Student Loan Garnishment? How Much of Your Income is Actually at Risk

Posted on February 19, 2019February 18, 2019 by Dawn Kennedy

Lots of news floating around about how a new legislative proposal where the federal government would take 10% of a student’s wages as an automatic payment for student loans, basically a garnishment, and this may affect many of the current 44 Million borrowers. This suggestion has drawn fire from many consumer law advocates, like myself, who feel that this plan would allow the government to prioritize student loan debt above necessary living expenses; food, utilities, shelter, and transportation. But this proposal also has me thinking about the state of current student loan garnishment structure.

Garnishment is simply a “forced” withholding of part of a consumer’s income in response to a debt. Federal Student Loans are subject to “administrative wage garnishment” and will not need a court order if the borrower is in default. The current percentage of wages which is subject to administrative wage garnishment is 15% of a borrower’s “disposable income”, defined as the net check, or income after withholding taxes and other deductions. But this 15% is after mandatory minimum amounts that are protected from any garnishment. I will cover both consumers earning regular wages, and then consumers on fixed Social Security income.

Please note that PRIVATE student loans require a court order and a judgement against the borrower before the lender can garnish. Also note that the total amount of garnishment for debt allowed by law is 25% of the debtor’s wages… meaning, I am going to talk at the 15% rate in this article, but if the consumer already has a garnishment from somewhere else, the total garnishment cannot exceed 25%, so the federal student loan garnishment may be less than the full 15%.

For Consumers Earning Wages

The rule is 15% of wages after deductions, but what exactly does that mean? First of all, there are minimum amounts that are “exempt from levy” meaning, that amount cannot be touched for any reason by federal student loan garnishment. The current amount, as of this article, is 30 times the minimum wage after deductions. This means, at the current minimum wage, which is at $7.25 an hour (15 USC §1673), the consumer “keeps” the first $217.50 per week. That is the amount “exempted” from any garnishment calculation. The government can then take the LESSER of either the amount that is left after the $217.50, OR 15% of the consumer’s total income. It can be confusing, so a few examples are in order.

A. Consumer’s net income is $300.00 per week. After the exempted $217.50, the consumer has $82.50 left over. 15% of the $300.00 is $45.00. The government can take the LESSER amount, or $45.00 per week. In perspective, out of $1200.00 net income per month, the government can take $180.00. (This is why us student loan/ consumer law types want to do everything possible within the law to prevent garnishment for student loan delinquency.)

B. Consumer’s net income is $500.00 per week. After the exempted $217.50, the consumer has $282.50. But, 15% of $500 is $75.00, so the LESSER is $75.00 a week, or $300.00 per month. Another ouch. This is one reason that over a certain threshold, the calculation is almost always just 15% of disposable income.

One more thing, both Federal Pension and Private Retirement payments that are exempted from garnishment for debts in most states, is also subject to garnishment for delinquent student loans.

For Consumers on Social Security Retirement and Social Security Disability

Unfortunately, most of the time when I run into the “offset” (garnishment) of social security payments, it is because the consumer co-signed someone else’s student loan. If the borrower becomes permanently disabled, there are administrative actions that can be taken towards forgiveness of the federal loan debt. This is true for federal loans where the student passes away as well. But there are many cases where the Department of Education is offsetting Social Security Retirement Income (SSRI) and Social Security Disability Income (SSDI) payments. SSI, the program for the indigent, is exempted from “offset”.

Social Security Retirement and Disability are subject to an “offset” to recover federal debts since 2001 under the “Debt Collection Improvement Act of 1996.” The Department of Education can offset up to 15% (31 USC §3716). The amount offset is the LESSER of 1. The total amount of the debt 2. The amount that exceeds $750.00 per month, OR 3. 15% of the total benefit amount.
Here are the actual examples from the legislation:

Example 1:
A debtor receives a monthly benefit payment of $850. The amount that is offset is the lesser of $127.50 (15% of 850) or $100 (the amount by which $850 exceeds $750). In this example, $100 would be offset.
Example 2:
A debtor receives a monthly benefit of $1250. The amount that is offset is the lesser of $187.50 (15% of 1250) or $500 (the amount by which 1250 exceeds 750). In this example, the offset amount is $187.50 (assuming the debt is $187.50 or more).
If the recipient receives $750 or less, nothing will be offset.

(from: 31 C.F.R. § 285.4(e)(3)(i), 31 C.F.R. § 285.4(e)(3)(ii), & 31 C.F.R. § 285.4(e)(3)(iii))

Alternatives to Default, Garnishment or Offset

I have covered in previous articles how dangerous it is to a consumer’s financial future if they default on student loans. There are currently nine, that is right, NINE repayment options available through the Department of Education for student loans, and while nobody qualifies for all of them, many qualify for more than two. So PLEASE readers, know your options. Please do not let your student loans go 269 days past due. Call your servicer or a student loan attorney if you need help. If you have private student loans, the payment options may be limited. But contact the lender if there is a problem making your payment. As for the topic that inspired this article, legislation proposing the 10% monthly payment option. You can see how it would begin to prevent defaults, and the amount proposed is less than the current garnishment scheme. But then again, I believe consumers should control their income and not have to choose between food and federal debts. A garnishment is imposed because federal student loan notices were ignored, or nine total monthly payments were missed in a row.

The Unspoken Danger of the UltraFICO- Creditor Judgments

Posted on October 30, 2018February 8, 2019 by Dawn Kennedy

In my last article on the “UltraFICO” I touched on the motivation for Fair Issacs Co. to change their scoring criteria to include consumers banking information, of course, only when the consumer provides this information. I also spoke to some of my particular issues of concern, including cybersecurity and creditors deciding to only use the UltraFICO calculation in future lending decisions because they know the consumer supplies banking information. But I have another concern, and it has nothing to do with FICO score or creditworthiness. I want to know what happens when a creditor receives a judgment against a debtor.

I have never met anyone who takes out credit without any intention of paying it back. But I know many people who lost a job, had an accident, had a medical issue, or other personal crisis that forced them to choose between their mortgage and Visa. And that is never a fun decision. But when it happens, sometimes Visa will sue. And Visa can get a court to order a judgment against the debtor. And that judgment has specific procedural rules but can be enforced through garnishment.

Each state has its own rules regarding creditor judgments. Which assets can be garnished, what percentage of a paycheck, whether a bank account can be raided, etc. But read that last statement again. Whether a bank account can be raided. It recently happened in Georgia. A law firm working for a creditor paid a private investigator to find the bank accounts of Connie James, and not only did the PI find the bank accounts, but the balances down to the penny. And they judgement was quickly settled, via a garnishment order, filed by the law firm against one of her bank accounts. Yup, with a court order, the law firm went in and just took the amount of the judgement. The firm recovered $2,624.00 in one fell swoop. And Mrs. James didn’t even know how the raid on her account occurred until she filed a complaint with the Georgia State Bar, which subsequently found that the law firm did not violate ethics rules. So be it.

The Federal Law which is supposed to keep your banking information private, the 1999 Gramm-Leach-Bliley Act, forbids anyone from attaining your bank accounts by “pre-texting” meaning, “under false pretenses.” Where there is a court order to find assets? Hmmm. It appears to be a gray area because the law office that garnished Mrs. James said it was, “common practice” to hire a PI to get the info.

Wow, scary story, but how is this relevant to credit bureau scores, right? Well, why would a creditor or creditor’s attorney with a judgment hire a private investigator if Experian already has your banking info? A court ordered judgment and subpoena straight to Experian cuts out the middle man. Based on judgment enforcement today, each state would need to pass legislation limiting access to account information- but how can you restrict that information AFTER the consumer gives consent to use the information to apply for credit? As I mentioned in my last post- Experian will likely keep the consumer banking information used to calculate scores. And, remember, the summary of bank accounts was already sent to the lender for consideration in the UltraFICO calculation.

Imagine emerging from personal circumstances that caused a financial hardship, only to learn (as you go to pay your bills), that Visa enforced their judgment against you- by emptying your account. They waited on the judgment until you started a new job, received a tax return, or an inheritance, or whatever, then boom. This is the unspoken danger of giving Experian banking information for the calculation of the UltraFICO, one that has, as of yet, been mitigated by legislation to protect consumers

Credit: nlipw.com

Why is My Paycheck Short? I wasn’t Sued

Posted on August 14, 2018February 8, 2019 by Dawn Kennedy

When a debt is in default to a federal agency, notably student loans for many Americans, a debtor’s wages can be garnished without a lawsuit through a process known as “Administrative Wage Garnishment” (AWG). This process is different from garnishments based on having a judgment against someone after a lawsuit, because the Treasury does not need to obtain a court order to have an employer withhold up to15% of an employee’s “disposable income.”

Now, there are specific rules surrounding these processes to get you to pay back the debt. For example, an employee must be at the current job for at least 12 months, and the employee left the previous job involuntarily through something like a layoff. But generally, they can take your money, right out of your paycheck, without taking you to court. And it can be frustrating and scary because the agency is in control of the money, and you are short and have other bills to pay.

The Debt Management Service

The Debt Management Service and their Office of Debt Management (ODM) is basically the Treasury’s collection agency. In addition to AWG, there are other processes that can be used to collect on debts owed to the government, such as taking tax refunds to apply to debts, called an “offset.” If you are a Veteran receiving disability compensation, or a retiree, your money can be garnished to satisfy an ODM debt. In fact, your entire monthly disability compensation benefit can be taken. If you receive a Social Security check, and are, or your student borrower is, in default, they can garnish your social security check. Not kidding here.

This post is meant to be a strong reminder that nobody should ignore federal debts. Again, getting a letter from a government agency can be frightening. Period. The Internal Revenue Service (IRS) is the best known, and there are a ton of ads on tv for help with “tax debt.” But these other types of federal debt? Many people are surprised at the power these other agencies have. Not unlike the IRS.

If you are being garnished, and you do not owe a debt to the agency, my suggestion is to contact a lawyer immediately. You may be a victim of identity theft, or the treasury may have wrong information about the debtor, and you are unfortunately targeted. There are stories of two “John Smiths” with a single digit off on the Social Security or account number. Make sure you do not ignore the notices that you may think are just mistakes, you may end up with a paycheck surprise. Not in a good way.

Steps You Can (and should) Take

Student Loans- if you are more than a few months behind in payments, know that after 270 days they CAN intercept your tax return and garnish your wages. If you take steps, such as contacting the servicer, there are steps to take. If you are already in garnishment, get some legal or financial help to see what you need to do to “rehab” your account and stop the garnishment.

Other Federal Debts- similar advice, contact the Treasury Department in charge of collecting your debt, or get legal or financial help in dealing with the agency. For Veterans there may be an option for a waiver, or a payment plan so you receive a portion of your compensation while paying back principal debt.

Final tip. Remain calm and respectful. If you receive a letter, call the numbers on the letter. If not, here is the general contact site for the Treasury Collections Department. You can take back control of your money, even if you are being garnished by a government agency. Get a plan, get help if you need it, and you can get through it.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.