I have had the distinct misfortune of having to familiarize myself with Garnishments. This can come in to play for Real Estate Professionals. It can also be important to our Clients. I discovered a lengthy list of useful information that I compiled to share.
A wage garnishment is also knows as a wage execution. A garnishment is defined as a court-ordered method of collecting a debt in which a portion of a persons salary is paid to a creditor. A garnishing order is always paid direct to the court, never to the creditor. A garnishment is considered a drastic measure for collecting a debt, usually a last resort.
There are three types of wage garnishment.
IRS Tax order of garnishment,
Child Support order of garnishment
Third Party order of garnishment.
Who is involved in a court ordered garnishment?
A creditor, seeking payment of a debt.
A debtor who owes the debt.
An employer, also called a garnishee, who owes money to the debtor (where the paycheck comes from).
There are two forms of garnishment:
Pre-judgement garnishment
Post-judgement garnishment
Prejudgement garnishment allows the debtor’s property to be garnished before a court judgement is made against the debtor. A pre-judgment protects a creditor from a debtor who is likely to dispose of property before the court case is resolved.
Garnishment Exemptions
If you have been threatened with a Garnishment Order, check to see if you might qualify for a garnishment exemption.
Some types of income are classified as Garnishment Exempt. The burden is on the debtor to prove the garnishment exemption though. Income Exemptions could be:
Workers compensation income
Railroad Retirement Tax Act pension and annuity payments and certain armed forces personnel
Child support orders already in effect
Welfare and supplemental social security payments
Unemployment compensation payments
Armed forces disability payments
When your bank notifies you of a bank garnishment attempt, you have a limited time to file an objection with the court. The court has a particular form #MC-49 for you to use. A hearing is scheduled after you file the form.
There is a freeze on the money in a bank account while a garnishment is pending. This means you could lose your ability to spend the money in the bank account while you prove to the court that your funds are exempt.
Some State law also exempts Individual Retirement Accounts (IRS’s) and life insurance payable to a spouse or child of the insured. Pension benefits can not be garnished before they are paid to you. Once pension funds are paid out, pension income can be garnished.
It is important to check with an attorney in your State if you have questions about a specific type of income or asset. Attorneys specializing in debt settlement and bankruptcy are your best options. Sometimes people do not know what type of attorney to ask for help in a garnishment order.
Wage Garnishment Types
Child Support Orders
A common type of employee wage garnishments are court ordered or adminstratively ordered deduction of a specified amount from a parents income for payment of child support.
All employers must honor an income withholding order/notice for child support throughout the county, including US territories.
State health and human services agencies rely on new hire reporting to determine if a non-custodial parent is currently employed and eligable for a wage withholding.
IRS Tax Levies
Once you receive a garnishment notice of intent to levy you, you will have 30 days before the levy can legally take effect. If you do not act within that 30 day, it is expected that the IRS will be contacting your employer and will require them to garnish your wages to pay for the unpaid tax liability that you have.
Tax Garnishments are incurred when a taxpayer fails to pay federal or local income taxes in a timely manner. IRS wager garnishment is a legal way for the IRS to seize wages you earn.
Make note that the IRS would prefer you settle your taxes in some other way before they have to levy your assets or wages. This is true even if they have to settle for less than the total amount that you owe. This is called “an offer in compromise”.
OR- you can enter into a payment plan called an “installment agreement”. With an installment agreement the IRS allows the taxpayer to pay back their taxes in monthly installments over a period of up to 3 years. The IRS will likely work with you unless you have a history of defaulting on these sort of arrangements.
If you can prove the IRS Garnishment would cause a financial hardship, you may be eligible for a hardship status. If you are categorized as a hardship status the IRS IRS may pause collection efforts until your financial picture improves enough so they can collect. The IRS will not collect from you if their collections leave you unable to pay your other bills required for living.
When an employer receives a tax levy, it typically means that the government has exercised all other collection methods with the employee and those efforts were unsuccessful.
A tax garnishment includes the deficient amount PLUS the penalties and interest accrued on the outstanding balance.
Tax levies take priority over all other garnishments, except existing child support that were in effect prior to the tax levy. In the case that one or more tax levies from different jurisdictions have been received from an employer, tax garnishments are paid in the order received unless otherwise instructed from the IRS.
The following list of wage-related payments may be exempt from tax levies:
Workers compensation income
Railroad Retirement Tax Act pension and annuity payments and certain armed forces personnel
Child support orders already in effect
Welfare and supplemental social security payments
Unemployment compensation payments
Armed forces disability payments
An employer absolutely must honor the garnishment order. Garnishment orders can not be ignored. The IRS will notify the employer to stop withholding with a Release of Levy/Release of Property from Levy From 668-D.
If an employee leaves the company prior to satisfying the tax garnishment, the employer is obligated to notify the IRS. If available, the employer should provide the new employer’s name and address. If the employee is owed a severance, dismissal or vacation pay, the tax garnishment should be applied to those payments as well. If an employer does not pay the amounts that are not excempt from the levy, the company is liable for the full amount required to be withheld plus interest and/or fees. The employer is liable for a penalty equal to 50% of the amount recoverable by the IRS.
An employer cannot terminate an employees employment because of a tax garnishment. The employer might face imprisonment for up to a year and /or up to $1000 in fines.
Third Party Collections
Collection efforts are often undertaken by third parties. Individuals, businesses, or most commonly, debt collection agencies that have bought bad debt from another source. These garnishments are also court-ordered, though voluntary wage assighments may also be structured between parties where a repayment plan is established outside of any legal proceedings.
The court paperwork that is served to the employer includes a worksheet that is filled out to determine the appropriate amount to be withheld, based on a federal minimum wage rate. Federal law limits the amount of employee wages taht are subject to Third Party garnishments.
Garnish Wages for a Bad Debt
Are you the victim of a bad debt? Are you wondering what you options are for collection? You might even find yourself in a financial hardship because someone is not honoring your contract of repayment, or your business agreement. Let me just take a moment to tell you that I understand how upsetting that is. Many who are victims of a bad debt can not relate to someone who (seemingly) elects to not pay their bills.
Even if you took special pains and expense to make sure your agreement was drafted properly, that it was executed in earnest, that it was signed in good faith. Those things, even though important, can simply not protect you from someone who cannot afford to pay. One could argue that most can pay their debt, they just choose to only work only one job, or refuse to sell their home in this market…….so they allow you to continue to be encumbered with their debt. I write this page with a little bit of anger brewing inside of me. I have experienced bad debt, and I do not wish it on anyone.
You could have this bad debt as a business entity, or a personal obligation. Either way, it gets very tricky when trying to determine your best option for debt recovery. Unfortunately, this is something else you will have to spend some money to figure out.
Anyone can garnish a debtors wages. It is advisable to talk to your tax adviser to find out if you can write off your bad debt as a means to make you less damaged than you currently are. Sometimes you can only be “less damaged”, which is a sad truth to many of us.
Sadly, many of us have experienced failed business partnerships, unpaid mortgages, unpaid 2nd mortgages, and more. This is what I classify as bad debt.
There are a few things you can do. If you were dealing with a business, which is probably the most common of situations regarding collecting bad debt, have your trusty accountant review your business capital account to help determine if this year a bad debt write-off might be your best option. It may be. If you had a business partnership, you have the advantage of being notified of other garnishments that may be in play. If they are IRS tax garnishments, you know the likelihood of successfully garnishing wages may be very slim until their IRS tax garnishment is paid in full.
Now, I am not taking about IRS Tax Garnishments, I am talking about non-government garnishments. Non IRS tax garnishments take a backseat and often are the cause of some real turmoil and bad blood.
Keep it nice with your debtor. I didn’t say friendly, but remain calm and document every conversation as though you are preparing for court. You are, preparing for court. Please post any useful information you have gathered about garnishments below.
