Accumulating Interest on Wage Garnishment
Often issued by a court, wage garnishment directly orders an employer to withhold an employee’s wages and pay the withheld portion over to a creditor or a designated third party in order to satisfy an underlying debt – consumer purchases or loans, child support, school loans, taxes, and the like.
Wage garnishment orders are often based on an underlying court judgment. That judgment can result from a contested case, or can be entered by default after the defendant no-shows. Very often a debtor chooses not to oppose a debt-collection lawsuit, figuring he owes the money and there’s nothing he can say to change it.
So technically, interest does not accrue on the garnishment order itself, but rather, the underlying judgment or, in the case of unpaid child support or taxes, the underlying debt.
Types of Interest
Interest exists in two types: pre-judgment interest and post-judgment interest. Pre-judgment interest arises from the date the underlying debt accrues, i.e., from the date of non-payment of the underlying debt.
Post-judgment interest arises from the date the Judgment is entered in the court record, and lasts until it is paid in full or compromised. Post-judgment interest is based on the entire Judgment, which typically includes the underlying debt, court costs, sometimes attorney’s fees, and pre-judgment interest.
So, post-judgment interest is accessed and accrues on pre-judgment interest. That is one of the reasons why debtors have such a difficult time paying off these debts, especially where the interest is high, and why wage garnishment orders get issued in the first place.
Rate of Interest
Many consumer contracts specify very large interest rates and penalties to be accessed against the borrower upon non-payment of the contracted debt. In pro-creditor states in the US, the courts allow the creditor to collect the interest set forth in the debt contract, even if the amount is more than double the statutory rate for interest that accrues on other Judgments.
In the absence of a contract rate, the so-called legal rate of interest accessed on debt and Judgments that result in wage garnishment orders varies wildly from state to state. Some states only allow small percentages of interest to be paid on consumer debt, going as low as 2%; others like California award the creditor 10% interest across the board on all Judgments; and still others like Nevada impose an interest rate of prime plus 2%.
A few years back, the New York Times published an article about a borrower who took out a $4,097 personal loan from a subprime lender. When he fell behind and missed some payments, the lender sued and obtained a judgment against him for $4,750, plus $900 in attorney’s fees and interest accruing at the rate of 27.55%. After paying off $10,000 in garnished wages, he still owed just a few dollars less than the original loan. Under Virginia law, the process was perfectly legal.
Word to the wise is to pay off the debt as quickly as possible, before it becomes a garnishment order, or after it becomes one. This is the only thing that stops the interest from running – except, of course, for working out a settlement with the creditor, or filing for bankruptcy. No matter what, consulting an experienced labor, debtor-creditor or consumer attorney is a smart way to address the issue head on and work towards a solution.
Federal Statute: Title III, Consumer Credit Protection Act (CCPA), 15 USC, §§1671 et seq.
Code of Federal Regulations: 29 CFR Part 870
Explanatory Brochures and Regulatory Materials Online: www.dol.gov/whd
U.S. Wage and Hour Division: Fact Sheet #30 – The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA)
Field Operations Handbook – 02/09/2001, Rev. 644, Chapter 16, Title III – Consumer Credit Protection Act (Wage Garnishment)
Listing of Garnishment by state: http://www.small-claims-courts.com/Wage-Garnishment-Laws.html
Child Support Interest by State: http://www.ncsl.org/research/human-services/interest-on-child-support-arrears.aspx
New York Times Article: http://www.nytimes.com/2010/04/02/business/economy/02garnish.html?pagewanted=all&_r=0