Can Creditors Garnish Wages for Charge-Off Amounts?

Before a creditor charges off a debt, it gives you every opportunity to make payments to bring your account current. Policies vary, but many creditors charge off your account after six months of consecutive nonpayment. At this point, the creditor writes off the debt as a bad-debt expense against an established reserve. Despite taking a charge for a bad debt, many creditors opt to sell their bad debts to a third-party debt collector for fractions of the original debt. In this case, the third-party becomes the creditor and can pursue you for the debt.

After several unsuccessful attempts at collection, a debt collector has the option of suing you in civil court to force you to pay the debt. This is mostly likely to happen the larger the debt you owe. The collector has to notify you regarding the pending lawsuit and give you time to respond. You have the right to put up a defense to get the lawsuit thrown out. You can mount a valid defense if you can legitimately prove the debt is not yours or the creditor failed to properly serve you the court order. If you fail to show up in court or lose your case, the court awards the creditor a default judgement, which gives it the right to pursue other avenues to collect payment such as a wage garnishment, imposing a lien or bank levy.

There are rules to wage garnishment. A debt collector can only collect the lesser of 25 percent of your disposable income or the amount of your disposable income that is greater than 30 times the federal minimum wage of $7.25 per hour. Your disposable income is the amount of money you have left over after pay basic necessities. For example, if after paying for such things as rent, food and transportation, your disposable income is $100, the debt collector can only collect $25 from your paycheck since your disposable income does not exceed the $217.50 threshold

Despite receiving a notice of lawsuit that could potentially lead to wage garnishment, you still have an opportunity to resolve the debt by making a payment arrangement. A creditor wants to avoid having to go to court if it does not have to, which saves legal expenses. For your part, letting matters go to court makes your debt more expensive, because a creditor has the right to tack on its legal expenses on top of the debt you owe. It is not uncommon for a creditor to offer you a reduced settlement. In such a case, the debt shows as settled in full rather than paid in full on your credit report. In either case, paying a charged-off debt looks better on your credit report and is better than a full-blown charge-off.