Effect of Wage Garnishment on Finances

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When you owe a debt, wage garnishment is what allows a court to order your employer to withhold part of your paycheck. It can affect your budget and credit score, but there are ways to handle it. The amount garnished is based on your disposable income. Depending on the type of debt, you may have some options to avoid wage garnishment or reduce its impact.

What is Wage Garnishment? 

A wage garnishment is an official notice or a court order that directs an employer to withhold the earnings of an employee to fulfill certain financial obligations or debts, such as child support, student loans, tax levy, etc. It is a legal procedure in which a law enforcement agency requires your employer to withhold a certain amount of your earnings to settle a financial obligation. This is done by deducting money from your paychecks.

Common Situations for Wage Garnishment

The following are some of the most common situations in which the garnishment of wages is ordered:

  1. Debt
  2. Taxes
  3. Credit Score
  4. Insurance


When a debt becomes seriously overdue, the creditor may opt to involve a third-party debt collection agency. This agency can handle various types of debt, ranging from installment loans and credit card balances to child support and outstanding income taxes. Debt collection is done in various ways; including sending late notices and charging you interest on missed payments. It is typically one of the final steps in the debt collection process, and there are measures to prevent it from reaching that stage.

The debt collectors are not permitted to garnish your wages immediately upon taking on your credit account. They can only initiate wage garnishment after they have taken legal action by suing you for non-payment. They do this by getting a court order to garnish your wages or salary until you pay what you owe. Wage garnishment is the most aggressive method of debt collection, and it can impact your finances.

Following this, the collector will make repeated attempts to contact you, reminding you of the total debt owed. They may apply late fees, raise interest rates, and engage in persistent phone calls to get your attention. If the debt remains unpaid, these companies may proceed with a lawsuit against you. Only if the court judgment favors the creditor can the collector move forward with wage garnishment. Even then, most federal laws establish limitations on wage garnishment to ensure that the rights of the borrower are safeguarded.

The amount of your paycheck that can be garnished is based on “disposable income,” which is left over from your regular salary after legally required deductions are taken. Voluntary wage assignment deductions, health or life insurance, and purchases of savings bonds are not included and cannot be garnished.


Wage garnishment takes a significant chunk of your paycheck each pay period. And since wages are taxable, it affects your tax bill as well. It can make it even more difficult to pay your tax debts.

Your disposable earnings—the money left over after legally mandated deductions from each paycheck. This is what determines how much of your income is subject to garnishment. Federal, state, and local taxes, as well as employee contributions to Medicare and Social Security, are included in these deductions.

It’s possible to challenge a court ruling that orders a garnishment by filing an exemption claim with the court. In order to prove that the levy is causing undue hardship or that the tax debt was assessed incorrectly, you must present thorough financial documentation. By agreeing to an offer in compromise, which enables you to pay less for your tax debt than is owed, you can also bargain with the IRS to stop or lessen a levy.

Credit Score

Wage garnishment happens when a creditor obtains a court order that allows them to withhold a portion of disposable income from your paycheck. The creditor could be a private loan originator, your employer, or the government (for unpaid taxes, debts, and court-ordered child or spousal support). Usually, you’re given several opportunities to work out a repayment plan with a creditor before wage garnishment is enacted. If those attempts fail, filing an objection can stop the process.

Fortunately, garnishment information doesn’t show up directly on your credit report. However, credit agencies are free to add any information related to your garnishment that they find in public records. As a result, lenders may see this information and decline to lend you money or approve credit cards.

The best way to avoid wage garnishment is to stay on top of your debt payments and seek financial advice. If you are in a situation where wage garnishment is imminent, try to work with collection agents to set up a payment plan and pay down the debt. If it doesn’t work, filing for bankruptcy is one last resort that can help you repair your credit. But remember, it can also hurt your credit even further, so this should only be considered if it’s necessary and you’ve exhausted all other options.


Creditors have the legal right to garnish wages or bank accounts for debt repayment. According to federal and state laws, there are restrictions on the amount of your income that can be withheld. It does not matter if you make money or help others. Wage garnishment generally does not apply to Social Security benefits.

When you owe money for student loans, child support, or back taxes, for example, a creditor may file a lawsuit against you and obtain a judgment against you before garnishing your wages. After that, the creditor will ask the court to set aside a specific portion of your paycheck, and this withholding will go on until the debt is settled, along with any interest and court costs.

Your finances and credit score may be impacted by wage garnishment, and the harm may not go away even if the debt is settled. For that reason, it’s important to prevent debt from reaching default. And to as well take proactive steps to improve your credit report and score, such as by paying bills on time and reducing outstanding debt balances.

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