The Effect of Wage Garnishment on Credit Report
If you default on loan payments, you might be concerned about how the situation affects your credit scores. If you default on your debt, your creditor may contact a debt collection agency to recoup unpaid debts. Such collection agencies can use various strategies to recover unpaid debts.
If the recovery fails, creditors/debt collection agencies can file a lawsuit against you. If the creditor/debt collector wins, the court can pass a wage garnishment order. Such an order allows the debt collector to deduct a percentage of your income to settle the debt.
When your wage is garnished, it impacts your finances, making it hard to fulfill your financial obligations. A wage garnishment hurts your credit history indirectly and lowers your creditworthiness to lenders in the future.
Your lender could request that the court garnish your wages whenever you stop paying a debt. If you’re dealing with wage garnishments, it can be very frustrating. Experienced attorneys from Cherney Law Firm LLC can guide you when dealing with bankruptcy and related matters such as wage garnishment.
What Is Wage Garnishment?
Wage garnishment is a court-mandated deduction from your paycheck for a debt obligation. It retains a predetermined percentage from your paycheck, which is then sent to the debt collector as part payment for the outstanding debt. Such an arrangement may be made due to various reasons, such as payment of:
- Medical bills
- Child support
- Unpaid court fees or loans
- Credit card debt
- Unpaid taxes
- Unpaid student loans
As mentioned earlier, lenders aiming to garnish a debtor’s wages must pursue legal action. The debtor has the right to present their defense. A debt collector obtains a wage garnishment order following a successful debt collection case or a default judgment. It is mandatory for the employer to adhere to the garnishment order within the specified timeframe.
Wage garnishments are forced payments that can exacerbate your financial hardship. Hence, it may be a good idea to avoid a garnishment by negotiating with your lender before they file lawsuits.
Understanding Wage Garnishment Laws
Garnishment Law exists to ensure that the debtor’s rights are protected. Creditors need to sue debtors first and get an order before starting garnishment. Some of the limits of wage garnishment as per Title III include:
- A judgment creditor can only take less than 25% of your weekly disposable income. If your order is based on a private student loan, the creditor takes less than 15% of your weekly earnings.
- If your weekly disposable earnings surpass 30 times the federal minimum wage, the excess amount is subject to garnishment. However, it cannot be garnished if your disposable income falls below the federal minimum wage. In other words, your wages can’t be garnished if you make less than $217.50 weekly disposable earnings.
What Is the Link Between Wage Garnishment and Credit Reports?
If you delay debt payment, your creditor can report to the credit bureau. Federal laws allow an original lender to send a debt account to a collection agency. When you don’t pay your debt for 90 to 180 days, the creditor sends the delinquent debt account to a collector.
Delayed payments result in negative entries in your credit history, which constitute a substantial part of Fair Isaac Corporation (FICO) calculations. Consequently, these negative entries can significantly impact your credit score. Moreover, your credit history may remain on your record for up to seven years.
Impact of Wage Garnishment on Credit Reports
The credit bureaus record wage garnishment in debtors’ credit reports. But, in 2017, the credit bureaus exempted civil judgments as public records in reports. Wage garnishment orders have no direct impact on your credit scores. However, failing to pay your debts as needed can damage your credit history.
Once the debt is settled, it will appear satisfied on a credit report. Future potential lenders can see that it was eventually paid in full. Hence, adverse impacts could be mitigated by the fact that the debt was settled. More so, satisfied debts no longer appear on a credit report after seven years.
At the same time, it is important to note that wage garnishment orders aren’t suitable for your creditworthiness. Lenders might request a record of your financial obligations and liabilities when assessing your borrowing requests and the creditor might reject your loan application if they find a wage garnishment on your income.
How Can Borrowers Work to Rebuild Credit After Falling Behind on Debt Payments?
Persons facing garnishments might have already taken some damage due to missed payments. So, it’s imperative to consider ways to rebuild your credit after you’ve dealt with your debt.
Prioritizing the rebuilding process helps you achieve your aim faster. More so, rebuilding your credit improves your financial situation. Some of the steps you can take to improve your credit score include:
- Getting and using a secured credit card responsibly.
- Applying for a credit-builder loan.
- Letting a family member add you as an authorized user on their credit.
How to Avoid a Garnishment Order?
Garnishment worsens an already bad situation, especially for persons struggling with financial needs. Fortunately, you can stop wage garnishment before it wreaks havoc. Here’s how:
Explore Debt Management Plans
Debt management plans simplify the payment processes, reducing time to be debt-free. If settling the owed amount in a single payment is challenging, consider negotiating a payment plan. Collaborating with a lawyer can facilitate discussions with the creditor to establish an affordable payment arrangement.
To initiate this process, you can share your financial details with your lawyer and provide documents such as your credit report and rating. While negotiating a payment plan or debt settlement after a court order is feasible, it generally involves a more intricate process.
Pay Off the Debt
You can indulge in a settlement negotiation process if you have been sued for a debt. Debt settlements involve agreements between a debtor and a creditor. In a debt arrangement, the lender can forgive a portion of the debt to allow the debtor to pay less.
Alternatively, you can consolidate the debt with another loan. Debt consolidation won’t eliminate the debt, but it can pay off the original debt. Consider debt consolidation if you can make the payments on the new loan.
File for Bankruptcy
Debtors can file for bankruptcy as an option to avoid wage garnishment. Bankruptcy filing may be a good option if you have no means of paying off debts for the long term. However, filing for bankruptcy can affect your assets and tarnish your credit.
Challenge the Garnishment
Debtors receive court orders of garnishment alongside instructions on how to challenge it. Debtors are offered several days to file a claim of exemption. You can challenge the garnishment if you believe the garnishment is invalid.
How Can Cherney Law Firm LLC Help?
If creditors threaten to garnish your wages, seek help from Cherney Law Firm LLC. Our wage garnishment attorneys can help you negotiate with lenders for positive outcomes. Our lawyers can challenge wage garnishment to prevent lowering your credit score.
Let us help eliminate instances that can lead to your wage garnishment. Contact our law office today to protect your income from garnishment action. Schedule an initial free consultation today!