Garnishments: A Trap for Employers

    Employee garnishments are a no-win proposition for employers. For a miniscule $6 payment, employers must process employee garnishments, calculate and withhold from employee’s paychecks, and often at the same time balance competing obligations, such as support orders and tax levies. Even worse, if a garnishment is mishandled, an employer can be held liable for the entire debt of the employee, along with court costs and attorney fees.

    In difficult economic times, all employers are likely to receive an employee garnishment at one time or another. Aggressive creditors will send out garnishments to possible employers and anyone else who may owe money to the debtor. Creditors who realize the debtor may be uncollectable will not hesitate to use an error by an employer in handling a garnishment to require the employer to pay the debtor’s judgment.

    There are two types of garnishments: periodic garnishments, which are sent to employers; and non-periodic garnishments, which are typically sent to banks. The paperwork for garnishments is innocent looking, but in fact a garnishment is actually a lawsuit against the employer. The creditor files a writ of garnishment with the court, and then serves the garnishment on the employer, often by mail. The clock begins ticking immediately upon the employer’s receipt of the garnishment: within fourteen days, the employer must file a garnishment disclosure with the court, and send a copy of the disclosure to the creditor’s attorney and to the employee.

    Not Filing on Time: Big Mistake
    Probably the most serious mistake an employer can make is not to file the garnishment disclosure with the court within 14 days after receipt of the garnishment. The creditor may take a default judgment against the employer for the full amount of the debt owed by the employee, and it does not have to give advance notice to the employer before filing the default judgment. As a result, employers may be surprised to receive in the mail a default judgment which has been entered against them for not following the requirements of Michigan’s garnishment laws. Employers must then act quickly and retain counsel to file a motion with the court to set aside the default judgment. This motion should be filed within 21 days after the default judgment has been entered by the court.

    Federal law limits the amount that creditors may garnish from employees. The amount subject to garnishment is the amount above 30 times the federal minimum wage, or 25 percent of disposable earnings, whichever is less. Employers must correctly calculate the amount to withhold, and must make the deductions until the garnishment expires. Periodic garnishments last for 90 days and creditors may file another garnishment after the first one expires.

    Sometimes when an employer receives a garnishment, the employee will tell the employer to ignore the garnishment, or that the employee is making arrangements with the creditor to pay the judgment. Employers should always file a disclosure and not stop withholding on a garnishment until it expires or the court issues an order releasing the garnishment.

    Creditors are entitled to send interrogatories to the employer within 14 days after the employer files the garnishment disclosure. Interrogatories are written questions the creditor may have about the garnishment disclosure. Employers must answer the interrogatories within 28 days.

    The filing of a bankruptcy by the employee stays (stops) any action to collect the judgment against the employee. Employers should stop withholding on the garnishment if it receives written notice that the employee has filed bankruptcy.

    Garnishments from Other States
    Sometimes out-of-state judgment creditors will send garnishments to Michigan employers when the debtor moves to Michigan. As a general rule, employers are not required to respond to garnishments issued from courts in states where they do not do business. However, employers should contact their attorney when they receive a garnishment from another state.

    Other Withholding Orders
    Employers may also receive other types of withholding orders, including support orders, federal tax liens, and state tax liens. Many issues can arise when employers receive these types of withholding orders, including the correct amount to withhold, which order has priority if there are competing garnishments or withholding orders, and similar questions. Employers should consult with counsel about these questions. Generally, child support orders have priority over creditor garnishments and often result in no money being available to pay the garnishment.

    In summary, garnishments appear to be routine and innocent looking but, in reality, can lead to serious problems if they are not handled correctly. Employers should make sure they handle garnishments promptly and within the time limits imposed by Michigan law.

    Randall J. Groendyk, counsel – Creditor’s Rights Experience, Varnum LLC, focuses his practice on creditor’s rights law, including collections, bankruptcy, landlord-tenant, claim and delivery, foreclosure, and commercial and general civil litigation. His specialties also include Fair Debt Collection Practices Act and Fair Credit Reporting Act defense and compliance review. He can be reached at [email protected]. This article has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice.