When you stop paying a debt, a creditor isn’t limited to calling you and sending you demanding letters—the creditor can file a lawsuit and obtain a money judgment. With a judgment, the creditor has access to some powerful collections tools—a garnishment, attachment, or levy. Each tool gives the creditor access to different types of property, thereby forcing you to pay the debt.
Set Up a Court-Ordered Payment Schedule
After winning in court and receiving the money judgment for the amount you owe, both the creditor and the court would prefer that you start making payments. In some states, the court will automatically set up a schedule of installment payments (or do so at the creditor’s request). Either way, the schedule will be included in a court order. If you miss a payment, you can be held in contempt of court and assessed a fine, community service, and, although rare, jail time.
Attach Your Wages
If you have a job, in many states, you can expect the creditor to garnish your wages. Federal law limits the amount the creditor can take from each paycheck to the lesser of:
- 25% of your pay after required deductions, or
- the amount that your pay exceeds 30 times the federal minimum wage.
Suppose that you make $800 (gross pay) per week. You’ll pay either $150 (25% of $600—the amount that remains after subtracting deductions of $200) or $582.50 ($800 gross pay minus 7.50 federal hourly minimum wage times 30, or $217.50.) Because $150 is less than $582.50, the creditor will be entitled to take $150 from your paycheck each week.
State law. Your state law might protect even more of your income. In fact, some states don’t allow wage garnishments at all (other than for child support).
IRS, child support, and student loans. Federal law allows garnishment for back taxes and student loans even without a judgment. Also, the amount taken can differ. The IRS and a child support creditor will likely be entitled to take a higher percentage. By contrast, a government student loan provider is limited to 15% of your disposable income. (Learn more in How Much Can a Creditor Garnish From My Paycheck?)
Self-employed individuals. If you are an independent contractor, a freelancer, or otherwise self-employed, a creditor cannot garnish your pay as wages. That doesn’t mean that the money you’re owed is safe. The creditor can attach what’s owed to you in a different way. The judgment creditor is not limited to 25%. The levy can take the entire payment. Also, the judgment creditor must obtain a separate levy for every payment.
Attach Your Bank Account and other Cash Assets
Creditors can also reach the balances in your deposit accounts—and the creditor isn’t limited to a percentage of your balance. Unless you have more money on deposit than necessary to satisfy the judgment, the bank will drain your account and give the funds to the creditor.
Other sources of cash will also be vulnerable. The judgment creditor can potentially ask the court to assign your right to payment of an annuity, the cash value of a life insurance policy or even a tax refund.
Attach Your Real Estate
The judgment acts as a lien against all of your property. (A lien gives a creditor an ownership interest in the property it attaches to until the judgment is satisfied.) In some states, the lien arises automatically when the judgment gets entered. In others, the lien arises after the creditor files the judgment in the county records.
The judgment will appear in a title search as a cloud (defect) on the title. Before the seller can transfer title to a new owner (or refinance the property), the judgment will need to get paid along with any other liens against the property.
Many judgment creditors will be satisfied taking a wait and see approach, expecting that sometime before the judgment expires they will be paid. But, the creditor isn’t required to wait. A more proactive approach is to force the sale by having the court order the county sheriff to put the property on the auction block. Prior liens, like your mortgage, will be paid first. Anything remaining will be applied to the judgment. In some states, this approach is available only for property that isn’t a homestead.
Attach Other Property
Similarly, a judgment creditor can look to your personal property (everything other than real estate) to satisfy the judgment. The creditor can ask for a court order forcing you to turn over personal property to the sheriff. The sheriff will conduct a sale, and the creditor will apply the proceeds to the outstanding judgment.
A creditor can’t take all of your personal property, however. Every state protects (exempts) the items that you need to live your life, like ordinary household goods, furniture, clothing, medical equipment, and tools of the trade. The sheriff will target unnecessary or luxury items of value, like antiques, artwork, collections, electronics and jewelry.
Questions for Your Attorney
- What will happen if I don’t turn over my personal property to the sheriff?
- Can I stop a wage attachment and set up a repayment plan with the creditor?
- Will bankruptcy stop a wage garnishment or prevent the sheriff from selling my property?