No one likes getting calls from creditors or debt collection agencies. Even worse, what if you wake up and find that you suddenly have less money in your account than you had the night before because a lender garnished your wages?
Unfortunately, it is possible for a lender to garnish your wages. A debt collector or creditor can sue you if you haven’t paid your bills, and you’ll be served with legal paperwork that gives you a deadline to respond. If you fail to respond, a court can enter a judgment against you that gives the plaintiff (the lender) broad powers to collect from you.
The Consumer Finance Protection Bureau warns that this can happen in three ways: The creditor can garnish your wages, place a lien against your property, or move to freeze or garnish funds in your bank account.
Is there any way to keep your money from being garnished? Fortunately for you, there is.
If you want to protect your cash from creditors, there are ways you can do it. In fact, there are four different ways to open a bank account that creditors cannot touch, specifically for wage garnishment purposes.
If you want to shield your financial assets from a judgment creditor, you can do one of four things:
There are pros and cons to each of these approaches. We’ll go over them one by one in more detail below.
Social Security funds and Veterans Affairs benefits that are directly deposited into a bank account are protected from creditors under federal law. If the funds came directly from Social Security, Veterans Affairs, or certain other federal programs, then those funds are protected from garnishment.
This applies up to two months’ worth of benefits. Beyond that, any funds in that account may be subject to a freeze, although you may be able to prove that the funds should be exempted from seizure.
It’s important to note that these exempt funds MUST be put in the account via direct deposit. Deposits can’t be made by check, and you can’t transfer funds from one account to another; once funds are moved to a new account, creditors gain the right to garnish those transferred funds.
Social Security and VA benefits are also protected from seizure if the money is deposited straight from the Treasury to a prepaid card that’s used like a debit card.
To make sure you have enough money to pay living expenses and creditors don’t take everything you have, federal and state laws have been instituted to limit the amount of wage garnishment that can take place.
Federal law protects 75% of your disposable earnings from garnishment or 30 times the federal minimum wage — currently $7.25 an hour, which amounts to $217.50 a week — whichever amount is greater. The remainder is up for grabs for creditors to garnish.
Some states, however, go further and offer stronger protections against wage garnishment. In fact, if you live in any of these four states, all wages are fully protected from wage garnishment:
Other states offer varying degrees of limited protection, so it’s helpful to know the state law where you live.
Ten states shield a higher percentage of wages from garnishment than are protected under federal law. But it’s not just the shielded percentages that may be higher. Because many states have higher minimum wages than the federal government, they offer substantially more protection as a result.
New York, for example, protects 90% or 30 times the state’s minimum wage of $15, which equates to $450 per week. That’s substantially more than the federal level. Colorado’s level of protection turns out to be even more: 80% or 40 times its $12 minimum wage, which works out to $480 per week. And Massachusetts offers the best protection at $637.50 per week: 85% or 50 times the $12.75 minimum wage.
Other states that offered better-than-federal protections against garnishment as of October 2020 were Illinois ($450), Nevada ($362.50), South Dakota ($372 plus $25 per dependent), Vermont ($290), Washington ($472.50), and West Virginia ($362.50).
Be aware, though, that creditors can try to get around these restrictions. If you live in one of the four fully protected states but your employer has an office in a state that allows wage garnishment, the creditor may try to collect by garnishing your wages in that state instead.
One way to protect your money from creditors is by placing it in a bank account under the name of a limited liability corporation. This has the effect of separating your personal funds from those of your business.
If you set up an LLC, you aren’t responsible for its debts, and it isn’t responsible for yours. As a result, creditors can only garnish the LLC’s funds for debts owed by the business, not for your personal debt. Still, it’s not a foolproof shield against garnishment.
If, for example, you comingle your personal funds with those of the business, an LLC account can be garnished for personal debt, even though it’s a business account.
In order to avoid garnishment for personal debts, you’ll also need to obtain a separate employee identification number (EIN) for your company. If you fail to do so and instead operate your business under your own Social Security number, a creditor or debt collector could succeed in garnishing your business account to pay your personal debts.
Also, if you incur a business debt, your LLC account can be garnished.
A fourth option available to you is to open a trust, an offshore trust, or an offshore LLC.
Some states offer the option of transferring funds to an asset protection trust (APT), which is run by an independent trustee. If you do so, you’ll be giving control of your assets to someone else (the trustee) in exchange for strong protection against creditors, lawsuits, and judgments against your estate.
APTs are irrevocable trusts that allow for occasional set distributions, but those can only occur at the trustee’s discretion.
Domestic asset protection trusts are available in 17 states: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. This isn’t as limiting as it may sound, because you don’t need to be a resident of the state in order to buy into one.
Offshore bank accounts can provide even more protection if you deposit your money in a bank that is outside U.S. jurisdiction.
A creditor might be able to garnish your funds if the U.S. has an agreement with the country where the bank is located that allows for judgments to be enforced there, but it’s still a more difficult and time-consuming process than it would otherwise be.
These accounts offer a greater degree of privacy than domestic ATPs, but they are often more expensive. Also, reporting requirements for offshore accounts have become more rigorous, and some U.S. judges have moved to jail defendants who refuse to turn over assets in offshore accounts.
When and how can a creditor garnish your bank account?
Creditors or debt collectors can go after your wages through your employer, who will be legally obligated to withhold a specific amount of money from your paycheck pursuant to a court order. The creditor begins this process by filing a request with the court for the garnishment of your wages. The judge or clerk will then file a writ of garnishment requiring the garnishee to hold any wages at the time the writ is filed.
If you lose your job, wage garnishment is no longer possible.
Alternatively, a creditor can go after the money in your bank account through a mechanism known as a bank levy or bank account levy.
In the case of wages being garnished from a bank account, the bank has two business days to review the court judgment, after which it will identify your accounts and determine the reason for the garnishment. If it’s not for federal taxes or child support, it will then review your account history for the two months prior to receiving the garnishment order.
Upon completing its review, the bank has three days to notify you of the results and any garnishment.
Once in effect, the garnishment will continue until the debt is paid or until you’ve come to some other form of resolution.
As mentioned, federal benefits such as Social Security and VA benefits are generally exempt from garnishment, but there are exceptions in those cases, and they aren’t the only kinds of funds that are protected.
Exceptions to exempt Social Security funds are federal student loans and tax debt, and any child support you owe.
Other forms of income and government benefits that can’t be garnished are state disability benefits for the aged, blind, or disabled (ADB); most pensions; state welfare (Temporary Assistance for Needy Families or TANF); child support payments you receive; supplemental security income (SSI) benefits; and unemployment benefits, with the exception of owed child support.
Some money in your bank account may also be protected. This can amount to $2,000 for consumer debt such as credit card debt or $2,500 if your only judgment is for a private student loan debt. In addition, $500 in your account is exempt for all other debts, plus $1,000 in additional cash for a total of $1,500. In addition, any payments issued by the federal government in response to the COVID-19 pandemic, including Economic Impact Payments (aka stimulus payments) and child tax credit payments, may be exempt from garnishment.
There are several ways you can protect your assets from creditors. The best way to avoid this is to build good credit and stay on top of your debt and personal finances.
If you find yourself needing to shield money from creditors, however, there are legal ways you can do so. Options include setting up a trust account, domestically or offshore; creating a limited liability company account; opening a bank account for government purposes; and taking advantage of the laws in your state.
In addition, certain retirement benefits may also be protected, such as an employer-sponsored retirement account.
If you’re unsure which of these options works best for you, seek legal advice to help you decide.
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