An individual indebted to a creditor or a legal entity, such as the Internal Revenue Service, can be subject to a wage garnishment. The latter is a legal order for the debtor’s employer to withhold some portion of his income to fulfill a debt he owes. Depending on the situation, the debtor may have to pay interest if his wages are garnished.
An ordinary wage garnishment is one that a debt collector or creditor initiates, such as for credit cards, auto loans, medical bills and personal loans. Some debts, such as mortgage and car loans, automatically incur interest from the day the loan is granted. To garnish wages a creditor must first sue the debtor in court. If the judge agrees with the claim, it grants the creditor a judgment. The creditor then applies for a writ of garnishment, which the court sends to the debtor’s employer so it can begin the withholding. Depending on the state, a judgment can incur interest.
For example, in 2011, the Eastern District Court of Missouri charges weekly interest rate on judgments – those granted from February 18 to February 24 are assigned a rate of 2.9 percent. The judgment accrues interest from the day it is granted until it’s paid off.
Child support and alimony withholding orders are valid only they are court-ordered. Under federal law, the employer can withhold up to 50 to 60 percent of an employee’s disposable income for child support or alimony, which do not generate interest. However, the employer can withhold an additional 5 percent for support payments exceeding 12 weeks in arrears.
The IRS does not need a court order to garnish or levy wages. Delinquent federal taxes are subject to interest and penalties from the IRS. Before levying, the IRS assesses tax, interest and penalties due, but the levy itself does not accrue interest. The state taxation agency also does not need a court order to garnish. Similar to the IRS, many states assess penalties and interest before levying. Along with interest, these agencies can charge late payment, failure to file and failure to pay penalties, which can be as considerable – if not more – than the interest a creditor receives on its judgment.
State law varies on the time frame a creditor has to enforce a judgment, such as via garnishment. For example, the state of Maryland allows a creditor up to 12 years to enforce a garnishment. Furthermore, the creditor applies garnishment payments received from the debtor’s employer against the accrued interest on the unpaid balance. Then it applies against the principal and lastly against attorney fees and additional costs assessed to the debtor.