Protecting Wages, Benefits, and Bank Accounts from Judgment Creditors

More Than Ever, Consumers Need to Know About Wage Garnishment and Bank Account Seizures

Millions of American families experiencing financial distress related to COVID-19 are facing or will soon face wage garnishment and freezes and seizure of bank accounts, as creditors obtain court judgments against them in collection lawsuits. In a number of states, collection lawsuits and garnishments were temporarily suspended during the COVID emergency, suggesting that there will be a spurt of post-judgment collections in these states after the suspensions are lifted. This article explains how to evaluate, respond to, and minimize a consumer’s exposure to the post-judgment creditor remedies of wage garnishment and bank account freezes and seizures.

Other Essential Resources to Deal with COVID-19 Related Debt

This article is one of a number of new NCLC publications geared to assisting families and their attorneys deal with COVID-19 related financial distress:

• Free digital access for the rest of 2020 to NCLC’s Surviving Debt (2020) (288 pp.): practical and hard-hitting advice for consumers and counselors in responding to all kinds of consumer debt—home foreclosures and mortgage servicing, car repossessions, credit reporting, evictions, debt collection, student loans, credit cards, utility terminations, whether to file bankruptcy, and much more.
• A free article Mortgage Relief for Homeowners Affected By COVID-19 (updated Sept. 23, 2020).
• A free new article on New Rights for Homeowners Exiting COVID-19 Forbearances (Sept. 25, 2020).
• Free digital access for the rest of 2020 to NCLC’s just-updated 50 state-by-state analysis of state exemption laws at NCLC’s Collection Actions Appendix H (5th ed. Oct. 2020).
• A just-released free NCLC report—No Fresh Start 2020: Will States Let Debt Collectors Push Families into Poverty in the Wake of a Pandemic (Oct. 2020), grading each state’s efforts to protect consumers from harsh post-judgment remedies, with recommendations for change.
• A brand new digital and print release of NCLC’s Collection Actions (5th ed. Oct. 2020) (788 pp.), a unique legal treatise covering in depth consumer defenses and tactics responding to debt collection lawsuits and post-judgment remedies, with special chapters on medical, criminal justice, and government debt.
• A new digital and print edition of what for 38 years has been the definitive consumer bankruptcy treatise—NCLC’s Consumer Bankruptcy Law and Practice (12th ed. 2020) (2 vol. 1776 pp.), including annotated, completed sample Official Forms to initiate a chapter 7 or 13 case, 170 other sample pleadings, and other practice tools.

State Law Is Key to Protecting Wages from Garnishment

A creditor that obtains a court judgment on a debt can garnish the consumer’s wages—it can obtain an order requiring the consumer’s employer to send a portion of the consumer’s wages directly to it. Federal law protects from wage garnishment 75% of a consumer’s disposable earnings or 30 times the federal minimum wage of $7.25 ($217.50 per week), whichever is greater. The creditor can seize the balance.

Disposable earnings are the employee’s earnings after deduction of amounts required by law to be withheld. Amounts required to be withheld include federal, state, and local taxes, Social Security, and contributions to other governmental retirement programs required by law. See NCLC’s just-released Collection Actions § 14.2.1 for more on the definition of “disposable wages,” what income is protected, the treatment of multiple wage garnishment orders, and other aspects of the federal wage garnishment protections.

These federal protections provide a baseline of protected wages, but even stronger protections are available under most states’ laws. Up-to-date knowledge of these state exemptions is essential since the laws and the state minimum wages to which they are linked are constantly changing. What follows is a current assessment of each state’s protections. See also NCLC’s Collection Actions Appendix H and No Fresh Start 2020: Will States Let Debt Collectors Push Families into Poverty in the Wake of a Pandemic (Oct. 2020). For a comprehensive analysis of state restrictions and remedies regarding wage garnishment and the relationship between federal and state exemptions, see generally NCLC’s Collection Actions § 14.2.3.

With few exceptions, all wages are fully protected from garnishment in North Carolina, Pennsylvania, South Carolina, and Texas. Judgment creditors may seek to evade these protections by serving the wage garnishment order on the consumer’s employer’s office in another state. For example, if a Texas debtor works for a Texas employer that also has an office in Oklahoma, the judgment creditor might serve the wage garnishment order on the Oklahoma office. See NCLC’s Collection Actions § 13.3.8 for a discussion of applicable law in this area.

Another ten states protect both a higher percentage of wages and a higher minimum amount per week than federal law requires:

• California protects 40 times the state or local minimum wage (the current state minimum is $13 for larger employers and $12 for smaller employers, going up a dollar for both in 2021, and another dollar for both in 2022), and allows garnishment of just 50% of the debtor’s wages in excess of that amount;
• Colorado protects 80% or 40 times the state minimum wage of $12 ($480);
• Illinois protects 85% or 45 times the state minimum wage of $10 ($450);
• Massachusetts protects 85% or 50 times the state minimum wage of $12.75 ($637.50);
• Nevada protects 82% or 50 times the federal minimum wage of $7.25 ($362.50);
• New York protects 90% or 30 times the state minimum wage, which in 2020 varies by location from $11.80 to $15 and in 2021 is $15 statewide ($450);
• South Dakota protects 80% or 40 times the state minimum wage of $9.30 ($372), plus $25 per dependent;
• Vermont protects 85% or 40 times the federal minimum wage ($290);
• Washington protects 80% or 35 times the state minimum wage of $13.50 ($472.50), adjusted for inflation starting in 2021; and
• West Virginia protects 80% or 50 times the federal minimum wage ($362.50).

Protecting a higher flat amount per week means that more low-income debtors will have all or almost all their wages protected. Protecting a higher percentage of the debtor’s earnings benefits workers at all income levels except for workers whose income is so low they utilize the flat dollar amount exemption.

Fourteen jurisdictions protect a higher flat amount per week, but do not protect a higher percentage of wages than the federal minimum. These states are:

• Alaska protects $743 a week if the debtor is the household’s sole support;
• Connecticut protects 40 times state minimum wage of $12 ($480);
• District of Columbia protects 40 times the District’s minimum wage of $15 ($600);
• Iowa protects 40 times the federal minimum wage ($290);
• Maine protects 40 times state minimum wage of $12 ($480)
• Maryland protects 30 times the state minimum wage of $11 ($330);
• Minnesota protects 40 times the state minimum wage of $10 ($400);
• New Hampshire protects 50 times the federal minimum wage ($362.50);
• New Mexico protects to times the federal minimum wage ($290);
• North Dakota protects 40 times the federal minimum wage ($290) plus $20 per dependent;
• Oregon protects $254;
• Tennessee protects 30 times the federal minimum wage ($217.50) plus $2.50 per child;
• Wisconsin protects the federal poverty amount; and
• Virginia protects 40 times the federal minimum wage ($290) plus extra for children in low-income families.

Six states protect a higher percentage of wages than federal law requires, but not a higher flat amount:

• Delaware (85%);
• Hawaii (protects 95% of first $100, 90% of next $100, 80% of remainder);
• Missouri (90%);
• Nebraska (85%);
• New Jersey (90% of wages if the debtor is under 250% of poverty); and
• Virgin Islands (90%).

Arizona, Indiana, Oklahoma, Rhode Island, while not generally offering a fixed dollar or percentage protection greater than the federal protections do in certain hardship situations, provide greater protections as described in the next section. Alabama also does not generally protect a greater dollar or percentage amount, but a state appellate court has ruled that the state wild card exemption can be applied to protect $1000 in wages in the hands of the employer.

Arkansas, Georgia, Idaho, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Montana, Ohio, Puerto Rico, Utah, and Wyoming do not offer protections greater than the federal minimum.

Hardship Exemptions May Further Protect Wages

Seven jurisdictions provide for hardship exemptions in addition to the percentage or dollar amount protections. How these exemptions work will vary by state, but consumers should seek this protection where applicable in Arizona, California, Colorado, District of Columbia, Indiana, Oklahoma, and Wisconsin. In addition, New York, Minnesota, and Rhode Island provide exemptions for debtors based on receipt of or, in Minnesota and New York, eligibility for public assistance. For more detail on hardship exemptions, see NCLC’s Collection Actions § 14.2.3.3.

Four Practice Tips Concerning Wage Garnishment

Tip #1: Because the amount of wages protected by state law often changes, make sure the creditor and employer are complying with current law. Seizing an unlawful amount may subject creditors or employers to remedies under federal or state law. See NCLC’s Collection Actions § 14.2.7.

Tip #2: Watch out for multiple creditors garnishing the same wages. Because the maximum legal amount of wages that can be garnished applies to the total of all creditors and not just each creditor, make sure a second wage garnishment from the same paycheck does not exceed the allowed maximum, including the amount taken in the first garnishment. Student loan and child support garnishments all count toward this maximum.

Tip #3: Consumers should adequately withhold taxes. If insufficient taxes are withheld, not only is there a tax liability at the end of the year, but an additional amount can be garnished from the consumer’s paycheck.

Tip #4: Take advantage of the rule that wage garnishment limits apply to the cumulative amount of all garnishments sought by multiple creditors in a given pay period. Where a consumer is obligated to pay child support, if that obligation is paid through a payroll deduction rather than voluntarily, the consumer is better protected from another judgment creditor’s garnishment. See NCLC’s Collection Actions § 14.2.1.5.5.

Most Wage Assignments Are Illegal

Collectors may seek to avoid state and federal protections from wage garnishment and even the necessity to obtain a court judgment by asking the consumer to agree to a wage assignment. The assignment instructs the consumer’s employer to send a portion of the consumer’s pay to the creditor each pay period. Courts have held that the federal limits on wage garnishment do not apply to wage assignments. See NCLC’s Collection Actions § 14.2.1.2.

However, the Federal Trade Commission’s Credit Practices Rule prohibits wage assignments in connection with the extension of credit to consumers in or affecting commerce. 16 C.F.R. § 444.2(a)(3). Only three exceptions are allowed: if the assignment is by its terms revocable at will by the debtor; if the assignment is a payroll deduction plan that commences at the time of the transaction; or if the assignment is of wages already earned at the time the consumer entered into the wage assignment. In addition, a number of states have their own statutes restricting wage assignments, typically part of the state’s wage and hour laws or consumer lending laws. See, e.g., NCLC’s Consumer Credit Regulation Appendix D and Appendix E.

If a consumer has entered into a wage assignment with a collector, the consumer should immediately revoke the assignment. If the assignment is irrevocable and does not fall into one of the other exceptions, then this is a violation of the FTC rule. While there is no direct private right of action for a violation of an FTC rule, a rule violation should be an unfair or deceptive practice under a state UDAP statute, leading to strong private remedies. For more detail on wage assignments and remedies, see NCLC’s Collection Actions § 14.2.5.

Federal Student Loan Wage Garnishment Is a Different Animal

Federal law allows administrative wage garnishment—a garnishment issued by a federal agency rather than a court, and without any court judgment—to collect federal student loan and other federal debts. Up to fifteen percent of the borrower’s disposable wages can be seized through a single administrative wage garnishment order. State law wage garnishment protections do not apply, but the federal limit on wage garnishment applies to these administrative student loan garnishments. See 34 C.F.R. § 34.19(b).

Thus a minimum of 30 times the federal minimum wage—$217.50 a week—of disposable earnings is fully protected. In addition, the 15% federal student loan garnishment counts toward the 25% federal wage garnishment limit, so that a second garnishment by a private creditor could only seize 10% of the debtor’s income.

Student loan borrowers can also object to the administrative garnishment on a number of grounds, including on the basis of financial hardship. See NCLC’s Student Loan Law § 9.3.2.3.4. If borrowers instead enter into a rehabilitation plan, garnishment stops after the borrower makes five payments. See NCLC’s Student Loan Law § 9.3.2.4.

Student loan borrowers can also head off garnishment by entering into a repayment plan or consolidating their loans before the garnishment begins. Consolidation means that the loan is no longer in default and thus is not subject to garnishment. But consolidation is not allowed once the garnishment order has been entered. See NCLC’s Collection Actions § 10.2.9.3.

Offset is allowed for Social Security benefits, Black Lung Part B benefits, and some railroad retirement benefits. Offset is not allowed for many other federal benefits, including Supplemental Security Income (SSI), VA benefits, benefits under the Higher Education Act, and Black Lung Part C benefits.

Federal regulations require the debtor to be given advance notice and an opportunity for administrative review before the offset occurs. In the case of student loans, the borrower can also apply for a hardship reduction of the amount offset. See NCLC’s Student Loan Law § 9.4.3.2.

Protecting Public Benefits Deposited in a Consumer’s Bank Account

Private judgment creditors cannot garnish federal and state benefit payments while in the hands of the disbursing agency. Most federal and state benefit payments retain this exemption after deposit in the recipient’s bank account, but the traditional rule is that the consumer bears the burden of claiming and proving the exemption. A bank that receives a garnishment order from a judgment creditor may freeze all funds in the account, and the consumer’s failure to claim and prove the exemption results in the funds being sent to the judgment creditor.

An important exception is a U.S. Treasury rule that requires banks to protect any Social Security, SSI, VA, or certain other federal benefits that were directly deposited into a consumer’s bank account within the preceding two months. 31 C.F.R. § 212. For a thorough analysis of the Treasury rule, see NCLC’s Collection Actions § 14.5.4.

The Treasury rule protects two months of electronically deposited Social Security, SSI, or VA benefits from a bank freeze and from turnover to the judgment creditor. Any amount more than two months’ worth, any benefits deposited by check (as opposed to direct deposit), and any state benefits are subject to a bank freeze, although the consumer eventually may be able to prove the funds exempt from seizure.

Another way to protect Social Security, SSI, and VA benefits from seizure is to have them deposited directly from the Treasury to a Direct Express prepaid card. Funds deposited onto Direct Express cards are completely exempt from garnishment by judgment creditors. The consumer uses the card like any debit card to obtain cash or to make purchases. To sign up for a Direct Express card, call 1-800-333-1795 or visit www.usdirectexpress.com. See NCLC’s Collection Actions § 14.5.5.2.

If the consumer has exempt funds that are not protected by the U.S. Treasury Rule, an option is to create two bank accounts, one account holding only the exempt funds. This makes it easier for the consumer to prove that funds in that account are exempt from seizure, eliminating the complications caused by commingling of exempt funds with non-exempt funds. If the consumer opens two accounts, the consumer should first spend down funds from the non-exempt account before using the exempt funds.

State Law Protecting Wages and Other Funds Deposited in a Consumer Bank Account

Unless funds are exempt, judgment creditors can seize funds from a consumer’s bank account to pay a judgment against the consumer. While federal and state laws protect wages before they are distributed to the consumer, the wages and other funds may be subject to seizure once deposited in the consumer’s bank account, absent state law to the contrary. Depending on the state exemption, even exempt funds in a bank account may be frozen.

For a detailed description of applicable law protecting wages and benefits deposited in a bank account, see NCLC’s Collection Actions § 14.5. See also No Fresh Start 2020: Will States Let Debt Collectors Push Families into Poverty in the Wake of a Pandemic (Oct. 2020). This article provides a summary of state exemptions that protect bank accounts from judgment creditors. Additional or different exemptions may apply in a bankruptcy proceeding.

A key distinction is whether an exemption for funds in the consumer’s bank account is self-executing or whether the consumer must take affirmative action to assert the exemption. If an exemption is self-executing, the bank should protect the funds without the consumer having to claim an exemption, so there will not be a period of time when those funds are frozen.

Exemptions for funds in a bank account are self-executing in some states. For example, New York’s exemption of $2664 to $3600 (depending on the applicable state minimum wage) in the consumer’s bank account is self-executing. The consumer need take no action to protect the funds and they are not subject to a bank freeze. Effective September 1, 2020, the same became the case in California with a $1788 exemption, to be adjusted each following year for inflation. Delaware prohibits garnishment of bank accounts altogether.

An example of an exemption that is not self-executing is a wildcard exemption that allows the consumer to designate the property to which the wildcard dollar exemption applies. To make a wildcard exemption effective, the consumer must affirmatively initiate a process to apply the exemption to the bank account, and the account may be frozen until the process is successfully completed.

About two-thirds of the states give debtors a wildcard exemption that can be applied to property of the debtor’s choice, which in many states includes funds in a bank account. State exemption law explicitly allows the wildcard to be applied to a bank account, or courts have interpreted the exemption to allow that in a number of states. Examples include Alabama ($7750 in 2020 and $8225 in 2021), District of Columbia ($8925), Florida ($5000), Illinois ($4000), Maryland ($6000), Mississippi ($10,000) (exemption applies to “cash on hand” so should apply to bank accounts), Nebraska ($5000), Nevada ($10,000), New Hampshire (the amount varies depending on other use, but can be as high as $8000), New Mexico ($5500), North Carolina ($5000), South Dakota ($7000), Tennessee ($10,000), Virginia ($5000 plus $500 per dependent), and Washington ($2000 of $3000 wild card exemption can be applied to a bank account).

In other states, courts have not yet ruled on application of a wild card exemption to a bank account, but the statute allows the wild card to be applied to any property, so should include bank accounts. Examples include Iowa, Maine, Massachusetts, New Mexico, New York, Oregon, Pennsylvania, and Vermont.

Of course, consumers may prefer to apply the wildcard exemption to protect a car or other property instead of or in addition to the bank account. Moreover, in many states, the wildcard is available only to the extent that the debtor does not use a homestead exemption or, in a few states, certain personal property exemptions.

In a number of states, an exemption law explicitly provides that the wage garnishment exemption continues after the wages are deposited into a bank account; and in other states, courts have interpreted the statute to protect deposited wages. All in all, it appears that deposited wages continue to be exempt in at least thirteen jurisdictions: California, Colorado, Connecticut, Florida, Idaho, Iowa, Minnesota, Montana, Nebraska, North Carolina, Oklahoma, Oregon, and Puerto Rico.

This protection is not self-executing, however. The bank does not know the dollar amount of the consumer’s wages that are exempt from seizure, and the consumer must prove this amount. In addition, the exempt portion of wages will be commingled in the account with the non-exempt portion of wages and other non-exempt deposits. Issues will arise as to whether the withdrawals from the account were of exempt or non-exempt funds, affecting the exempt status of funds left in the account. The whole account may be frozen in the interim.

Twelve states follow a third approach to exempt a certain dollar amount in the consumer’s bank account no matter their source (some of these states also allow for wild card exemptions to be applied to funds in a bank account and/or also exempt certain wages in a bank account):

• Alaska ($2970 if the debtor is not earning regular wages);
• Arizona ($300);
• California (as described above, this exemption is explicitly self-enforcing: $1788 and adjusted each year for inflation);
• Delaware prohibits garnishment of bank accounts;
• Indiana ($350 to be applied to choses in action, deposit accounts or cash);
• Massachusetts ($2500);
• New York (as described above, this exemption is explicitly self-enforcing: $2664–$3600);
• Ohio ($500);
• South Carolina ($6325 but only in certain conditions);
• Vermont ($700);
• West Virginia ($1100); and
• Wisconsin ($5000).

Whether such an exemption is self-executing or not will depend on state law and practice.

Practice Tips for Dealing with Bank Account Freezes and Seizures

Tip #1: Where only one of two account holders owes a judgment debt, consider splitting the joint account into two accounts and keeping all of the non-debtor’s funds in the account that is solely in the non-debtor’s name. Paying expenses first from the account that is in the judgment debtor’s name will reduce the balance in that account and minimize the amount that is vulnerable to seizure.

Tip #2: Remove the judgment debtor’s name from any account where the funds really belong to someone else, such as a child or elderly family member. If the owner of the funds needs the judgment debtor to manage the account, use a power of attorney or the account should be clearly designated as a trust.

Tip #3: Place funds on a prepaid card, such as those sold at big box or drug stores, or by opting for wages sent via a payroll card, if available. Funds in an account linked to a prepaid or payroll card may be subject to seizure, but, as a practical matter, judgment creditors are less likely to seize these types of accounts, particularly if the funds are held at a smaller bank. Check the prepaid and payroll card fees and understand how to avoid high fees, especially by using only ATMs in the card’s network. Avoid prepaid cards, debit cards, or “checkless checking” accounts offered by payday lenders and check cashers, which may have high fees or even overdraft fees.

Tip #4: Seizure can be avoided by opting out of direct deposit payments to a bank account and instead receiving paper checks. Paper checks do have a greater risk of theft and loss and will have to be cashed. Avoid expensive check cashers. Look for local stores or friends or relatives to cash a check without high fees. Even if the consumer must pay a fee to cash a check, that may be better than having the check deposited and then seized or frozen in its entirety.

Resources for More Information

• NCLC’s Collection Actions Appendix H (free access for the remainder of 2020) provides detailed state-by-state summaries of each state’s exemption laws that apply to wages, homestead, bank accounts, tangible personal property, benefits, retirement plans, other intangibles, and tax refunds. Statutory citations are provided, and details regarding extraterritorial application and the relation of state exemptions to federal bankruptcy exemptions are also listed.
• NCLC’s Collection Actions (5th ed. Oct. 2020): Chapter 10 (Federal Administrative Agency Collections); Chapter 13 (Enforcement of Judgments); Chapter 14 (Protecting Debtors’ Wages, Benefits, Other Income, and Bank Accounts); Chapter 15 (Protecting the Debtor’s Home, Tangible Personal Property, and Other Assets); and Chapter 16 (Debtor’s Examinations and Imprisonment for Debt).
• NCLC’s Student Loan Law Chapter 9 (Seizures of Income and Assets to Collect Federal Student Loans).
• No Fresh Start 2020: Will States Let Debt Collectors Push Families Into Poverty In The Wake Of A Pandemic (Oct. 2020) is a detailed report on the state of exemption law in all 50 states with recommendations for reform.