Car loan wage garnishment can be a stressful financial burden for borrowers who fall behind on payments.
Of course, this is a situation you want to try to avoid. Fortunately, there are steps you can take to help prevent it. This guide will cover what wage garnishment is, when an auto lender is likely to use it, and how to stop wage garnishment for a car loan.
Key Points
• Car loan companies can garnish your wages, but they first must obtain a court judgment.
• If you default on your loan and the lender repossesses your vehicle, they may sell it to recover losses. If the sale doesn’t cover the full loan balance, the lender can sue you for the remaining amount.
• If you fail to pay this deficiency, the lender may pursue legal action to recover the funds, potentially resulting in wage garnishment.
• Federal law caps wage garnishment at the lesser of 25% of your disposable earnings or the amount by which your weekly disposable earnings exceed 30 times the federal minimum wage.
• Not all states permit wage garnishment for car loan deficiencies. It’s crucial to check your state’s laws to understand your rights and protections regarding wage garnishment.
What Is Wage Garnishment?
Creditors may use a method called wage garnishment when you fail to pay off your debts. It’s a legal procedure that allows them to get a court order requiring your employer to withhold a percentage of your earnings to pay off your debt. The employer is required to send the garnished wages to the creditor.
Common causes for wage garnishment include outstanding court fees, medical bills, child support, unpaid taxes, defaulted student loans, and in some cases, car repossession or voluntary repossession.
Can Car Loan Companies Garnish Wages?
If your car has been repossessed, a car loan company can garnish wages in particular circumstances and in certain states. Not all states allow wage garnishment, so check to see if yours does.
How Wage Garnishment Works
If you default on your loan, your lender may repossess your car. To recoup the money you still owe on your loan, the lender will typically sell the car at auction. In the meantime, they may also foot the bill to clean the car and make any minor repairs.
If the lender doesn’t make enough money through the sale of the vehicle to cover the outstanding loan plus any other costs they’ve incurred, you’ll owe what is known as a deficiency. You’re responsible for paying off this amount. If you don’t, your lender may take you to court to obtain a judgment against you that allows them to garnish your wages.
If this happens, the court will send an order to your employer to withhold a certain amount from your paychecks. Your wages will continue to be garnished until the debt is repaid in full.
It’s important to note that federal law prohibits an employer from terminating you if your wages are garnished–up to a point. You can’t be dismissed if you have one wage garnishment order, but that’s where the federal protection ends. State laws may offer further protection, but you’ll need to check with your specific state’s labor department.
How Much of Your Wages Can Car Loan Companies Garnish?
If your state allows lenders to garnish your wages after a car repossession, federal law limits the amount they can take to 25% of your disposable earnings or the amount of disposable earnings you have that exceed 30 times the federal hourly minimum wage — whichever is the lesser of those two.
Some states have a lower limit for wage garnishment. For example, California limits the amount of wages that can be garnished to 25% of disposable income, or 50% of 40 times the state’s hourly minimum wage — whichever is less.
Recommended: How Long Does a Car Repossession Stay on Your Credit Report?
Can You Stop Wage Garnishment for a Car Loan?
You’ll want to avoid having car loan companies garnish wages if you can. For one thing, wage garnishment can be stressful for you and your employer. Even more important, if a lender has resorted to garnishing your wages, it’s likely that some serious damage has been done to your credit score, which can make it more difficult to get credit in the future. Here’s how to stop wage garnishment for a car loan.
Pay Your Bills On Time
The best way to avoid car repossession and possible wage garnishment is to regularly make on-time bill payments. This will also help you maintain a good credit score.
If you encounter financial problems that will make it difficult to repay your car loan, contact your lender immediately. They’d rather not have you default on the loan, so they may work with you to come up with a new payment program to help you get back on track. They could lengthen the term of your loan or break your payments into smaller sums that you pay twice a month, for instance.
If you’re experiencing a more severe financial hardship, you may be able to request a grace period or a deferral on the loan, which allows you to skip a small number of payments. The lender will tack the deferred payments onto the end of your loan.
Recommended: Is an Auto Loan Secured or Unsecured?
Refinance Your Loan
If you’re having trouble making your loan payments on time, consider an auto loan refinance, especially if interest rates have dropped. When you refinance a loan, you pay off your old loan with a new one, ideally at a lower interest rate or more favorable terms. A lower interest rate or lengthening your loan term could reduce the size of your monthly payment, which may help your budget.
Refinancing might be tricky in certain situations, such as with upside down auto loans, for example. If your auto loan is upside down, talk to your lender to see what your options might be. The same is true if you end up having to declare bankruptcy. While it might be possible to get an auto loan after bankruptcy, it will likely be challenging.
Recommended: Pros and Cons of Car Refinancing
Pay Off Your Deficiency
You can stop wage garnishment by paying off the debt in full, including any court fees or interest that has accrued. Once the balance is paid, the lender is required to notify the court and your employer to stop the garnishment.
It’s important to get written confirmation and keep records of the payoff to ensure the garnishment ends promptly. Additionally, negotiating a payment plan or filing for bankruptcy may also halt wage garnishment in certain cases.
Reinstate or Redeem Your Loan
If your car has been repossessed, there are steps you can take to get your car back.
Depending on the state you live in, you may be allowed to reinstate your loan. You’ll have to make all past due payments and pay all costs associated with repossession, such as towing fees. Generally, this needs to happen 10 to 20 days after the car is repossessed. Your lender can give you the specific payment amount and time frame information.
You might also be able to redeem your loan. In this case, you’ll need to pay off the entire balance of the loan plus any costs associated with the repossession. At this point, you’ll own the car outright.
Buy Back Your Car
In some cases, you can buy back your car after it has been repossessed to avoid wage garnishment, typically by paying off the full amount owed, including any repossession fees and past-due payments.
As mentioned above, this process is called “redeeming” the vehicle. Some lenders may also offer reinstatement, where you bring the loan current and cover fees to get the car back. Acting quickly is essential, as the vehicle may be sold at auction if not reclaimed within a certain timeframe.
Recommended: Refinancing With Bad Credit
The Takeaway
Wage garnishment is a situation you want to avoid, if possible. To prevent your wages from being garnished, do your best to make your car payments on time. If you’re experiencing financial distress, reach out to your lender right away to see if they will work with you on a payment plan.
Another option is to explore refinancing your car loan, possibly lowering your monthly payments if you can get more favorable interest rates and terms.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Can a car loan company garnish your wages?
Auto loan lenders can garnish your wages in certain states when your car has been repossessed. Typically, the lender will sell the car to help recoup their loss. If the car sells for less than what you owe on it, plus any expenses the lender incurred during repossession, you’re responsible for paying the deficiency. If you can’t pay it, the lender can go to court to get an order to have your wages garnished.
What is the most car companies can garnish from your paycheck?
Federal law limits garnishment to 25% of your disposable income or the amount of disposable earnings you have that exceed 30 times the federal hourly minimum wage, whichever is less. State laws may set lower limits, so check the rules in your state.
How do I stop wage garnishment for a car loan?
You may stop wage garnishment by paying off your deficiency, which is the difference between your loan balance and the amount your lender is able to get from the sale of your repossessed car.
Photo credit: iStock/AndreyPopov
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