Are you stuck with your payday loan debt?
“If you have a valid, binding, legal agreement to pay that debt, and you’re in a state where they can sue you and attach your wages, you’re playing a game of chicken that you’re going to lose,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
After a continued period of non-payment, it’s quite obvious that you have started getting collection calls from your creditors. Also, garnishing your earnings might be one of the threats from them. But, can they do this to you?
Is it a wage assignment or wage garnishment?
Before opting for a payday loan, read the terms and conditions of the same very carefully! Your creditors will make sure that they have the provision to squeeze out money if you fail to repay.
Garnishing your wages to pay off debts can be of two types. And you need to know the subtle difference between them before you find a solution.
A wage assignment is a voluntary agreement between you and your creditors to take out money from your checking account if you fail to pay it off!
Whereas, wage garnishment is a legal procedure where a court orders your employer to withhold a portion of your paycheck to pay your creditors. To do this, your creditors need to sue you in court, then win a case in their favor. And after that, the court will give the order for wage garnishment.
Common reasons for wage garnishments are child support, consumer debts, student loans, etc.
How are they processed?
The process of wage assignment is comparatively simpler. Your creditor(s) need to send you and your employer an email, for a letter of intent. According to the Federal Trade Commission (FTC), you have the legal right to revoke your wage assignment at any point in time. So to stop, you need to send an email to your company’s payroll department and your creditor(s).
On the contrary, wage garnishment is a time-consuming process. If you fail to pay off your creditors for a certain time, they sue you in court. With the court’s order, they send you and your employer a notice to garnish your wages. As a result, it becomes tough to stop wage garnishment.
Under Title III of the Consumer Credit Protection Act (CCPA), the maximum garnishment in a week should not exceed 25% of your net income (if your disposable income is more than $290); or, any amount greater than 30 times the federal minimum wage, i.e., $7.25 per hour at present.
It also protects you from getting ousted by your employer if your wage gets garnished due to a single debt.
However, CCPA doesn’t prohibit discharge if your wages are separately garnished for two or more debts.
Wage garnishment creates an adverse impact on your credit report and credit score! But, how so? Usually, creditors mark your credit account as defaulted or closed after you pay off your debts by garnishing wages. But you have seen in most cases that, wage garnishment is possible by court order only! Thus, the judgment of the court for your wage garnishment will be shown in the public records!
Credit reporting bureaus can figure that out, as it’s easily accessible. And they can lower your credit score by almost 150 points per entry and the negative impact stays up to 7 years!
So, wage garnishment is mostly used as the last way out to pay off your debt.
“Prevention is better than cure”
It might happen that due to some unforeseen situation, you are going through a financial crunch. And if you are trapped with your different pdls, then your situation becomes worse!
Pdls usually come with a very high Annual Percentage Rate (APR) like about 400% or more. Thus, it becomes very wearying to get out of the pdl debt trap.
So, what are you waiting for? Avoiding paying off your pdls might lead the way to your wage garnishment!
You may opt for payday loan consolidation to get rid of your payday loan debts!
In this method, you need to negotiate with your creditors to reduce the high-interest rates of your pdls. If your creditors agree, you can start making payments with slashed interest rates. After you complete paying off your pdls through consolidation, your creditors report those debts as “paid in full”. This results in a gradual improvement in your credit score.
By the way, you might feel that negotiation with your creditors is becoming too frantic. In that case, you can approach a payday loan consolidation company. They will try to negotiate with your creditors to reduce the interest rates on your behalf.
You can pay off your multiple debts through single monthly payments to a debt consolidation company. But always remember, they will charge you for these services.
It’s always advisable to pay off your pdls asap to avoid falling prey to the debt trap. However, we understand that you might be going through any unanticipated financial crunch. But your creditors are masters at one thing, i.e., human apathy!
So, when they sue in court for continued nonpayment of your dues, never fail to show up in the court summons. If you don’t, then the court judgment might go against you!
So far, you have seen that to garnish your wages, a valid court order is mandatory! But there are some cases where your creditors don’t need a court order.
- If you owe a tax debt, the Internal Revenue Service (IRS) has the power to garnish your wages without a valid court order.
In this case, you will receive a Notice of Demand for Payment, followed by a Final Notice. IRS will allow a period of 30 days from the date of receiving the notice, to pay off your outstanding tax debt. This can result in garnishing of nearly 15% of your wages.
Else, they will contact your employer to garnish your wages to pay off the tax debt.
If you fail to pay for court-ordered spousal or child support, it can lead to your wage garnishment. And for that, it won’t take a separate court order to garnish your wages.
- In this scenario, the laws allow garnishing 50% of your wages if you are supporting your other child or spouse. And your wages might be garnished up to 60% if you don’t have to support any other person.
If you are 12 weeks late in your payments, an additional 5% of your wages can be garnished!
How can you stop your wage garnishment?
“Tell the lender: “Look, I simply can’t pay you and I’m considering bankruptcy,’” says John Ulzheimer, a credit expert who has worked at credit scoring company FICO and credit bureau Equifax. “The minute you start using the BK word, they get real serious, because BK means they get nothing.”
Yes, declaring bankruptcy is the ultimate way to stop your wage garnishment. However, it impacts your credit score heavily. Chapter 7 bankruptcy adversely affects your credit score for about 10 years and the effect of Chapter 13 bankruptcy stays for about 7 years!
Otherwise, you can challenge your wage garnishment in court in the following cases only:
- You have already paid your creditors and still, they have sued you in court for wage garnishment.
- Your creditors have failed to give you notice of wage garnishment. They are supposed to issue a notice at least 5 to 30 days prior to your wage garnishment.