Can I Settle After a Wage Garnishment Notice?

Your employer removes garnished funds from your paycheck before you receive it.

If you can’t afford to pay off your creditors, settling the debt releases you from your financial liability while simultaneously reducing the amount you owe – making paying the debt less of a strain on your budget. It is up to your creditor whether to negotiate a settlement with you, and convincing it to do so once a wage garnishment is already in place may prove problematic.

The Problem

Creditors would prefer not to settle consumers’ debts. They do so because settling the debt and receiving a partial payment on the balance is a smarter financial move than refusing to work with the debtor and receiving nothing as a result.

If you receive a wage garnishment notice from your creditor, this means that the creditor has already filed and won a lawsuit against you – giving it a court judgment. The court’s judgment provides the creditor with a wider range of collection options. Because it can now collect the debt in full by seizing money and property from you, it has little incentive to offer you a settlement when it can collect the full amount through garnishment.

Getting a Settlement

Just because a creditor notifies you that it intends to file a wage garnishment order against you, that does not mean it will necessarily be successful. The U.S. Department of Labor notes that the maximum garnishment amount allowed under the law is 25 percent of your disposable earnings or the amount you earn each week in excess of 30 times the current minimum wage. Thus, if you are under a previous garnishment order that seizes the maximum amount allowed by law each pay period, your current creditor must wait until you complete the first garnishment to proceed with the second – giving it a clear incentive to accept a settlement offer.

Another situation in which a creditor may accept a settlement after sending you a wage garnishment notice is if 100 percent of your income is exempt from garnishment, such as unemployment or veteran benefits.

Considerations

Consumers sometimes confuse a creditor’s intent to garnish because it has the right to do so and a creditor’s threat to garnish. Unless the creditor is a branch of the federal government, such as the Internal Revenue Service, it must sue you before it can apply for a wage garnishment order. If the creditor has not sued you and has merely sent you a letter threatening to garnish your wages, you still have the opportunity to negotiate a settlement and avoid a lawsuit and subsequent garnishment.

Warning

If you do successfully settle your debt, the creditor forgives the remaining balance and then reports the forgiven debt to the IRS. While doing so provides the creditor’s business with a tax deduction, it has financial consequences for you. You must include the forgiven amount in your yearly income when you file your own taxes. Depending on the size of the forgiven balance, you could end up owing a tax debt after the settlement.

References

• U.S. Department of the Treasury: Answers About Garnishments; June 2011
• U.S. Department of Labor: Wages and Hours Worked – Wage Garnishment; September 2009
• Federal Trade Commission: Creditors Seeking Federal Benefits in Your Bank Account? May 2009
• Bankrate.com: Forgiven Debt Could Increase Your Tax Bill; Jenny C. McCune; 2011

Resources

• Neighborhood Economic Development Advocacy Project: Wage Garnishment; 2007
• Bankrate.com: How to Settle With a Debt Collector; Brigitte Yuille; January 2007