Be careful who you owe: Here's who can garnish your wages

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Benjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes." Nowadays, some people would want to update that famous quote to include "debt."

From student loans to alimony, there are several instances in which your employer must withhold a certain amount from your wages and send it to your creditor. Let's review which creditors can do this, and when they are legally allowed to claim part of your hard-earned dollars.

RELATED: Here are some ways you constantly disrespect your money:

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10 ways you disrespect your money
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10 ways you disrespect your money

1. You Don't Have a Budget

Whether you're flush with money at the end of every month, or you are always scraping to get by, there is no excuse for not having a set budget. You owe it to yourself to know exactly how much money is coming in each month; what the bills are, how much you should be setting aside for retirement and an emergency fund, and what you should be spending on things like food, entertainment, clothing, and so on. Without this budget, you are playing fast and loose with your money, and it can result in some financial hardships that can be avoided. You can also see just where you are spending, and wasting, your hard-earned money.

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2. You Don't Store Receipts in an Organized Fashion

It's all well and good to keep every receipt, but if they are all over the house and garage, stuffed into junk drawers and nightstands, they aren't much good when you actually need them. It does not take a lot of work to have an organized receipt folder. Just purchase an alphabetized concertina folder, and place your receipts in the appropriate section each time you get home. Go through it every few months to remove receipts that are no longer needed (although if they are for tax reasons, keep them…for years). You can also scan your receipts and save them digitally. This saves room and makes them even easier to organize and reference.

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3. You Max Out Your Credit Cards

Some people will tell you credit cards are just free money. These people have no respect for credit, and how it should be used. Credit cards, when used responsibly, are a fabulous way to securely pay for goods and services, giving you purchase insurance, fraud protection, and cash back or travel rewards. But if you don't use them correctly, you will pay the price.

By maxing out a credit card (or many cards) you are damaging your credit, and you are running up huge interest charges. Some people can only afford to pay the minimum, and when that happens, it can take years (or even decades) to pay the balance off. Use credit cards as a tool, but make sure you pay as much off as possible (ideally, bring the balance to $0 with each payment) to reap the rewards.

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4. You Keep Spending the Equity in Your Home

Right now, the housing market is in pretty good shape. That means many of us owe considerably less on our mortgage than the home is worth, and that means equity. Lovely, lovely equity. Hey, it means the investment paid off, and you can take out a home-equity loan to pay off debt, make home improvements, or go on lavish vacations. Well, not so fast. A lot of people made that mistake the last time the housing market flourished, only to see house prices crash, and ended up with a mortgage that cost more than the home was worth. Your house should not be a piggy bank. If it's an emergency, and there is plenty of equity, it's certainly an option to take a little out to pay for something you need. But dipping into that equity too often, or spending it all, can lead to financial heartache.

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5. You Live a Champagne Lifestyle on a Beer Budget

No matter how much money you have coming in each month, if you are spending more than you earn, this applies to you. Sure, you like the name-brand goods and fashions, and you must have your Starbucks every morning. But if your budget does not support that kind of spending, you are racking up debt that will have to be paid back sooner or later. It's possible you once had that bigger budget, but now have less due to a major life event (getting divorced, for instance). Sadly, you have to adjust. No more expensive pedicures and massages. No more fancy dinners that cost a small fortune. Your budget will dictate where you can go, how often you go, and how much you can spend. Listen to it. Ignore it, and you'll be in real trouble.

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6. You Are Not Saving Regularly

This is not about saving money on deals and bargains, but rather, putting money away for the future. Every financial planner will tell you to pay yourself first, and it's good advice. Whether it's a 401K, an IRA, a savings account, an emergency fund, or ideally, all of them, you need to get into the habit now of squirreling away your money. Right now, time is your friend. The longer you have to go to retirement, the more money you can accumulate through compound interest. What's more, if anything bad were to happen that required access to quick cash, that emergency fund or savings account will be invaluable. Of course, it's easier said than done. Many Americans simply cannot afford to put money away each month, and something like an unexpected bill for $400 can put so many people in real trouble. Analyze your finances. Look at every cent coming in, and going out. Where can you cut back, to save money for tomorrow?

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7. You Don't Have a Calendar of Bills and Payments

Many of us do the old "set it and forget it." Basically, we set up automatic bill payments, linked to a checking account or credit card, and let the automated system do the rest. This is great for avoiding late fees, but it can also be hazardous if you don't have a clear picture of your finances. If you set up a spreadsheet or simple Word doc, outlining all of the bills you have to pay each month, cross-referenced with when you get paid, you will see any potential issues that could arise. Can you schedule some of the payments to fall a day or two after you get paid, rather than a week before? Do you have a lot of bills coming out on one day? Are you cutting it a little too close with the mortgage, or paying late fees? This will all become clear on a financial calendar.

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8. You Don't Check Your Accounts Daily

Checking accounts, credit card accounts, and all other sources of money should be checked at least once a day. This takes just a few minutes, but it can make all the difference. You may have several auto-debits come out at once, leaving your balance precariously low. You may be the victim of credit card fraud, which if left unchecked can spiral out of control. From spotting suspicious activity, to simply monitoring the credits and debits on each account, get into the habit of checking your accounts every day.

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9. You Ignore Your Debt

Most of us have debt. Let's face it, who can afford to put down $400,000 in cash on a new home, or $45,000 on a new car? However, if it's all kept under control, and there is a plan in place to pay everything off, you're good to go. Problems arise when people accumulate a lot of debt from many different sources, and then choose the "head in the sand" approach. It's scary to acknowledge a lot of debt, and even scarier to figure out how to pay it off. So, why not just ignore it, pay the minimums, and smile? Well, ignoring debt is like ignoring the hungry wolf that is sat in the corner of the room with you. At some point, it will attack you, so you better have a plan on how to deal with it before that happens.

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10. You Don't Check You Credit Score and Reports

In America, your credit score can be life altering. If it's high, especially in the 800s, you get amazing offers, low APRs, and a whole world of options. If it's low, you can be denied even the most basic offers, and may not be able to live with things many of us take for granted. Checking your credit reports is free, and should be done regularly to ensure you spot inaccuracies. Go to AnnualCreditReport.com and request yours (not freecreditreport.com, which is NOT actually free). You should also know what your specific credit score is, and this can be found viaCreditKarma.com (again, totally free). Also, the three different credit-reporting agencies — Equifax, TransUnion, and Experian — should also be able to supply this to you.

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1. Issuers of Student Loans

With the average student loan for Class of 2016 graduates at $37,172 (up 12.64% from two years earlier), many Americans entering the workforce may feel like the main character in "Game of Loans" (Interest is coming!). Since one estimate claims that 76% of Americans are living paycheck to paycheck, you could assume that it's just a matter of time until some of them start missing some monthly payments on their student loans.

After failing to make payments for 270 days, your federal student loan is considered to be in default. The period is 330 days for Federal Family Education Loan (FFEL) Program loans. The consequences of student loan default are very severe, including:

  • Losing eligibility for additional federal student aid;
  • Damaging your credit history;
  • Having the federal government request your employer to withhold up to 10% from your paycheck to pay back a federal student loan;
  • Having up to 100% of your federal tax refunds seized through the Treasury Offset Program; and
  • Having authorized state guarantee agencies take up a portion of your state income tax refund.

Uncle Sam is legally allowed to withhold not only your paycheck, but also your tax refund! To prevent your student loan from being considered in default, stay in constant communication with your student loan issuer. If you are planning to miss any payments, read the fine print of your loan agreement to minimize consequences. If you're going into default, talk with your student loan officer in advance to discuss alternatives to wage garnishment, including consolidating your federal education student loans.

2. Internal Revenue Service (IRS)

When the taxman cometh and you don't answer his call, he'll seize part of your wages each pay period and send it to the IRS to cover your unpaid back taxes. Unlike other creditors, the federal government doesn't require a court order to levy your wages.

Once your employer receives a notice for wage garnishment (usually Form 668–W (ICS) or 668-W (C) DO) from the IRS, your employer must return a Statement of Exemptions and Filing Status to complete and return within three days. It's critical that your employer submits this form on time because it may help you to exempt part of your wages from garnishment according to the schedule of its Publication 1494.

For example, if you file your return as married and joint, and are able to claim four exemptions, you can exempt $951.92 from garnishment. If were to not return the statement in three days, your exempt amount is figured as if you were married filing separately with one exemption ($640.38).

Keep in mind that other income sources, including one-time bonuses, wages from additional employers, and commissions, may be levied at 100%. Besides when you pay back the remaining balance in full, the IRS will stop withholding part of your wages when you make other arrangements to pay your overdue taxes, including setting up an installment agreement, payment extension, or offer in compromise.

3. Spouse Demanding Child Support or Alimony

Love and marriage go together like a horse and carriage, until your spouse calls its quits and obtains a court order to automatically withhold child support or alimony moneys from your paycheck.

The Federal Wage Garnishment Law sets the following limits on wage garnishment on your paycheck for child support and alimony:

  • Up to 50% of your disposable earnings if you're supporting another spouse or child;
  • Up to 60% of your disposable earnings if you're not supporting another spouse or child; and
  • An additional 5% for support payments more than 12 weeks in arrears.

4. Other Creditors With Court Orders Against You

Last but not least, private creditors, including credit card companies and health care institutions, and federal agencies other than the IRS, can obtain a court order to start garnishing your wages. Without a court order, "take it all" threats from pushy reps from creditors are absolutely empty. (See also: 4 Annoying Things Bill Collectors Can't Do — And How to Stop Them)

The Debt Collection Improvement Act of 1996 authorizes federal agencies and collection agencies under contract to garnish up to 15% of disposable earnings to repay defaulted debts to the U.S. government. For private creditors, the Act sets a limit on wage garnishment of up to 25% of disposable earnings or up to the amount that your earnings are greater than 30 times the federal minimum hourly wage, whichever is lower. In case of economic hardship, you may be subject to lower limits for potential wage garnishment.

Besides garnishing your wages, some creditors with a court order may want to go after your personal assets. Depending on your state of residence, you may be eligible for protection exemptions on vehicles and real estate property. For example, states New Mexico and Hawaii have collection exemptions on motor vehicles of $4,000 and $2,575, respectively. Contact your State Labor Office for more details.

The Bottom Line: Inform Yourself!

Wage garnishment is scary. Fortunately, there are several steps you can take to minimize how much can be seized from your paycheck. For additional information, visit the Wage and Hour Division website from the U.S. Department of Labor or call its toll-free helpline 1-866-4-USWAGE (1-866-487-9243), available 8 a.m. to 5 p.m. in your time zone. Also, you can find the contact information of your State Labor Office for specifics on the rules in your state.

More From Wise Bread:
What Every Parent Should Know About the New College Financial Aid Rules
4 Ways to Make the Most of Your Student Loan Grace Period
What to Do If You Didn't Save for Your Child's College

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