When you have mounting debts and are in a financial struggle to pay them off, lenders may resort to hitting you where it hurts: your wallet. As a serious consequence of being delinquent on credit obligations and not paying bills on time, lenders may garnish your wages directly. They aim to get paid no matter what by taking a pretty penny out of your paycheck or straight out of your bank account.
Why Does Wage Garnishment Happen?
Lenders and collection agencies are increasingly using wage garnishment in order to get the money they are owed. According to a report by NPR and ProPublica, almost 4 million U.S. workers in 2013 had their wages seized due to debt. With millions of Americans under billions of consumer debt, including outstanding payments on credit cards or unpaid loans, it's no surprise collection agencies are doing all they can to collect. As another scenario, you may also owe the Internal Revenue Service money for taxes, which is also a major reason why wage garnishment happens.
How Much is Taken Out During Wage Garnishment?
Certain states will have limits and restrictions for how much lenders can retrieve through wage garnishment. However, in about half of the states in the U.S., creditors may be able to garnish up to 25 percent of a paycheck. This pay cut could affect your ability to pay your bills. If you make $1,000 per paycheck and lose $250 of that to wage garnishment, you may have to cut corners or may not be able to spend money on bills, groceries and rent or mortgage.
In addition, if you owe a large amount of money to debt collectors, there may be extra costs involved. Lenders or collection agencies can also add to the total amount owed by having penalty fees or increase interest rates.
What to Expect with Wage Garnishment
Wage garnishment can negatively influence how you manage your life and finances. Having money taken from you could lower your purchasing power and hinder your progress in saving for a house, car or retirement. Since you have less money coming in each month, you may also find it harder to resolve your existing bills and payments, which could put you deeper in debt.
Another big impact of wage garnishment is the possibility that your employer will find out about your inability to fulfill your credit obligations. Employers may already be aware that collection agencies are going after your wages, which could cause them to reevaluate your ability to do your job, especially if you work in the financial services industry. Having multiple accounts that are embroiled in wage garnishment can impact your relationship with your current or future prospective employer if they perform a credit check and see that you are not fulfilling your end of the bargain with certain credit obligations.
How Does Wage Garnishment Affect My Credit Score?
As with any negative event, wage garnishment will lower your credit score. Not only does the fact that you have unpaid debts affect your standing with lenders, the fact that debt collectors or creditors had to garnish your wages may also play a factor in future decisions to grant you a new credit card or loan.
With the severe consequences of wage garnishment, avoid having unpaid debts by paying bills on time and make sure that you resolve errors on your credit report that may result in collection agencies going after you. Consumers who may be at risk for wage garnishment must determine whether they should consult with legal experts on the issue and if any other action could be taken to prevent this from happening.