garnishment

What It Is

Also called wage execution, a garnishment is a process under which money owed or paid to a borrower is given to a creditor instead.

How It Works

Let's say John Doe has stopped paying child support to his ex-wife. His ex-wife takes him to court for the money owed and obtains a garnishment, whereby the court seizes a portion of John's monthly paycheck and automatically gives it to his ex-wife.

One of the most common forms of garnishment is wage garnishment. Wage garnishment is often used to recoup back taxes, delinquent child support or judgments, and the courts have the ability to garnish not just wages, but bonuses, commissions, pension income and distributions from retirement plans. Welfare, unemployment, veterans benefits, social security income, workers compensation and child support payments generally cannot be garnished.

The Consumer Credit Protection Act prohibits employers from firing employees just because their earnings are being garnished, though there are exceptions.

Why It Matters

Garnishments generally require a court order, and they can destroy a person's credit rating. It is important to note that not all things can be garnished; state laws set forth the exemptions. Usually, state laws prohibit garnishing a person's assets to the extent that they leave the borrower with no way to support himself or herself.

Source: Investing Answers