Every year millions of Americans fall behind in their debts.
Whether due to an economic downturn, closing of a factory, or reduction in tourism due to inclement weather such as a hurricane – times can get tough. When that happens, taxes become delinquent, child support payments are late, student loans fall into default, and credit cards often go unpaid, prompting creditors to take action.
One of the harsher debt collection actions is wage garnishment, but fortunately for the debtor, the state of North Carolina is one of the most protective jurisdictions in America. So let’s explore the details of the wage garnishment process in North Carolina to better understand how it works and how those protections can be invoked.
What is a wage garnishment?
When a creditor snatches your wages right out of your paycheck or direct deposit, before those wages reach your hands, that is a wage garnishment taking place in all its glory. A wage garnishment is a form of attachment whereby the creditor takes the debtor’s wages before they are paid over to the employee and applies those wages in satisfaction of a debt. The result is the obvious one: the debtor employee’s check is lighter by the amount of the wage garnished.
Can all of the debtor’s income be attached?
The term “wages" has a technical definition that is much narrower than income in general. Under federal and state wage-and-hour law, “wages" refers to that species of income that derives from a bona fide employment relationship. A bona fide employment relationship is one involving an employer and an employee whereby the employee typically reports to work for hours set by the employer, and where the employer takes out withholding from a regular paycheck. Independent contractors and freelancers are not technically employees, meaning any income earned thereby is not considered “wages" for purposes of wage garnishment. A wage garnishment order served on a person hiring a freelancer must therefore be ignored.
How does a creditor obtain a wage garnishment order in North Carolina?
The way wage garnishment orders are obtained by the creditor depends entirely on the type of debt involved.
Consumer debts are those that stem from the debtor acting in the capacity of a buyer or recipient of goods or services. Falling into this very wide category are credit card debts, retail store debts, online purchases, medical and hospital bills, and matters of this sort. For all consumer debts, the creditor must first file and serve a debt collection lawsuit alleging a precise amount due and unpaid. The debtor must then timely answer this complaint or a default judgment will be entered. If a money judgment is obtained, that judgement can then be converted into a wage garnishment order, which can be served on the employer to accomplish the garnishment process described above.
Not surprisingly, the IRS does not have to file a debt collection lawsuit and obtain a money judgement in order to reach a debtor’s wages. When taxes go delinquent, all the IRS must do is send various letters prescribed by federal law and regulations to the debtor, notifying him or her of the collection action pending. If the taxes are not paid, or a repayment arrangement is not reached, the IRS can issue a garnishment order to the tax debtor’s employer, commencing the garnishment process.
Child Support and Alimony
The most common reason for garnishing wages in America in general and North Carolina in particular is for ongoing and unpaid child support and alimony. Since 1988, wage withholding orders have been automatically included in all child support and alimony proceedings in all states across the country. When the judge orders that child or spousal support be paid, that order is reduced to a wage garnishment order and sent to the employer, which must instantly comply with it.
Most student loans are in some way connected to the U.S. Department of Education (DOE). If these loans go delinquent, the DOE will apply for and receive an administrative garnishment order that is forthwith served on the defaulting student’s employer, when he or she has one. Very often, of course, the problem is that the student cannot find or has lost his/her job, in which case the wage garnishment order collects dust until employment is obtained.
Out-of-State Garnishments – Special Rules in North Carolina
Sometimes the creditor has already obtained a garnishment order from another state. In that case, the wage garnishment order may be served directly on the employer and wages must be withheld, subject to the limits and protections of federal and North Carolina law.
Limitations on Garnishments
A nightmare scenario that would put any debtor into a cold sweat is the prospect of the creditor or a group of creditors being able to take all of the debtor’s wages through the garnishment process, leaving the debtor destitute, unable to pay for the basic living expenses of himself or his family. Federal law, and in the case of North Carolina, state law, do not permit that to happen for public policy reasons. Instead, limitations are fixed on how much wages can be garnished, depending on the type of debt involved.
Consumer Debts – Federal Law
Under federal law, Title III of the Consumer Credit Protection Act (CCPA) limits the portion of wages that can be attached to collect a consumer debt in any one pay period depending on the application of two different rules, collectively known as “the 25-30 Rule."
Under the 25 Rule, no more than 25% of the employee’s “Disposable Wages" can be garnished. “Disposable wages," as defined by federal and North Carolina law, are the net wages that remain after deductions for federal withholding, Social Security or SSI, Worker’s Compensation, Unemployment Insurance, and certain pensions (not all qualify).
The 30 Rule, by contrast, protects 100% of 30 times minimum wage, allowing 100% of all amounts above and beyond that to be attached. Since federal minimum wage is $7.25, and $7.25 x 30 = $217.50, if an employee’s disposable income per week is $500, the employer can take $500 – $217.50 = $282.50 (or more than 50% of the worker’s paycheck).
Fortunately for the worker, the Rule that most protects the employee’s wages must be applied. So in the above scenario, since 25% of $500 is $125, that is the most that can be withheld for garnishment purposes.
Consumer Debts – North Carolina Law
The state of North Carolina joins a small handful of states that provide complete protection against wage garnishment for consumer debts. In other words, consumer debt creditors cannot attach employee wages in any percentage or amount in the state of North Carolina. It is important to note, however, that once these wages reach the debtor’s personal bank account, they can be attached, so the protection in that sense is only a partial one. That said, the same is true under federal law in those states where federal law provides the protections. Once the wages arrive in the debtor’s personal bank account, they can be attached in full.
Unpaid and delinquent federal can be garnished to a much higher degree than consumer debts, even in those states where only the federal protections apply for consumer debts. What matters most is whether and to what extent the delinquent taxpayer has dependents, because the more dependents the less the government can garnish. A garnishment table is published by the federal government, but generally speaking, around 50% or more typically can be withheld to satisfy taxes, though the IRS will consider hardship when backed by solid documentation. By contrast, only 10% of gross wages can be garnished to pay delinquent North Carolina state taxes.
Delinquent student loans administered or subject to the jurisdiction of the Department of Education can result in 15% of disposable wages being garnished through an administrative garnishment order. Before this happens, there are procedures for the student-debtor-employee to make repayment arrangements, and these should always be diligently pursued.
Unemployment Benefit Overpayments
Occasionally the state of North Carolina will overpay unemployment insurance benefits. These overpayments are subject to wage garnishment within the protections of federal law, according to “the 25-50 Rule," despite them not being consumer debts.
Garnishment orders from other states
Likewise for garnishment orders from other states. They will be honored in North Carolina, but subject to “The 25-30 Rule."
Child Support and Alimony
These are debts that don’t receive protection like unpaid consumer bills, for obvious reasons. The policy considerations around collecting child support and alimony have motivated Congress to pass federal legislation that allows up to 50% of disposable earnings to be garnished for people currently supporting a family, and up to 60% for those who are not. Fall more than 12 weeks behind, and those numbers bump up to 55% and 65%, respectively.
Multiple Garnishment Orders in North Carolina
When it rains, it pours, or so the old Morton’s Salt advertisement goes, and it couldn’t be truer for debt. Fortunately for working debtors, the garnishment caps are blind to the number of garnishments, meaning the protections fully survive no matter how many garnishments there are. For example, if 15% of your wages are being garnished for a student loan, a persistent collection agency for a credit card company or medical provider can only reach another 10% under “the 25-30 Rule" previously described.
Employers Angry at Garnishment
Anger may not be the right word to describe it, but feeling hassled could well be. Employers, especially smaller ones, might roll their eyes and grunt upon service of a wage garnishment order, knowing it involves wasted time, effort and tedium that does nothing for their bottom line, particularly for easily replaceable laborers and clerks. Federal law, however, intervenes at this point to make it illegal to fire an employee for getting garnished. But after the one, you’re on your own, as the federal protection falls off and North Carolina does not step in – as some states do – to provide further protection from termination for multiple garnishments.
As you can see, the garnishment process in North Carolina – as in any state – can be nuanced, tricky and formalistic. Knowing when to reply, what to say, and how to do it – often require a level of expertise the ordinary debtor does not possess. In that situation, calling upon a professional in debt collection – attorney, accountant, tax person – may be the wisest thing to do to gain needed peace of mind.
North Carolina Law
Labor Laws: https://www.labor.nc.gov/
Consumer Credit Protection Act: https://www.govinfo.gov/content/pkg/USCODE-2009-title15/html/USCODE-2009-title15-chap41.htm
Federal Garnishment FAQ Sheet: http://www.dol.gov/whd/regs/compliance/whdfs30.pdf
Higher Education Act Loans: 20 U.S.C. § 1095a; 34 C.F.R. § 682.410(b)(9)
Office of Child Support Enforcement: https://www.acf.hhs.gov/css/resource/processing-an-income-withholding-order-or-notice
Bankruptcy and Wage Garnishment: https://search.uscourts.gov/search?affiliate=uscourts.gov&locale=en&query=wage%20garnishment