In 1964, the Consumer Credit Protection Act (CCPA) was enacted to protect workers facing wage garnishments by creditors. Today, the CCPA no longer reflects the reality of consumer debt in America, and its approach to wage garnishment is in need of reform.
Low-wage workers facing a garnishment should take home more of their pay, and they should not face a steep penalty for earning additional income.
A wage garnishment occurs when a creditor obtains a judgment against a debtor and a court order to seize wages directly from their employer. About one percent of all American workers experience a wage garnishment at any point in time, and the average worker has a 15 percent chance of experiencing at least one garnishment over a ten-year period.
When the CCPA was passed, total consumer debt stood at $80 billion. Today, this figure is over $4.8 trillion. With debt of this magnitude, widespread default is now a fact of economic life.
The CCPA limits the total wages that a creditor can garnish. The maximum garnishment is the lessor of: (i) twenty five percent of the worker’s disposable earnings or (ii) the amount by which disposable earnings exceed thirty times the federal minimum wage.
The CCPA formula should be amended in three ways.
First, the exempted amount should be increased to 40 times the minimum wage to reflect a full work week. This amount should also be adjusted annually for inflation. Currently, a worker’s wages cannot be garnished if their weekly wage is less than 30 times the federal minimum wage ($217.50). But the experience of many states shows that low-wage workers can be given additional, temporary relief from their debts. At least sixteen states now protect a higher amount from garnishment. These states include California, which protects up to 40 times the state or local minimum wage, and Texas, which prohibits garnishment for most types of consumer debt.
Second, the maximum garnishment percentage should be lowered to 15 percent. Currently, a worker who earns the federal minimum wage and works 40 hours a week can be garnished up to 25 percent of their income. This is a high percentage for those who are among the lowest-earning full- time workers in the economy. By comparison, the garnishment ceiling for default on student debt—which is most often owed by college graduates—is 15 percent.
Third, the garnishment formula should not penalize low-wage workers who seek to increase their earnings. Currently, if a minimum-wage worker with a garnishment increases their hours a week from 30 to 40 then every additional dollar earned goes to their creditor. For this worker, garnishments are a 100 percent tax on additional income. This formula is unnecessarily punitive. The most that can be garnished from an additional dollar of earnings should be 15 percent.
In sum, the CCPA should be amended so that a wage garnishment is no more than 15 percent of the amount by which disposable earnings exceed 40 times the federal minimum wage, with an upward annual adjustment based on inflation.
This change to federal garnishment law would not cancel a single dollar of debt. Instead, it would increase the time to payment of creditors, who are also entitled to post-judgment interest.
While the benefits of amending the CCPA would be substantial, the costs would likely be modest. A recent Consumer Financial Protection Bureau (CFPB) study found that if a state reduced its garnishment percentage to 15 percent, the average credit card limit would fall by around $500. This result is not surprising. If credit markets are functioning normally, then some reduction in credit is to be expected, though the study makes no findings with respect to actual credit use.
Even so, the relevant policy question is whether the tradeoff between reduced credit access and greater wage protection in the event of a garnishment is worth it to consumers as a whole and to consumers most at risk of default. In other words, is this wage insurance that a consumer would or should purchase?
After all, abolishing the federal bankruptcy code would also lead to lower interest rates and possibly more credit, but there is good evidence that the benefits of bankruptcy to consumers are substantial, so such a proposal would be a non-starter.
Garnishment laws are a shadow bankruptcy code for workers who lack the resources to make it worthwhile to file for bankruptcy. These worker protections cannot be supplied by the market. It is up to Congress to enact fair and humane garnishment rules for an economy that runs on consumer debt.
Prasad Krishnamurthy is a professor of law at U.C. Berkeley School of Law.