Does Bankruptcy Stop Wage Garnishment by the State of New Jersey?
If you don’t pay your taxes, Uncle Sam will notice. The IRS, or the state of New Jersey, will go straight to your employer and take what you owe out of your paycheck, and your bank accounts. The process is known as garnishment, and unlike other creditors, the taxing authorities don't need a judgment before they can proceed. Employers are obligated by law to honor valid requests for garnishment. This is part of what makes tax creditors the worst type of creditors to have.
If you’re struggling to pay your tax debts, you’re probably struggling to pay other bills as well. The last thing you need is wage garnishment. So, how can you make it stop?
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IRS and NJ Wage Garnishment
For most types of debt, creditors have to get a court order before they can start garnishing your wages. For back child support, spousal support, and unpaid income taxes, that step is unnecessary. If you haven’t paid your income taxes, the IRS can go straight after your paycheck.
Garnishment for "normal debts"
For most types of debt, both federal and state laws limit how much creditors can deduct from your paycheck. New Jersey law imposes stricter limits than the federal laws, and those strict limits control. If you earn less than 250% of the federal poverty level, creditors may only garnish up to 10% of your income. If you earn more than 250% of the federal poverty level, creditors may garnish up to 25% of your income.
Garnishment for IRS and tax debts
Garnishment for federal income tax debt is governed by the federal rules. It has to leave you 75% of your disposable earnings or 30 times the federal minimum wage, whichever is greater. Your disposable earnings are calculated for garnishment purposes as your total earnings minus the legally required deductions for federal, state, and local tax, social security, retirement plans, and unemployment insurance. This is supposed to leave enough that you can afford basic living expenses. If you can’t you may be able to show that the garnishment is a hardship and should be reduced because of your specific circumstances.
The Automatic Stay Stops Collection Activity Including Garnishment
When you file for bankruptcy, the court steps between you and your creditors. If you have back tax debt, that includes the IRS. One of the most important protections that bankruptcy offers to debtors is the automatic stay. The automatic stay stops all proceedings against the debtor for collection – foreclosure, lawsuits, repossession, and wage garnishment – and remains effective for the length of the bankruptcy.
It is important to note, however, that the relief may not be permanent. Discharging tax debts in bankruptcy can be difficult.
How will bankruptcy affect my tax debt?
If you file for Chapter 7 bankruptcy, the bankruptcy trustee will liquidate your non-exempt assets and pay your creditors with the proceeds. Under Chapter 13, you’ll work out a five-year repayment plan. At the end of either type of bankruptcy, your unsecured debts will be discharged (you’ll still have to either repay your secured debts or surrender the collateral). However, tax debt is generally considered nondischargeable. So, while the automatic stay will protect you from wage garnishment during the course of your bankruptcy, you’ll still have to deal with your tax debt on the other side. If you don’t find another solution, the IRS will simply start garnishing your wages again.
Remember also that bankruptcy affects all of your debts, not just your debt to the IRS. It will knock 200-300 points off of your credit score, affecting your ability to make large purchases, take out loans, get credit, and more. If your biggest issue is tax debt, bankruptcy should probably be your last resort. If you’re struggling with many debts, bankruptcy may be your best option.
What else can I do?
If you owe back taxes, reach out to the IRS. While they don’t have to get a court order to garnish your wages, they do have to give you 20 days’ notice before they start garnishment. When you get notice, contact the IRS and try to work out either a settlement or a repayment plan. You may be able to settle your tax debt at once for less than you owe (and save the IRS the time and administrative expense of garnishing your wages) or work out a plan to pay it back over time without garnishment.
Where do I start?
Gather your financial information and tax returns and spend some time familiarizing yourself with them. Determine exactly how much you owe and from which years. Then call up the IRS. Explain your situation and that you’d like to try to work out a way to pay your debt. If you can’t come to an agreement, speak to an experienced attorney to determine your next best option.
