The Consumer Credit Protection Act puts limits on the amount creditors or the government can garnish from your wages. Depending on the type of debt owed, you’ll lose a specific percentage of your income to garnishment. However, the allowable percentage is calculated, not on your gross wages, but on the amount of money left after mandatory deductions are subtracted from your gross pay. This amount is considered disposable earnings.
After any mandatory deductions are taken from your gross pay, the amount left over is considered disposable income.
Mandatory Payroll Deductions
Employers operating legally report your income to the federal government and make deductions from your paycheck for federal, state and local taxes, state unemployment Insurance and Social Security. In addition, some states also require deductions for employee retirement plans. The amount of each deduction is noted on your paycheck summary, along with a year-to-date amount. These deductions are mandatory and are subtracted directly from your gross pay.
Non-Mandatory Payroll Deductions
You may have other deductions from your paycheck that are considered voluntary. Examples include medical, dental and life insurance premiums, union dues, charitable donations and contributions to retirement accounts, unless they’re required by state law. These deductions aren't factored in before determining your disposable earnings.
Net pay isn't necessarily the same as disposable earnings. In fact, for many employees, the difference is significant, as insurance premiums and investment contributions may add up to a large amount, depending on your circumstances.
Disposable Earnings Calculation
Mandatory deductions are subtracted prior to calculating disposable earnings; voluntary deductions are not. For instance, say you earned wages of $500. You paid $100 in combined taxes, state unemployment insurance and Social Security, and another $100 for insurance premiums and retirement account contributions. Your garnishment would be based on disposable earnings of $400. The $100 for mandatory deductions is subtracted from your gross pay; the $100 for voluntary deductions is not.
Garnishment Amounts to Consider
Federal law establishes the amount of money a creditor or the government can garnish from your disposable earnings. Creditors may garnish up to 25 percent of disposable earnings, or the amount of disposable earnings in excess of 30 times the federal minimum wage, whichever is less. Court orders for child support or alimony may specify garnishments of up to 60 percent of disposable income.
Federal agencies may garnish up to 15 percent of disposable earnings. If you’ve defaulted on federal student loans, up to 10 percent of disposable earnings are subject to garnishment. However, bankruptcy courts aren't subject to garnishment restrictions of any kind, nor are state tax agencies or the Internal Revenue Service.