Protecting Wages from Creditors

Every state has an exemption for certain types of income that creditors may not be able to garnish even if they hold a judgment against you. If you have exempt income or property, a debt collector cannot take it in order to cover a debt. These may include wages, salary, Social Security, welfare, or unemployment compensation. Some exemptions apply to only heads of households, but many apply to anyone. In some states, earnings of independent contractors or sole owners of corporations are not considered exempt wages.

Exempt & Protected Income

A creditor or debt collector cannot force you to use exempt income to pay a debt. The following types of income are exempt under federal law:

  • Public Assistance (PA)
  • Supplemental Security Income (SSI)
  • Social Security
  • Social Security Disability (SSD)
  • Veterans benefits (VA)
  • Child Support
  • Spousal Maintenance
  • Workers Compensation
  • Unemployment Insurance
  • Railroad Retirement benefits
  • Black Lung benefits

Under federal law, Title III of the Consumer Credit Protection Act protects employees by limiting the amount of earnings that may be garnished in any workweek or pay period to the lesser of 25 percent of disposable earnings or the amount by which disposable earnings are greater than 30 times the federal minimum hourly wage prescribed by Section 6(a)(1) of the Fair Labor Standards Act of 1938. This limit applies regardless of how many garnishment orders an employer receives. The federal minimum wage is $7.25 per hour.

Note: All states allow wage garnishment for child support, alimony, taxes and federal student loans.Each state differs in its wage garnishment laws, but if a state’s law allows for more of your wages to be garnished than the federal law, the state must comply with federal law.

Separate Wage Accounts

A way to help protect your income from creditors is to place the funds into a separate bank account, called a wage account. The purpose of the wage account is to segregate protected wages and not commingle it in accounts with money from other sources. Separate wage accounts are not always necessary. In Florida, for example, the law provides for the protection of 100% of the head of household’s wages from garnishment even if the wages are commingled with other funds, as long as you can clearly trace and identify the wages deposited into the account.

Note, however, that it has become common practice for debt collectors to freeze accounts containing protected income. If your account consists solely of exempt funds, it is much easier to get the account released. Other states may differ, but under Florida law, wages are exempt for a period of six months. This means wages in the debtor’s possession, which are less than six months old on the date of filing are exempt. However, those wages must be identifiable. So, although not necessary under Florida law, it would seem to be beneficial to segregate your wages from other money.

In New York, the maximum amount of garnishment is ten percent 10% of gross income, or the federal maximum, whichever is less. If the debtor is subject to garnishment for alimony, support or maintenance, the combined garnishments cannot exceed twenty-five percent 25% of disposable earnings.

Other examples are California, which uses the same rules as the federal government; Massachusetts, which allows garnishment of wages up to 15% of gross wages or disposable income less 50 times the greater of the Massachusetts minimum wage or the federal minimum wage; and Pennsylvania, where wages can only be garnished for taxes, student loans, back rent on a residential lease, final divorce distribution, court-ordered restitution in criminal matters, and child support. Check with your state’s Department of Labor or an attorney in your area for your state’s rules on wage accounts and garnishment of wages by creditors. It is important to know your rights. If a creditor freezes your bank account and all the money in the account is from recent paychecks, odds are, it is all exempt from debt collection.