What Are Disposable Earnings?

Did you know that creditors have the right to seek a garnishment order against you if you fail to repay your debt? Additionally, loan documents and credit card statements contain language that confirms the creditor’s right to sue you in court to get a judgment and have you pay their attorney’s fees and court costs.  This article will give you an overview of what income may be garnished under the law and how to avoid and/or stop garnishment actions by filing a Chapter 7 bankruptcy case.   

What are Disposable Earnings?

Disposable earnings are your wages minus mandatory payroll deductions for local tax, federal tax, state tax, and unemployment insurance tax, as well as Social Security and Medicare. These legally-required deductions are not part of your disposable earnings. After these deductions come out of your paycheck, the income you receive is defined as disposable earnings that you can spend as you desire. Many employees opt to have additional expenses paid from their earnings in the form of voluntary deductions. These deductions may include payments or savings towards a pension plan, life insurance plan, a savings plan, or a health insurance plan. These deductions are considered part of your disposable earnings. Thus, take-home pay is not the same as disposable income.     

If a creditor files a complaint against you, the court will calculate your disposable earnings by deducting certain additional eligible expenses from your monthly gross income. These expenses include housing, utilities, food, transportation, clothing, childcare costs, life insurance premiums, health insurance premiums, and court-ordered support payments like child support and alimony. Fitness club memberships and other non-essential expenses are not allowable expenses you can deduct from your monthly gross income. If you have any disposable income left over after deducting allowable expenses from your paycheck, these disposable earnings will be used to pay your creditors. 

Disposable Earnings and Wage Garnishment

If a creditor gets a court order against you, they can send this legal document to your employer and request that they withhold a portion of your disposable earnings to pay back the money you owe. This action is taken after a judge signs a withholding order or garnishment order to “garnish” your wages. This process is known as wage garnishment. There are federal laws and state laws that limit how much money each type of creditor can withhold from the employee’s disposable earnings.  Sometimes, a person may not realize they have a wage garnishment in place until they receive their paycheck and see less money. This can be true in cases where the debtor does not answer the complaint filed by the creditor to collect the money owed on the account. This can also happen if the consumer fails to appear in court on the day of the hearing. There are some creditors who don’t need a court order to garnish your wages, including the Internal Revenue Service (IRS). However, the IRS must notify you before your wages are garnished for tax debts.    

If you are an employee subject to a withholding order, the federal Consumer Credit Protection Act (CCPA) does provide you with some safeguards against certain lender-based actions. The CCPA is a federal law protecting consumers against lenders. All employees and individuals who derive their earnings from personal services are also covered by the CCPA and they can keep a portion of this income. Their earnings may include wages, salaries, pension plan funds, and commissions but tips are not included.   

Title 3 of the CCPA provides specific guidelines for wage garnishments, including protecting employees from being fired from their job because of a garnishment order for any one debt. However, an employee can be subject to discharge if they have a garnishment order for a second or subsequent debt.  

The CCPA limits the maximum amount that may be garnished in any one week or pay period from an employee’s disposable earnings. The amount that can be withheld from your disposable earnings is taken out after payroll and income taxes are deducted. The garnishment amount is limited to 25 percent or an amount that is greater than 30 times the federal minimum hourly wage of $7.25. However, the CCPA allows garnishment of up to 50 percent of an employee’s disposable income to pay for child support, income taxes, and bankruptcy judgments. Federal agencies can also garnish your wages. If you have defaulted on student loans, education agencies are allowed to garnish up to 15 percent of your wages.

Avoiding Wage Garnishment Through Chapter 7 Bankruptcy

Chapter 7 bankruptcy can stop wage garnishment. You must earn an income amount subject to specific limits to be eligible to file Chapter 7. If either your median income or disposable income is below the average or median income for your state or area, you automatically pass the “means test” to file Chapter 7. If either your median income or disposable income is above the median income for your state or area, you may still qualify for Chapter 7, but you will have to provide additional information on your bankruptcy petition.

In Chapter 7, the court will discharge your eligible unsecured debts like credit cards, personal loans, and medical bills. However, not all debts are discharged in Chapter 7. Common debts that the court will not generally discharge include student loans (sometimes), support payments, and tax liens. Additionally, most secured debt is not dischargeable in bankruptcy if you intend to keep the assets secured by that debt. You can find out if you are eligible for Chapter 7 by speaking with a bankruptcy attorney or reading more about Chapter 7 bankruptcy income limits and the means test calculator.  

Conclusion

When you are already struggling to pay your debts, it becomes even harder to do so when a creditor takes you to court and gets a judgment allowing them to garnish your wages. Filing a Chapter 7 bankruptcy can provide some relief if you find yourself facing the threat of wage garnishment.  If you can’t afford to hire a bankruptcy lawyer, see if you qualify to use Upsolve’s free web tool to prepare the bankruptcy forms for you.