Personal Income Garnished: When You're Liable For Company Debt

Wage garnishment is a legal process where a portion of an individual's income or bank balance is withheld to settle a debt. This can occur when a creditor sues for nonpayment and wins in court, or in some cases, without a court order, such as for unpaid taxes or federal student loans. While laws vary across states, generally, a business is not liable for its owner's personal debts unless it is a sole proprietorship. However, personal finances can be garnished for business debts in certain circumstances. Federal law dictates that creditors can garnish a maximum of 25% of disposable earnings or disposable earnings minus 30 times the federal minimum wage. This protection is provided by the Consumer Credit Protection Act (CCPA), which applies in all 50 states and protects everyone receiving personal earnings.

Can a law garnish personal income for a company account?

Wage garnishment provisions of the CCPA

Wage garnishment is a complex process governed by an array of federal and state laws. The Consumer Credit Protection Act (CCPA) is a federal law that provides strict limitations and protections for employees regarding wage garnishment. The CCPA's wage garnishment provisions are administered by the U.S. Department of Labor's Wage and Hour Division and apply across all 50 states, the District of Columbia, and all U.S. territories and possessions. These provisions protect everyone who receives personal earnings, including wages, salaries, commissions, bonuses, and income from pension or retirement programs.

The CCPA sets maximum limits on the amount that can be garnished in any workweek or pay period, regardless of the number of garnishment orders. For ordinary garnishments, which exclude those for support, bankruptcy, or state/federal tax, the weekly amount generally cannot exceed 25% of an employee's disposable earnings. Disposable earnings refer to the income remaining after legally mandated deductions such as taxes, social security, and employee retirement contributions. In cases of court-ordered child support or alimony, up to 50% of a worker's disposable earnings can be garnished if they are supporting another spouse or child, or up to 60% if they are not. An additional 5% may be garnished for support payments that are more than 12 weeks overdue.

The CCPA also protects employees from being terminated due to wage garnishment for a single debt. However, it does not offer protection for subsequent debts. This means that an employer cannot fire an employee because their wages have been garnished for one debt, but there is no such protection if it happens again.

If an employee believes their rights under the CCPA have been violated, they have the legal recourse to take action against their employer or the creditor. This includes seeking damages for wrongful garnishment or employer retaliation. Understanding these federal protections is crucial for employees concerned about the financial and employment implications of wage garnishment.

Personal finances and business finances

Firstly, it's crucial to understand the difference between personal and business finances. As a business owner, maintaining separate personal and business accounts and assets is essential. This separation can provide protection, as generally, a business is not liable for the owner's personal debts. However, this can vary depending on the structure of the business. For example, in a sole proprietorship, personal and business assets are not legally separated, leaving personal finances vulnerable to business debts. On the other hand, corporations or limited liability companies (LLCs) offer more protection, as creditors can only go after property owned by the individual, not the company.

In the context of garnishment, both personal and business finances can be impacted. For personal finances, wage garnishment is a common concern. The Consumer Credit Protection Act (CCPA) provides protections for individuals, limiting the amount of earnings that can be garnished and safeguarding employees from being fired due to a single garnishment. Disposable earnings, calculated after mandatory deductions like taxes and Social Security, are subject to garnishment, with federal law dictating a maximum of 25% or disposable earnings minus 30 times the federal minimum wage. Additionally, certain types of income, such as Social Security, Supplemental Security Income, and veterans' benefits, are exempt from garnishment.

When it comes to business finances, garnishment can occur through a bank levy, where creditors can access your business bank account. This typically happens when a creditor sues for nonpayment of a debt and wins in court. The amount that can be garnished depends on factors like the type of debt, state laws, and the debt amount. Federal tax debts, for instance, allow the IRS to levy funds up to the tax debt amount. To protect business finances, it's advisable to maintain adequate insurance, especially liability insurance, which can shield business assets in the event of a lawsuit. Additionally, avoiding personal guarantees when securing financing or signing contracts can help prevent personal finances from being tied to business debts.

If facing garnishment, individuals have several options. They can contact creditors to negotiate a payment plan, dispute the garnishment if they believe it is erroneous, or object in court if it causes undue harm. Seeking legal advice from a consumer law attorney or local legal aid is recommended to determine the best course of action. Additionally, staying on top of debts and taking threats of legal action seriously can help prevent garnishment before it occurs.

Debt collection options for self-employed people

Self-employment can be financially challenging, and this has been especially true during the Covid-19 pandemic. Self-employed people may be twice as likely to fall behind on bills and are more likely to be in poverty than those in full-time employment.

If you are self-employed and struggling with debt, it is important to understand your options. In the UK, self-employment is usually split into three categories for legal and tax reasons:

• Sole trader: As a sole trader, you are personally liable for any losses or debts. You will be responsible for all of your business and personal debts.
• Partnership: In a partnership, there must be a minimum of two people with responsibility for the business. Income and liability are based on each person's share in the business.
• Limited company: A limited company is a separate legal entity from the people running it. There is more separation between personal and business finances, and the business can own assets, incur debts, and file for bankruptcy.

If you are a sole proprietor, you may be able to file for personal bankruptcy, and if you have a separate business entity, such as an LLC or corporation, you can put your business into bankruptcy.

To prevent debt issues, it is important to keep your personal and business finances separate. If you are facing a debt collection lawsuit, it is important to take it seriously. You can also maintain adequate insurance, such as liability insurance, to protect your business assets in case of a lawsuit.

If you are dealing with tax debt, the IRS will assign your account to a private collection agency, and you will be contacted by one of the following agencies:

• CBE Group Inc.
• Coast Professional, Inc.
• ConServe

These agencies will work with you to resolve your overdue taxes and will not threaten you.

Other options for dealing with debt include working with a debt relief company, which can help you understand your options and find a solution to resolve your debt and free up your cash flow.

Income exempt from garnishment

Income garnishment is a legal procedure where a portion of an individual's earnings is withheld for debt payment. While it is a means to ensure debt repayment, it is essential to understand that not all income can be garnished. Certain types of income are exempt from garnishment, providing financial protection for individuals. Here are some key insights into income exempt from garnishment:

Understanding Disposable Earnings

Disposable earnings refer to the amount of income remaining after mandatory deductions. These deductions include federal, state, and local taxes, as well as contributions to Social Security, Medicare, and State Unemployment Insurance tax. Disposable earnings are crucial in determining the amount subject to garnishment. Federal law, such as the Consumer Credit Protection Act (CCPA), sets limits on the percentage of disposable earnings that can be garnished, typically ranging from 25% to 60% depending on the individual's situation.

Exempt Income Sources

Not all sources of income are treated equally when it comes to garnishment. Here are some specific income types that are typically exempt:

• Compensation for Injury, Death, or Detention: Certain scenarios, such as injuries or deaths involving employees of U.S. contractors outside the U.S., may result in compensation that is exempt from garnishment.
• Student Assistance: Student loan disbursements, grants, or work assistance are generally protected from garnishment, as long as the debt is not related to unpaid student loans.
• Social Security and Retirement Benefits: While these benefits are protected, there is a limit. For example, Social Security disability benefits are typically protected up to twice the monthly amount received.
• State Public Assistance Benefits: In some cases, a small percentage of these benefits may be garnished for specific judgments, such as eviction cases.
• Head of Household Exemptions: If you are the primary provider for a dependent, you may qualify for a "head of household" exemption, reducing the amount of garnishment.
• Lower-Income Debtors: In some cases, lower-income individuals may be able to protect all of their wages from garnishment.

Protecting Your Exempt Income

It is important to understand that claiming exemptions is not automatic. You must proactively file a claim of exemption with the court handling the garnishment order. This process may vary depending on your state and the specifics of your situation. Additionally, maintaining separate bank accounts for protected funds can provide a layer of protection. If your exempt income is mistakenly garnished, having a separate account will make it easier to prove that the creditor should not have accessed those funds.

Actions to take after receiving a garnishment notice

If you're facing a debt collection lawsuit or have had a judgment entered against you, you may be concerned about how it will affect your finances. Here are some actions you can take after receiving a garnishment notice:

Understand Garnishment and Your Rights:

Firstly, understand what garnishment is and how it works. Garnishment is when a court orders your employer to withhold a portion of your paycheck and send it directly to the creditor or person you owe money to. This is done to settle a debt. You do have rights in the wage garnishment process, including caps on how much can be taken at once, and you cannot be fired for a single debt that led to garnishment.

Review the Garnishment Notice Carefully:

The garnishment notice should contain instructions on how to object to the garnishment and important deadlines. It should also include information on exemptions, which may apply if you've received certain types of government assistance or benefits.

Act Quickly:

If you wish to object to the garnishment, you must act promptly. Contact the court that issued the garnishment documents if you need clarification or if you don't receive the necessary forms. You may need to attend a hearing, so ensure you file any required paperwork on time.

Consult with an Attorney:

Dealing with debt and garnishment can be complex and overwhelming. Consider scheduling a consultation with an attorney who can help you understand your rights and explore potential solutions.

Protect Your Finances:

Maintain adequate insurance for your business, and try to avoid personal guarantees when securing financing or signing contracts. Keep your personal and business finances separate, especially if you operate as a sole proprietorship, as your personal debts could affect your business. Stay on top of your debt and be aware of the potential consequences of non-payment.

Remember, every situation is unique, and it's important to understand your specific circumstances and seek appropriate advice.

Frequently asked questions