Having debt and owing money to creditors can be an incredibly stressful situation. Creditors and debt collectors contacting you to repay debts can feel overwhelming. However, there are certain laws that protect some of your income and assets from creditors and debt collection. This income is considered “exempt” and cannot be taken to pay back debts even if creditors win a lawsuit against you.
What Does It Mean for Income to Be Exempt from Creditors?
If certain income is exempt from debt collection, it means that creditors have no legal right to force you to use that income to repay what you owe, even if they obtain a court judgment against you. So even if a creditor sues you for an unpaid debt and wins the case, your exempt income remains protected and they cannot seize it.
Some key types of exempt income include
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Public assistance benefits like Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), and Social Security Disability Income (SSDI)
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Social Security retirement benefits
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Veterans benefits
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Workers’ compensation benefits
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Unemployment insurance benefits
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Child support and spousal maintenance
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Certain retirement accounts like 401(k)s and IRAs
If all of your income comes from these types of exempt sources, creditors can’t take that money to pay off your debts.
What Makes Someone “Judgment Proof”?
You may hear the term “judgment proof” related to debt collection and exempt income. Being judgment proof does not mean a creditor cannot sue you and win a judgment against you in court for an unpaid debt. They can still do that.
However, if all your income is from exempt sources outlined above, and you have no substantial non-exempt assets, creditors cannot actually collect on that judgment. They can’t garnish your wages or levy your bank account because your income is fully protected.
So “judgment proof” basically means creditors can get a judgment, but they have no way to enforce it or collect the debt from you. Just understand that the judgment still legally exists, so if your income situation changes in the future, creditors could collect at that point.
How Much of Your Earned Wages are Exempt?
For non-exempt income, like wages from a regular job, you are protected up to a certain amount, which depends on your income:
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If your take-home pay is $495 per week or less, your full wages are exempt.
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If over $495 per week, either 90% of gross pay or 75% of disposable income is exempt, whichever is greater.
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Regardless of income, 90% of wages earned in the last 60 days are exempt.
So, unless you make a lot of money, well above the minimum wage, most of your wages are safe from creditors.
What Assets are Exempt from Debt Collection?
Not just income, but certain assets are exempt as well. Creditors cannot seize:
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Up to $1,000 in personal property like clothing, furniture, appliances
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Tools or equipment necessary for your work, up to $3,000 value
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Professionally prescribed health aids
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One car, if your equity is $4,000 or less
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Retirement accounts like 401(k)s and IRAs
So personal belongings, household items, and retirement savings remain protected. Just know that since home and car loans are secured debts, they are handled differently.
How to Keep Exempt Income Safe from Creditors
If a debt collector contacts you, send them a cease and desist letter stating your income is fully exempt and demanding no further contact. Also consider sending your bank a similar letter, asserting your account contains only exempt funds.
Most importantly, if you receive a court summons about a debt, consult a lawyer or legal aid clinic. Never ignore a summons, but understand the law protects your exempt income, even if creditors win in court.
The Bottom Line
Having exempt income and assets does not erase debts you owe, but it does shield that money from creditors. So don’t panic if creditors win judgments against you – just know which income and property the law protects. This allows you to maintain financial stability, despite any debts owed.
What types of income are exempt from wage garnishment?
Some income is protected from wage garnishment by federal exemptions. For example, income from federal disability programs cannot be garnished. States may also protect certain income like unemployment benefits from wage garnishment. So, it is important to check your state garnishment laws.Â
Generally, most types of government-provided income are exempt. These exemptions include income from the following sources:Â
- Social Security benefits
- Disability benefits
- Supplemental Security Income (SSI) benefits
- Unemployment benefits
Workerâs compensation benefits, retirement income, annuities, and life insurance are also exempt from wage garnishment. Also, child support and alimony (spousal support) payments are generally exempt from wage garnishment orders. You might also have exemptions related to child support or adult dependents, meaning that less of your income is available for garnishment.
Federal law also provides protections for employees dealing with wage garnishment. Only those who earn a certain minimum weekly disposable income can have their wages garnished. Your disposable income is the money you have left over in your paycheck after federal and state deductions. These legally required deductions are federal, state, and local taxes; Social Security; Medicare; and state unemployment insurance tax
If your weekly disposable income amounts to less than 30 times $7.25 (the current federal minimum wage), then your income canât be garnished. That means if your weekly disposable earnings are $217.50 ($7.25 hourly wage à 30) or less, the court will not grant a withholding order.Â
What Is Wage Garnishment and When Does It Occur?
A wage garnishment allows your creditor to take money directly from your paycheck or sometimes your bank account. In most cases, a creditor must go to court and get a judgment that allows them to garnish wages for unpaid debts. The creditor that obtains a court judgment is called a judgment creditor. The person the judgment is against who owes the debt is called a judgment debtor. Creditors like hospitals, personal loan companies, or credit card companies must first have a court hearing and get a judgment before they can withhold money from your paycheck.Â
If the judge grants the garnishment order, a levying officerâ typically the local county sheriffâwill deliver the order to your employer. Based on your stateâs laws, the judgment creditor may decide to have the levying officer deliver the garnishment order to your financial institution rather than your employer.Â
Whoever is served notice to surrender moneyâyour employer or bankâto pay your debt is called a garnishee. The garnishee is a third party who withholds money from your paycheck based on the court order. They then give that money to the creditor to pay your debt. If the garnishment is delivered to your financial institution, the garnishee will take the money from your bank account to pay your debt. If the garnishment is delivered to your job, your employer is the garnishee. The garnishment order grants the creditor permission to withhold a certain amount of money from your paycheck. This is known as an earnings withholding order.Â
Federal law limits the amount of money that can be garnished from your paycheck. The amount withheld is either 25% of your disposable income or the amount by which your weekly income exceeds 30 times the federal minimum wage ($7.25 per hour), whichever is less. The amount withheld from your paycheck will depend on whether your pay period is weekly or bi-weekly.Â
There are important exemptions that can limit the income amount that can be garnished from your wages. There are also ways to stop wage garnishment.
What income is exempt from creditors? Attorney James Giardina explains.
FAQ
What money is exempt from garnishment?
However, creditors holding debts like taxes, federal student loans, alimony, and child support usually don’t have to go through the court system to obtain a ….
What money is protected from creditors?
Certain federal benefits, such as social security benefits and veterans’ benefits, cannot be garnished. Generally, real estate and other forms of property are protected when a creditor is implementing the wage garnishment collection tool.
Can creditors go after social security income?
Social Security benefits are generally protected from creditors, but exceptions exist for federal debts, child support and legal judgments. The IRS can garnish up to 15 percent of your Social Security for unpaid taxes, and defaulted federal student loans can lead to benefit reductions.
What income is judgement proof?
In layman’s terms, a person is judgment proof when they have no collectable income or assets.