If you borrow money online or from a payday loans store and are unable to pay back your loan, be it a payday loan or another form of short term loan like an installment loan or cash advance loan, lenders could garnish your wages as a last resort and in the worst cases.
This would however, only happen if they have taken out a lawsuit against you and received a court order.
It is important to remember to only ever borrow money you know you can truly and comfortably afford to repay on time. If you don’t think you will be able to pay back a loan on time or in full, the best thing you can do is avoid getting that loan in the first place and seeking an alternative way to get the money you need for your financial emergency.
What is Wage Garnishment?
Wage garnishment is when your employer is legally required to hold back a portion of your wages in order to put towards your debts. Similarly, bank garnishment is the name given when your bank or credit union is given an order to hold a certain amount back to pay back your payday lender or collector.
The exact conditions of wage garnishment will vary from state to state, with some states not permitting either wage or bank garnishment. Certain states will also have specific exemptions.
Therefore, in the case of online loans, if you have for example, taken out a payday loan in Florida, the laws around your employer garnishing your wages will be specific to the State of Florida. Likewise if you live in Kentucky or another state. Always check your state’s laws on garnishing wages before borrowing any money.
Are Payday Lenders Legally Allowed to Garnish My Wages?
If you cannot repay your loan, the lender can sue you in order to collect their debt. In the case that you do not dispute the lawsuit or claim, or that it goes ahead and they win, the court can issue an order against you.
The order, or judgment, will lay out the amount of money that you are required to pay back. After that, the lender can then arrange for a garnishment order against you.
It should be noted that even if payday lenders threaten garnishment, they can only do so if they have a court order or judgment.
In certain states, wage garnishment is banned. For example, in Pennsylvania, North Carolina, South Carolina and Texas, wage garnishment is banned altogether. In other states, there may be limits to how much creditors are able to garnish.
What Happens If You Don’t Repay a Loan?
If you are unable to pay back your loan, there are various steps that will take place before your wages are garnished. It doesn’t matter whether you have taken a $2000 loan or if you have a smaller loan, if you do not repay what you owe, the consequences are broadly similar.
When your payment is due, if the money is not received by the payday lender, they may try to cash your post-dated check or try to make an electronic withdrawal from your bank.
If you do not have enough balance in your account, you could be charged overdraft fees by your bank. For example, if you borrow $500 and do not repay what you owe on time and only have $200 in your bank account, and owe $400 a lender may withdraw the money from your account, leaving you with a $200 overdraft, plus any overdraft fees.
At this stage, the lender will most likely contact you for payment. Only then, if their efforts to contact you are unsuccessful, will the lender escalate action to a debt collection agency. When this happens, the collection agency can use all means possible in order to recover the debt.
If the debt collector wins the case, they could be granted a wage garnishment order; this means that they are able to collect their payment directly from your paycheck.
What is the Most Wages Can Be Garnished?
There is a maximum amount which is legally allowed to be garnished from your wages, if you owe money. In accordance with Title III of the Consumer Credit Protection Act, the maximum amount that can be garnished is either:
- The amount by which an employee’s disposable weekly earnings are greater than 30 times the federal minimum wage
- 25% of the employee’s disposable earnings
The amount that can be taken will be the lesser of these two figures.
If an employee has a single wage garnishment, it is not grounds for their employer firing them; however, if they have two or more wage garnishments, an employer may choose to fire them.
Can Your Bank Account Be Garnished?
In short, yes. If you owe money and a court order is obtained, it is possible and legal for creditors to be able to garnish your bank account. This means that any money you hold in your bank account or accounts can be garnished by those that you owe money too.
This includes any savings and savings accounts, which legally be allowed to be garnished. This simply emphasizes the importance of paying what you owe on time and in full, to avoid being dragged through the court process and having your wages or your bank account and savings garnished.
Does Wage Garnishment Hurt Your Credit Score?
Wage garnishment itself does not harm your credit score as any wage or bank account garnishments are not included on a credit report and in your credit score. However, missing payments and failing to pay what you owe will affect your credit score in a negative way and will negatively affect your chances of being accepted for a loan or for any credit in the future.
Is It Possible To Avoid Wage Garnishment?
If you are worried about wage garnishment and fear that you are unable to repay your payday loan, first contact your lender to ask about an Extended Payment Plan (EPP) – this allows you to repay what you owe in installments without additional fees or interest.
In the case that you are not offered an EPP, you can still speak to your creditor to negotiate a payment plan in which you agree to pay back a lesser amount over a set period of time. At this stage it is important to be totally honest with your lender about what you are able to afford to avoid further financial trouble.
Research whether or not there are any local charitable organizations which might be able to offer temporary financial relief; these services can be a good idea if you are struggling to keep up with rent, utilities or groceries payments. Similarly, look up non-profit credit counselling services which could support you in creating a debt repayment plan and approaching your creditors with a renegotiation.
In the case that you are sued, the worst thing you can do is not attend your hearings. Failure to pay a debt will not result in you being arrested or jailed; however, if you fail to attend hearings or follow court orders, you could be arrested or jailed. In court, you will have the opportunity to ask the judge to consider an affordable repayment plan instead of wage garnishment.