Can a wage garnishment be taken from severance pay?
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Many Americans are facing major financial challenges as we enter the second half of the year, and for good reason. Inflation not only remains elevated but is climbing, and borrowing costs are still high, too. Household debt also continues to climb, leaving some borrowers, particularly those with high-rate credit card debt, struggling to keep up with their monthly payments. The job market is also tough, and if you’re one of the many who have experienced a job loss on top of those challenges, you know how quickly the financial pressure can escalate.
In that situation, a severance package from your former employer can provide some important but temporary financial stability. Whether that payment is enough to cover a few weeks of expenses or several months of bills, the money from a severance is generally intended to help you bridge the gap between jobs and maintain some stability while you plan your next move. But when you have unpaid debts that are already in collections or have progressed to legal action, that financial cushion may not be as secure as it appears.
And, if the creditor has already obtained a garnishment order — or is in the process of pursuing one — things can get even more stressful. Wage garnishment is a legal process in which a creditor with a judgment against you can have your employer divert a portion of your wages to them to satisfy unpaid debt, so it makes sense that your severance pay could be targeted, too. Is that really the case, though? That’s what we’ll examine below.
Tackle your high-rate debt before it escalates here.
Can a wage garnishment be taken from severance pay?
In many cases, yes, a garnishment can impact your severance pay — but there are caveats.
Federal law treats your earnings — meaning compensation for services — as subject to garnishment. Severance often falls into that category, particularly when it’s paid out as continued salary across several pay periods rather than as a one-time sum.
When severance is paid like ordinary wages, the limits under the federal Consumer Credit Protection Act typically apply. Under this law, a creditor generally can’t take more than 25% of your disposable earnings, or the amount by which your weekly disposable earnings exceed 30 times the federal minimum wage — whichever is smaller. The goal of those caps is to leave you with enough to cover basic living costs.
The picture shifts with lump-sum severance, though. Once a single severance payment lands in your checking account, a creditor may go after it through a bank levy rather than a wage garnishment — and bank levies don’t carry the same percentage-based protections. However, certain exempt funds already in the account may still be shielded.
How a lump sum gets classified, however, can vary from one court and state to the next, so state law matters significantly here. A handful of states fully bar most wage garnishment for consumer debts, which can offer real protection. But even in those states, exceptions exist for obligations like child support, unpaid taxes and federal student loans, which follow their own rules and can claim a larger share of your money than a typical creditor ever could.
Learn more about the debt relief options you qualify for now.
What to do if debt is putting your income at risk
If you’re concerned that a severance payment could be garnished, it’s likely a sign that your debt issues have reached a critical stage where action is needed. So it may be time to explore your debt relief options, which can be even more beneficial if you can do so before collection efforts intensify.
For example, debt settlement may be worth considering if you’re experiencing financial hardship and are fully unable to keep up with your required payments. With this approach, the goal is to negotiate with your creditors, either through a debt relief company or on your own, to agree on a lump-sum settlement that’s lower than your current balance, making it easier and more affordable to get rid of the debt.
Another option is to work with a credit counselor on a debt management plan, which can consolidate multiple unsecured debts into a single monthly payment while reducing your interest rates and fees. This keeps you on track with your payments while making it more affordable to pay off what you owe. Or, debt consolidation may make sense if you still have relatively strong credit and want to combine multiple high-rate debts into one fixed monthly payment. This strategy can simplify the repayment process and potentially lower your borrowing costs.
If lawsuits, judgments or active garnishments are already in place, speaking with a qualified debt relief professional sooner rather than later is particularly important. The earlier you address collection issues, the more options you will typically have.
The bottom line
Severance is meant to carry you to your next opportunity, but it doesn’t automatically come with protections against creditors. Whether a garnishment can reach your severance ultimately depends on how it’s paid, what you owe and where you live — variables that can have a big impact from one situation to the next. If you’re worried about a judgment catching up to your final check, the worst move is typically to wait it out. Exploring your debt relief options early gives you the best shot at keeping that money doing what it was supposed to do: getting you to the other side.
