How Credit Card Companies can Garnish Wages (and What to do About it)
By Janet Berry-Johnson, CPA
Can credit card companies garnish your wages? Yes, but it usually takes months
to reach the point where your wages are deducted. So you have time to take action and avoid it.
Here's what to know about wage garnishment, how it works, and what you can do about it.
In this article
Rising credit card debt
For many Americans, credit card debt is high and getting higher – especially during times of crisis. According to the latest data from Experian
, Americans carried an average credit card balance of $4,293
for the third quarter of 2018, an 11% increase
compared to the same quarter in 2015.
Even more troubling, credit card delinquency rates (late payments over 90 days past due) have been rising over the years, up 34% when you compare the third quarter of 2018 versus 2015.
If you’re one of the millions of Americans with outstanding credit card debt
that you can’t afford to pay, you may be tempted to ignore those bills.
But you might want to think twice about skipping your credit card payment. Not only do delinquent credit card payments
negatively impact your credit score; they can also affect your paycheck.
What happens if you stop paying credit card bills?
People dealing with a financial setback and limited income often need to make strategic decisions about which bills to pay
Faced with a choice between paying your mortgage, car payment, or a credit card, you’re more likely to prioritize your mortgage or car payment. After all, defaulting on those loans can lead to losing your home
or means of transportation.
Credit cards are unsecured debt, meaning it doesn’t have specific property – such as a house or car – serving as collateral. If you don’t pay unsecured debt, the creditor can’t just come repossess the goods or services you bought with your credit card. But that doesn’t mean skipping a credit card payment won’t cost you.
A timeline of what happens when you skip a credit card payment
1 day late.
If you pay your credit card bill just one day after the due date, you could be charged a late fee of up to $28.
30 days late.
Your credit card company may not immediately report a late payment to the credit reporting agencies, but if your payment is more than 30 days late, it’s almost guaranteed to show up on your credit report and negatively impact your credit score. (And make sure you know how to read your credit report
60 days late.
If you miss two payments within six billing cycles, your credit card company can charge you an additional late fee of up to $39. The credit card issuer may also bump up your interest rate to a penalty APR. The average penalty APR
is about 29.99%.
90 days late.
Once your payment is 90 days late, the credit card issuer may send your account to an in-house collection department or an outside collection agency. From there, a debt collector will try to contact you to arrange payment.
The card issuer may also lower your credit limit
, as will other credit card issuers who spot the 90-day late payment on your credit report. This will further damage your credit score, as the lowered credit limits will increase your credit utilization ratio
120 days late or more.
If your credit card issuer hasn’t already sold your debt to an outside collection agency, they most likely will at this point. This is known as a charge-off and is a big negative mark on your credit report.
How credit card companies can garnish wages
At some point, if you haven’t made arrangements to settle your debt, either the credit card issuer or the collection agency can sue you for your unpaid balance. If their lawsuit is successful, the company may have the right to garnish your wages.
Garnishment orders can be issued for different types of debt, such as child support
and student loans
, and credit card debt is no different.
Once you are sued by a debt collector, you will be “served” with legal paperwork. This paperwork gives you a deadline to respond. While you have the choice whether to respond by yourself or through an attorney, you can’t avoid the lawsuit by refusing to accept the paperwork or ignoring the court action. If you don’t respond by the deadline, the court will likely issue a judgment against you.
The judgment will likely be the amount the creditor or debt collector says you owe, but may also include additional fees to cover collection costs, interest and attorney fees.
According to the Consumer Finance Protection Bureau
“Judgments give creditors much stronger tools to collect the debt from you. Depending on your situation and your state’s laws, the creditor may be able to:
- Garnish your wages
- Place a lien against your property
- Move to freeze or garnish all or part of the funds in your bank account.”
If the creditor decides to garnish your wages, they will send a garnishment summons to your employer, notifying them that you are subject to wage garnishment. Your employer is legally obligated to start withholding a specified amount from your paycheck and begin sending it to the creditor.
The amount of your pay that can be garnished depends on state law. Some states prohibit garnishments for consumer debts while others allow a creditor to take as much as 25% of your wages. These restrictions are in place to protect employees so they have some income to live on.
Certain deductions that are required from employees by federal law, such as federal, state and local taxes, social security payments, etc., are exempt from garnishment. However, other payments, such as health insurance and other insurance premiums, are not exempt.
If you have a wage garnishment for only one debt, your employer cannot legally terminate you to avoid dealing with the garnishment. However, if you have multiple or repeated wage garnishments, that’s another story. Depending on the laws in your state, your employer may end your employment.
Once your employer receives a notice that they must start garnishing your wages, you cannot prevent them from complying, even if you believe the judgment against you is incorrect.
Only the court can change it, and it’s very difficult to get a judgment changed once the case is over. You’ll have a much better chance of preventing wage garnishment if you work out a compromise or settle with the debt collector and avoid going to court.
Where to get help if you cannot pay your credit card bills
If you know you won’t be able to make your credit card payment on time, your best course of action is to be proactive and reach out to your credit card company.
Here’s a list that can help you avoid wage garnishment:
1. Call the credit card company
If you’ve been a good customer and have historically paid your bills on time, your credit card company will likely work with you on a single missed payment, or perhaps be willing to set up an alternative payment plan. Just let them know your circumstances and ask if there’s anything you can do to avoid a late fee, penalty APR
, or having the late payment show up on your credit report.
There’s no guarantee that the lender will cut you some slack, but if you call before the payment due date and provide a timeline of when you will be able to pay, they are more likely to work with you.
2. Work with a credit counselor
If your financial troubles won’t be resolved within the next few weeks, you’re living paycheck to paycheck, and can’t get a handle on debt payments, you might benefit from working with a credit counselor.
A reputable credit counselor can offer advice on managing your money and debts and help you develop a budget and plan to deal with your financial troubles. They can also help you decide whether debt consolidation or debt settlement is a feasible option.
But choose your credit counseling agency carefully. Some credit repair scams charge high fees or make promises that are too good to be true. The U.S. Department of Justice maintains a list of approved credit counseling agencies by state
3. Talk to an attorney
If you have little or no disposable income and no assets to sell to cover your debts, consider talking to an experienced personal bankruptcy attorney who is familiar with the laws in your state. While filing for bankruptcy should be a last resort, an attorney can help you ensure you don’t make your financial problems worse.
Get a referral from your accountant, a friend or family member, or your local bar association. Most bankruptcy attorneys base their fees on the complexity of your case and your ability to pay, so don’t let a fear of fees prevent you from seeking professional help.
The best way to avoid wage garnishment is to make on-time payments on all of your debts. However, if you do find yourself in a situation where you can’t pay your credit card bills on time, be proactive and reach out to your creditors. They are more likely to work with you if you start communicating early and may have policies in place to help borrowers who are worried about falling behind.
About the author
Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes.