Many people are not aware that creditors have the right to seek a garnishment order against them if they fail to pay off their debt. Creditors may garnish directly from your disposable earnings, also known as disposable income. These disposable earnings reflect the financial status of an individual and their capability of paying for essential household materials. If a creditor issues a garnishment order, they may withhold a certain amount of the disposable income left over after other payment obligations have been made.
At O’Bryan Law Offices, we handle all matters concerning legal financial help. In this post, our experienced Louisville bankruptcy attorneys will help you to better understand disposable earnings and wage garnishment. For more information, schedule a free consultation with a member of our skilled legal team.
Disposable Earnings
Disposable earnings refer to income that a person is left with after taxes and other payment obligations have been met. Other payment obligations may include mandatory payroll deductions such as taxes and Social Security. Disposable earnings are income that is available for spending or investing however the individual desires.
Because things like local, state, and federal taxes and Social Security are all legally mandated, they do not count towards your disposable income. However, deductions for a pension plan, life insurance, employee savings plan, and medical insurance are included as part of your disposable earnings. This variety of deductions is what creates the difference between disposable income and take-home pay.
What is disposable income for garnishment?
Disposable income or earnings can also refer to the portion of income that is eligible for wage garnishments. A person’s income can be garnished after all legally required deductions have been taken out of the gross income.
When a creditor files a complaint against you, they are able to request from your employer that they withhold a portion of your disposable earnings in order to repay the money you owe. A creditor can only take this action once a judge signs a garnishment (or withholding) order to garnish your wages.
Before this garnishment order can go through, though, the court must calculate your disposable earnings by deducting certain expenses from your monthly gross income. The allowable expenses the court may consider include the following:
- Housing
- Food
- Utilities
- Transportation
- Clothing
- Life insurance premiums
- Health insurance premiums
- Childcare costs
- Child support and alimony
The courts consider expenses such as gym memberships or subscriptions to be non-essential, meaning they do not qualify for allowable deductions. Whatever is left over from your paycheck following all mandatory and allowable deductions may be garnished to pay back creditors.
Sometimes, a person who has had their wages garnished may not even be aware until they notice less money on their paycheck. This may be the case if they fail to answer the complaint filed by the creditor or if they do not appear in court the day of the hearing. In addition, there are some entities (like the Internal Revenue Services, for example) that do not require a court order to garnish wages. The IRS must still issue a notice of garnishment before withholding your wages to pay off tax debts, though.
How much money can be garnished from your paycheck?
Before a creditor can garnish wages, they must first go through a process that includes filing a lawsuit against the individual. The court will either award or deny the creditor this lawsuit. If the creditor does win the judgment and the debtor does not abide by its terms, the creditor may then be granted permission from the court to garnish the individual’s wages.
Federal laws place limits on the amount of wage garnishment that can be withheld from a creditor. However, states are able to impose stricter limits for wage garnishments if they so choose. The state of Kentucky does not impose stricter laws, so it follows federal regulations. The idea is that after wage garnishment, you should still have enough money to live on.
According to federal (and therefore, Kentucky’s) laws, wage garnishment cannot exceed 25% of your disposable earnings per week. It also cannot exceed the amount by which your weekly disposable income surpasses 30 times the federal minimum wage, whichever is less. Because 30 x $7.25 is equal to $217.50, if your weekly after-tax income is less than this number, you are not eligible for wage garnishment.
For example, if you make $500 per week in disposable income, only $125 of that amount can be subject to garnishment. This is because 25% of $500 is equal to $125, which is less than the amount your wages surpass 30 times the federal minimum wage ($217.50).
Once the court mandates the garnishment, your employer must withhold the specified amount and send the wage garnishments straight over to the creditor for payment. This will occur every paycheck until you’re able to pay off your debt. You may also choose to send additional payments to pay the debt off even quicker.
Are there exceptions to wage garnishment limits?
There are some exceptions to wage garnishment limits that don’t require a judgment beforehand. The IRS, for one, does not need to have a court-ordered judgement to garnish wages, but they do need to issue a notice to the individual before doing so. Another exception to these limits may include bankruptcy court orders, as they are exempt from going through the traditional wage garnishment process.
How to Calculate Disposable Earnings
Simply put, one may calculate their disposable earnings by subtracting the necessary deductions from their gross earnings. These deductions include Social Security, state income tax, federal income tax, and state disability insurance, if applicable.
First, you must confirm your annual gross income. For instance, let’s say your annual gross income is $100,000. Next, you’ll need to take note of your federal, state, and local tax rates. We’ll use Louisville, Kentucky tax rates for this example. The effective tax rate for this area currently comes to 29.82%. My multiplying your income by this percentage, you can find out about how much you will be spending in taxes.
$100,000 x 0.2982 = $29,820
With an annual gross income of $100,000, you can expect to pay nearly $29,820 in taxes in Kentucky. Then, to find your disposable earnings, you’ll subtract this number from the initial gross income amount.
$100,000 – $29,820 = $70,180
Thus, you have your disposable income amount: $70,180.
O’Bryan Law Offices is Louisville’s family-owned bankruptcy law firm. We don’t want you to go through the stress of increasing debt pressure alone. Our firm combines an in-depth understanding of bankruptcy law and strategy with individualized, compassionate client service. Whether you are filing for bankruptcy or have more questions like What are disposable earnings?, we have you covered. If you seek legal financial help, contact O’Bryan Law Offices today. Fill out our contact form or give us a call at 502-339-0222 to see how we can help you get your finances back in order.
