Can a debt consolidation loan stop wage garnishment?

Publish date: 2024-07-10

If your wages are being garnished, you’re not alone. According to a study on wage garnishment in the United States, more than one in every 100 workers was the subject of a wage garnishment in 2019. But you may be able to stop wage garnishment with a debt consolidation loan, if you can qualify for one. Debt consolidation is the process of using a new loan to pay off your existing debt in order to secure an affordable monthly payment (and ideally, a lower APR).

If you have bad credit, it may be difficult to get a lower rate than what you’re currently paying on your debt, but you may be able to extend the loan’s term to make monthly payments more manageable.

Wage garnishment is a court order that requires your employer to withhold your earnings to pay a debt you owe, such as child support. Earnings can include wages, salaries, commissions, bonuses, or payments from a pension.

The Consumer Credit Protection Act’s Title III (CCPA) provides rules around how much of your earnings can be garnished and protects you from being fired if your wages are garnished to repay a single debt. However, you’re not protected from being fired if your wages are being garnished for two or more separate debts.

For ordinary garnishments (not related to bankruptcy, support, or state or federal tax reasons), the amount of your earnings that can be garnished during a workweek or pay period is limited to the lesser of the two:

The amount garnished can increase if you owe money for spousal or child support: Up to 50% of your disposable earnings may be garnished if you’re supporting another spouse or child, and up to 60% may be garnished if you aren’t supporting a spouse or child. Also, if your payments are over 12 weeks late, an additional 5% may be garnished.

Debt consolidation is the process of using a new loan to pay off one or more debts in order to get a lower interest rate and/or a lower monthly payment. Personal loans are frequently used for this purpose as they provide a lump sum of money upfront, don’t require collateral (like your home), and are quick to close (funds can be available the same day you apply, in some cases).

Repayment terms for personal loans typically top out at seven years, and the interest rate you qualify for depends largely on your credit. Personal loans are available from banks, credit unions, and online lenders, and loan amounts can range from $1,000 to $100,000 or more.

If you can qualify for a debt consolidation loan, you would use the funds from the loan to pay off your debt and stop the wage garnishment. You would then begin making regular payments on the debt consolidation loan instead.

If your wages are being garnished, it’s possible that your credit score has been negatively impacted as a result, and your credit report will reveal delinquent and/or derogatory accounts to any lender that runs a credit check. Even if you can find a lender willing to extend a loan, you may receive a high APR.

Prequalify with personal loan lenders before applying to get rate estimates based on your credit score and basic financial information. Prequalifying won’t hurt your credit, but it’s not an offer of credit either. When you apply for a loan, your score may be impacted.

Here’s what you can do to qualify:

  • Review your situation: Gather information on your current debt (including interest, the total amount you owe, and the amount being garnished from your paycheck). Then, contact the creditor to determine what you need to do to pay off the debt.
  • Check your credit: Check your credit report for errors that could be dragging down your score, and report them immediately to the appropriate bureau. Visit AnnualCreditReport.com for a free credit report.
  • Check your credit score: Know your score before applying so you can get a sense of your approval odds. Most lenders prefer a credit score above 670, but some specialize in personal loans for bad credit and fair credit. Credit card and bank apps often let you check your credit score for free.
  • Prequalify: Most lenders let you prequalify for a personal loan without any impact to your credit. When filling out the prequalification form, you may have to provide your Social Security number and other personal information, such as your address and date of birth, to get customized rate estimates. Note that prequalification is not an offer of credit, and your final rate may differ from the quote.
  • Apply: Once you’ve found a lender and loan that looks good, fill out the application and submit it. The lender will perform a hard credit pull, which could temporarily hurt your credit.
  • Get your funds and pay off your debt: If approved, your lender may be able to send money directly to the creditor or it will disburse the funds to you. Depending on the lender, the money may be sent as soon as the same day you’re approved. But it’s more typical to take one to three business days after approval.

    • Getting a personal loan is not the only way to stop wage garnishment.

    If you retain an attorney to stop wage garnishment, direct any creditor or debt collector to contact them. An attorney may be able to help you challenge the wage garnishment, negotiate a payment plan, or even file for bankruptcy to stop wage garnishment (depending on the type of debt).

    A claim of exemption can protect certain types of wages from being garnished, including Social Security, disability, retirement, child support, or alimony. If you qualify, a claim of exemption can completely or partially protect your income. Exemptions vary by state.

    You may be able to request a payment plan from the court to stop a wage garnishment, also known as an order for installment payments. If approved, make timely payments to prevent your wages from being garnished again.

    Contact a credit counseling agency to see if you can use a debt management plan (DMP) to stop wage garnishment. A DMP is a payment plan negotiated by a credit counselor on your behalf. You would make a single monthly payment to the credit counseling agency, and it would pay your creditors. The National Foundation for Credit Counseling can connect you with a credit counselor in your area.

    If you own a home with sufficient equity, you may be able to use a home equity loan to pay off your debt. Most lenders let you borrow up to 80% or 85% of the equity. Like a personal loan, you would use the loan proceeds to pay off what you owe, thereby stopping the wage garnishment.

    Home equity loans often have lower APRs because your home is pledged as collateral. However, if you default on your payments, you could lose your home. If you’re already struggling to pay your debts, a home equity loan may not be the best option for you.

    Bankruptcy can be a way to stop wage garnishment, depending on the type of debt you owe. But the consequences of filing will stay with you for years. It’s a decision that should only be considered if you can’t see any other way out of your current situation.

    If the debt is not discharged as a result of the bankruptcy — for example, child support debts are exempt from discharge — you’ll likely need to resume making payments. Consult a bankruptcy attorney to understand the ramifications, suitability, and whether bankruptcy will ultimately stop wage garnishment.

    A debt collection agency can get a court order to garnish your wages. However, there are limits to how much can be garnished from your paycheck. Under federal law, a debt collector can’t garnish Social Security, veteran’s benefits, Supplemental Security Income, or other federal-related income.

    Wage garnishment itself doesn’t hurt your credit score as court-ordered judgments do not appear on your credit report. However, actions leading up to the wage garnishment, such as late and missed payments, may have a large and negative impact on your score. Payment history makes up 35% of your FICO Score.

    You may be able to stop wage garnishment by paying off your debt in full, requesting a payment plan, filing a claim of exemption (for certain types of income), and filing bankruptcy. Using a personal loan or home equity is one way to pay off the debt, but you’ll need to find a lender willing to give you a loan.

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