Garnishment or Levy
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Explore the differences and legal implications of garnishment and levy.
Garnishment or Levy: Understanding Wage Seizure and Asset Freezing
Garnishment and levy are two legal tools creditors may use to collect unpaid debts, but they work in different ways. Garnishment usually involves taking money from your wages, while a levy typically targets funds in a bank account or other property.
This guide explains the difference between the two, how each process works, and what legal protections may apply.
Defining Garnishment and Levy
Imagine suddenly finding your bank account empty or your paycheck much smaller; this is what can happen with levies and garnishments. These are legal ways that creditors can claim money from you, leaving you feeling powerless.
What Is Garnishment?
Garnishments are court orders directing a third party to deduct payments from a debtor’s wages or bank account. For example, if an individual fails to pay child support, taxes, or a court judgment, a creditor may seek a wage garnishment. This process usually requires your employer or bank to send part of your earnings directly to the creditor.
Types of income that can be garnished include:
- Wages from your job
- Bonuses
- Commissions
- Pension or retirement funds
- Social Security benefits
In California, workers’ compensation and unemployment benefits are generally exempt from garnishment by creditors. However, they can be subject to court-ordered deductions for child/spousal support and taxes. Private disability payments may also be garnished for child support.
What Is a Levy?
Unlike garnishment, a levy involves the seizure of assets. Creditors, including the IRS for tax debt, may levy a bank account. This allows them to take funds directly from your bank accounts. Levies can also lead to the seizure and sale of personal property.
Assets that can be levied include:
- Bank accounts
- Real estate property
- Personal property, such as jewelry, vehicles, and valuable collectibles
- Business assets like equipment and inventory
In short, garnishment means taking part of your wages before you even get them, directing your employer to send that money to your creditors instead.
A levy, on the other hand, allows creditors to take money directly from your bank accounts or other financial assets. If a court grants a creditor permission to levy on your accounts. They can lock your funds, and only they can unlock them.
Legal Process & Creditor Steps Before Garnishment or Levy
Before most creditors can garnish your wages or levy your bank account, they need to first follow a formal legal process rooted in both federal and state law. This process ensures due process and protects consumers from unlawful collection efforts.
Here’s what typically happens:
Filing a Lawsuit: The creditor (or debt collector acting on their behalf) files a debt collection lawsuit in the appropriate court to pursue a money judgment.
Written Notice of Lawsuit: You have to be properly served with a summons and complaint. Improper service can be grounds for dismissal.
Court Judgment: If you don’t respond, the court may grant a default judgment. If you defend the case and lose, the court still issues a money judgment in the creditor’s favor.
Final Notice of Garnishment or Levy: After obtaining a judgment, the creditor sends a final written notice.
Garnishment or Levy Authorization: The creditor then requests the court’s permission to execute a wage garnishment or bank levy. Your employer or financial institution gets notified.
The Internal Revenue Service (IRS) and other federal government agencies do not always need court permission to collect tax debt. Under federal law, the IRS can initiate bank levies or garnish wages after providing the required final notice (usually Letter 1058) and allowing for appeals.
Legal Protections Against Garnishment and Levies
Legal protections against garnishment and levies are designed to safeguard individuals from excessive financial hardship due to debt collection. These regulations ensure that people retain enough income to meet basic living expenses while balancing creditors’ rights to recover debts.
Consumer Credit Protection Act (CCPA)
The Consumer Credit Protection Act (CCPA) is a federal law in the United States that provides essential protections for consumers regarding credit transactions. CCPA limits the amount of money that can be garnished from an individual’s wages to ensure that they have enough income left to meet basic needs.
Here’s how the CCPA regulates wage garnishment:
Garnishment Limits: The general rule is that the lesser of the following amounts may be garnished: 25% of the debtor’s disposable earnings for that week, or the amount by which the debtor’s disposable earnings exceed 30 times the federal minimum wage.
Multiple Garnishments: If an individual has multiple garnishments, the total garnishment amount still needs to be at most 25% of their disposable earnings. This helps ensure that garnishments don’t take an excessive share of a person’s income.
Exceptions: Higher amounts can be garnished for child support, alimony, federal taxes, and certain federal student loans. For child support and alimony, up to 50% of disposable earnings can be garnished if the debtor supports another spouse or child, and up to 60% if not. An additional 5% may be garnished for support payments that are 12 weeks or more in arrears.
Protection Against Termination: The CCPA also protects employees from being fired if their wages are garnished for any single debt.
California Claim of Exemption for Wage Garnishment
In California, the Claim of Exemption for Wage Garnishment is a legal process that allows individuals whose wages are being garnished to seek relief. This option may apply when the garnishment negatively affects their ability to meet basic living expenses, such as housing, food, and healthcare.
If a garnishment order is issued, the debtor can file a Claim of Exemption with the court. This form explains why the garnishment causes too much hardship and shows how much income is needed for basic living expenses. The debtor also has to file a financial statement that lists income, expenses, and dependents.
Once the Claim of Exemption is filed, a hearing may be scheduled. At the hearing, the debtor can present evidence and argue the case for reducing or halting the garnishment. The court then decides whether to adjust the garnishment based on the debtor’s needs and the exemption guidelines.
If the court approves the Claim of Exemption, the garnishment amount may be reduced or, in some cases, completely stopped.
Filing for Bankruptcy as a Solution
Bankruptcy can be a powerful legal tool to halt garnishments and levies, providing a fresh start by addressing overwhelming debt.
When you file for bankruptcy, an automatic stay immediately goes into effect. This stay is a court order that prevents most creditors from collecting debts. This means garnishments and levies are halted after the bankruptcy petition is filed.
While the automatic stay is comprehensive, it does not cover all debt collection activities. Notable exceptions include:
- Child support and alimony
- Certain tax proceedings
- Criminal proceedings
- Loans from a pension
Here’s how bankruptcy works to stop these collection activities:
Chapter 7: In Chapter 7 bankruptcy, certain assets might be sold off to pay creditors. However, depending on state laws, many personal assets can be exempt from liquidation.
In Chapter 7, once the bankruptcy is finalized, debts related to credit cards, medical bills, and personal loans may be eliminated, stopping garnishments associated with these debts. It’s typically suited for individuals with limited income who do not have significant assets to protect from liquidation.
Chapter 13: In Chapter 13 bankruptcy, debtors propose a repayment plan to make consistent payments to creditors over three to five years. This can result in significantly reduced payments and may include restructuring secured debts (such as car loans or mortgages) and some unsecured debts (such as credit card debts).
Under Chapter 13, garnishments and levies are stopped by the automatic stay. Moreover, as long as the repayment plan is adhered to, creditors cannot resume these actions.
Talking with a bankruptcy lawyer, such as Chang & Diamond, APC, can help you understand your choices. They can explain which type of bankruptcy may fit your situation and how it may affect your current financial problems, including garnishments and levies.
Contact Chang & Diamond For All Your Garnishment or Levy Issues
If you are dealing with a garnishment or levy, consider speaking with Chang & Diamond, APC about your legal options. A consultation may help you understand how these collection actions work, what protections may apply, and what steps may be available to help safeguard your income and assets.
Contact us today and schedule a free initial consultation.
Frequently Asked Questions
1. What is the difference between a garnishment and a levy?
A garnishment generally involves taking money from a third party that holds funds owed to you, such as wages from an employer or funds in a bank account. A levy typically refers to a creditor taking property or funds directly to satisfy a debt, often after obtaining legal authority to do so.
2. Can a creditor garnish my wages without going to court?
In many situations, a creditor first has to obtain a court judgment before pursuing wage garnishment. However, some debts—such as certain tax debts, federal student loans, or child support obligations—may be collected through different procedures that do not always follow the same court process as private creditors.
3. How much of my paycheck can be taken through wage garnishment?
The amount that can be garnished often depends on the type of debt and the laws that apply. Federal law limits how much of a person’s disposable earnings can typically be garnished in most cases, but exceptions may apply for obligations like child support or tax debts.
4. What property or assets can be taken through a levy?
Depending on the type of levy and the debt involved, a levy may apply to bank account funds, certain personal property, or other assets. Some property may be protected under federal or state exemption laws, meaning it may not be legally available for collection in certain circumstances.
5. What legal options may be available to stop or challenge a garnishment or levy?
A person may be able to challenge a garnishment or levy based on improper notice, mistaken identity, exemptions, or errors in the amount claimed. In some situations, bankruptcy may also stop collection activity through an automatic stay, although eligibility and outcomes depend on individual circumstances.
