How to Handle a Garnishment

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When one of your creditors starts to take money out of your paycheck or bank account, it's called a garnishment. It's a legal collection action that creditors in some states can take to collect after they've obtained a judgment against you. Student loan creditors and the IRS can also use a garnishment to collect what you owe even if they don't file a lawsuit against you. Here's what you should do when you're faced with a garnishment.

The Garnishment Should Not Come as a Surprise

First of all, understand that the vast majority of the time, the garnishment should not come as a surprise to you. Your creditor will have employed all means at its disposal, including sending notices, letters, and telephone calls, to encourage a response from you and motivate you to pay your debt. Most garnishments require that the creditor obtain a court judgment first, which requires notices from the attorneys handling the lawsuit, lawsuit papers served on you, and more notices from the court. 

Many of these notices will state something like: "Notice of Intent to Levy" or "Notice of Intent to Garnish." Unless you have purposely tried to hide from your creditors, you should not be able to claim ignorance when your paycheck or your bank account comes up short. 

If you do reach the point where your creditor has asked the court to garnish your wages or your bank account, there are several things you can do to stop the process and maybe even turn it to your advantage.

Talk to Your Creditor

When you know you’re not going to pay your account according to its terms, contact your creditor to find out about alternative payment options. Some creditors will not talk with you until you become 60 or more days past due, but other creditors want to know what's happening before you become delinquent. Some of the alternatives you can negotiate with your creditor include only paying interest for a period, making partial or no payments for a period, reducing the interest rate, or offering to settle the account for something less than what is owed.

It is also helpful to know how to talk with collectors if your account has been assigned to one. Read up on this at 12 Myths About Debt Collectors, where you'll learn more about keeping records of your contacts, finding out who's doing the calling, unfair debt collection practices, and more.

Defend the Lawsuit

If your creditor files a lawsuit against you, you may have defenses that would prevent the creditor from taking a judgment, or might at least provide you some bargaining leverage. If possible, negotiate a settlement with the creditor before the court enters a judgment, because if the creditor gets a judgment against you, your options are reduced. You may still be able to negotiate to pay a settlement amount that’s less than the amount you owe, but the judgment will erase any defenses that you could have brought during the court case on your debt. Also, under state law, interest will be tacked onto the judgment until it is paid in full unless you negotiate a settlement.

Challenge the Garnishment

Once the creditor obtains a judgment and asks the court to order a garnishment, the creditor is required to notify you before the garnishment takes place. That way, if you have any defenses to the garnishment itself, you can plead your case. If the garnishment is directed at your bank account, the bank will almost always freeze the account during this period to prevent you from taking any money out of it.

Even at that late date, after the court has entered the judgment, many creditors will often agree to hold up on the garnishment if you enter into a payment arrangement.

It is much easier to deal with collectors before you reach the lawsuit stage. Once a creditor decides to file a lawsuit, you'll be dealing with attorneys. It is certainly possible for you to defend a lawsuit or a garnishment on your own, but not necessarily the best course of action. You may think you're saving money by not hiring an attorney to defend you or challenge the garnishment, but attorneys can often save you much more money than they cost. Most attorneys who work with consumers offer no-cost or low-cost consultations. A good place to look for a consumer attorney is the National Association of Consumer Advocates.

File a Bankruptcy Case

Filing a bankruptcy case will also stop a garnishment. In most bankruptcy cases, an injunction called an automatic stay goes into effect when a bankruptcy is filed. This injunction stops most collection activity, including calls and letters, and most lawsuits and garnishments. It may be possible for the creditor to ask the bankruptcy court to lift the automatic stay to allow the garnishment to continue, but the court will only allow that under certain special circumstances.

Whether your debt can ultimately be discharged in a bankruptcy case is something that largely depends on the type of debt and bankruptcy you file. You can learn more about how debts are treated in Chapter 7 and Chapter 13 bankruptcies in Discharging Debts: General Discharge vs. Discargeability and What is a Bankruptcy Discharge When Does It Happen?