Can Your Taxes Be Withheld for Credit Card Wage Garnishment?
Credit card companies and collection agencies that recover debt for them have numerous options at their disposal for forcing nonpaying consumers to satisfy their financial obligations. One such option is suing the consumer and garnishing his wages until the account is paid in full. While your wages are fair game for a unpaid creditor, your federal tax refund is subject to special garnishment restrictions.
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Tax Refund Offset
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A tax refund offset occurs when the Internal Revenue Service redirects your expected tax refund to your creditor rather than sending it to you. The only creditors with the authority to garnish your tax refund before you receive it are government entities. For example, if you stop making payments on the federal student loan you owe to the U.S. Department of Education, the IRS will garnish your tax refund because the Department of Education is a government body. Because credit card companies are not affiliated with the federal government, they cannot garnish your tax refund money from the IRS.
Bank Garnishment
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Wage garnishment is not the only garnishment option a credit card company or collection agency has at its disposal. Creditors can also garnish, or levy, your bank accounts. If a credit card company has the authority to garnish your wages, that means it holds a legal judgment against you. This same legal judgment gives it the ability to garnish your bank account. Once you deposit your tax refund into your bank account, it loses its prior protection. Thus, while a creditor with a judgment cannot garnish your tax refund directly from the IRS, it can garnish your refund from your bank account.
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Considerations
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Just because a creditor can garnish your tax refund from your bank account, that’s no guarantee that it will. If your creditor is receiving regular payment toward your unpaid credit card debt via wage garnishment, it may decide that obtaining a bank account garnishment order against you isn’t worth the added cost and effort.
Your state laws also come into play when determining whether a creditor will garnish your wages and bank accounts simultaneously. Some states do not allow simultaneous garnishment, because this provides creditors with a way of getting around the federal government’s wage garnishment limitations. New York, for example, prohibits a creditor from garnishing money from your bank account – including your tax refund – if the creditor is already receiving the maximum wage garnishment amount allowed each pay period.
Collection Activity
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Limitations exist not only on what a creditor can garnish, but what it tells you it can garnish. Wage garnishment for credit card debt can only take place following a lawsuit. While credit card companies have the ability to sue consumers, many sell their defaulted accounts to collection agencies rather than seeking legal recourse on their own.
Regardless of whether or not a collection agency sues you and obtains a wage garnishment order, the Fair Debt Collection Practices Act prohibits it from threatening you with any action it cannot legally pursue – such as threatening to withhold a tax refund it lacks legal access to.
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References
- WLTX; How Can My Income Tax Refund Be Garnished?; Jennifer Collins; January 2010
- Bankrate: Creditors Can Garnish Your Bank Accounts; Justin Harelik; 2011
- Neighborhood Economic Development Advocacy Project; Wage Garnishments; 2007
- Federal Trade Commission: The Fair Debt Collection Practices Act (Section 808/p.10)
