunds. Statutory citations are provided, and details regarding extraterritorial application and the relation of state exemptions to federal bankruptcy exemptions are also listed.
• NCLC’s Collection Actions Chapter 13 (Enforcement of Judgments), Chapter 14 (Protecting Debtors’ Wages, Benefits, Other Income, and Bank Accounts), Chapter 15 (Protecting the Debtor’s Home, Tangible Personal Property, and Other Assets), and Chapter 16 (Debtor’s Examinations and Imprisonment for Debt).
• NCLC’s Student Loan Law Chapter 9 (Seizures of Income and Assets to Collect Federal Student Loans).
• NCLC’s No Fresh Start in 2019: How States Still Allow Debt Collectors to Push Families Into Poverty (Nov. 2019) (109 pp.) is a detailed report on the state of exemption law in all 50 states with recommendations for reform.