If your creditor sells an unpaid debt to a collection agency, the agency can garnish your wages if you refuse to pay what you owe. It needs to sue you in court first, however, and there are limits to how much money it can take.
A collection agency needs a court judgment to garnish your wages. The collector has to file a lawsuit against you, then prove to the judge that you owe the money. It also can prevail if you ignore the summons and fail to appear in court by securing a default judgment. Once the collector has the judgment, it can ask the court for a garnishment order. The order compels your employer to start taking money out of your paycheck.
Debt collectors cannot threaten you with something the law doesn't allow. It's not possible to garnish your entire paycheck, for instance, so telling you that will happen if you don't pay up immediately is illegal. The Federal Trade Commission has advice for dealing with unethical debt collectors.
Federal law limits how much of your wages creditors or debt collectors can take. If your disposable earnings -- your pay less your tax withholding -- are less than 30 times the federal minimum wage, creditors can't garnish any portion of them. The collection agency can garnish everything over that limit or 25 percent of your disposable earnings, whichever figure is smaller. If your state law sets a more restrictive limit, the lowest figure applies.
To put that into numbers, 30 times the federal weekly minimum wage at time of writing is $217.50. Below that, you're immune from garnishment. If you make $300 a week, the most the agency can garnish is $75 — 25 percent — leaving you $225.
Types of Income
A debt collector can garnish wages, salaries, bonuses and commissions. Tips, however, are not covered by wage garnishment law. If you're self-employed, the collector must ask the court for a non-earnings garnishment. The agency then gives the garnishment order to one of your customers after you've done a job for them but before the customer makes payment. Unlike wage garnishment, this is a one-time deal: a debt collector can't use one order to keep garnishing multiple projects.
The agency has to notify you before suing you. If you don't respond, even if the collection agency doesn't have a good case, you could lose by default.
State Law Defenses
Your state law may offer more protection from garnishment than federal law does. North Carolina, for instance, doesn't allow wage garnishment orders for consumer debt like credit card bills or auto loans. If a creditor gets an order in another state, however, a North Carolina employer has to honor it. Other states may exempt you from garnishment if you're the head of a household, or can prove you really need the money. To claim an exemption you have to file paperwork with the court and show proof that you're entitled to the exemption.