Volatility throughout the small business community arising from the COVID-19 pandemic has led to an increase in debt collection efforts by creditors. One frequently used collection remedy is referred to as garnishment.
What is a Garnishment?
Garnishment is a legal process by which a creditor who is owed money from a debtor may require a third party to hold (and ultimately pay to the creditor) any money or property that the third party owes to the debtor. For example, if an employee of your business owes money to a bank, the bank can send you a garnishment summons to require you to hold and pay to the bank, a designated portion of the wages that you would otherwise pay to your employee.
How Is the Garnishment Process Started?
As referenced above, a creditor starts the garnishment process by serving a legal document—called a garnishment summons—on the third party (called the “garnishee”) who the creditor believes to have money or property belonging to the debtor. The garnishment summons must identify (i) the name and address of the debtor, (ii) the amount of the debt that is unpaid, (iii) the date judgment was entered against the debtor, and (iv) various statements regarding the obligation of the garnishee. The garnishment summons must also be accompanied by the appropriate garnishment disclosure form (as discussed more fully below, either an earnings or a non-earnings disclosure form). The garnishment summons and garnishment disclosure form may be served by personally delivering the documents to the garnishee (or the garnishee’s registered agent) or by mailing the documents to the garnishee by certified mail.
What Happens When a Garnishment Summons Is Served?
At the time a garnishment summons is served on a garnishee, the garnishee is generally required to “retain possession and control of the disposable earnings, indebtedness, money, and property of the debtor” up to a maximum of 110 percent of the amount claimed by the creditor in the garnishment summons to be unpaid. Additionally, the garnishee must provide a written disclosure to the creditor and debtor based on the form that was served with the garnishment summons (which, as noted above, differs based on whether the garnishment applies to earnings or other property). In the case of a non-earnings garnishment, the garnishee must provide a written disclosure to the creditor within 20 days after service of the garnishment summons that identifies all indebtedness, money, or property that the garnishee owes to the debtor.
Special rules apply to a garnishment of “earnings.” This includes compensation paid to an employee for personal service (e.g., wages, salary, commissions, or bonus). An earnings garnishment only applies to “disposable earnings” (i.e., earnings that remain after the deduction of all amounts required by law, including taxes and social security payments, but not including voluntary deductions such as health insurance premiums or charitable contributions). Further, the amount of an earnings garnishment is limited to the less of (i) 25% of the debtor’s disposable earnings, or (ii) the amount by which the disposable earnings exceed the federal minimum wage (currently $7.25 per hour) assuming a 40-hour workweek. For example, if a debtor has disposable earnings of $1,000 per week, a garnishment would only apply to disposable earnings of $250 per week (25% of the disposable earnings, which is less than the federal minimum wage times 40 hours). Higher amounts are subject to garnishment if the judgment is for child support.
In the case of garnishment on earnings, a garnishment summons applies to the current pay period when the summons is served and all future pay periods that conclude within 70 days after service of the garnishment summons. The garnishee must retain all earnings subject to the garnishment during this period and must serve the earnings disclosure on the creditor and debtor within 10 days after the end of the last pay period to which the garnishment summons applies.
In either case, the garnishee must retain property that is subject to the garnishment (up to 110% of the amount claimed in the garnishment summons to be owed by the debtor to the creditor) for 180 days. If the garnishee receives a levy, written authorization of the debtor, or other court order directing the garnishee to deliver the earnings or property to the creditor within the 180-day period, the garnishee shall comply with such order. Otherwise, the garnishee must return the retained property to the debtor after the 180-day period expires.
What Happens When if a Garnishee Does Not Comply with a Garnishment Summons?
If a garnishee fails to serve a written disclosure within the required time, a court may enter a judgment against the garnishee for the amount of the creditor’s claim against the debtor or 110 percent garnishee serves a disclosure but fails to retain property belonging to the debtor, the creditor may obtain a judgment against the garnishee for the value of the property that was disclosed but not retained. In other words, if a third party fails to comply with a garnishment summons, it may become directly liable to the creditor for all (or part) of the amount owed by the debtor to the creditor. Further, if the court finds the garnishee to have willfully disregarded the garnishment summons, the court may hold the garnishee in contempt of court. This court result in fines, or worse.
If you are served with a garnishment summons, do not ignore these documents because they do not directly involve a debt that you owe. Instead, you should immediately freeze any payments to the debtor, retain the necessary property, and provide the required written disclosure. Even if you do not have any property that belongs to, or owe any money to, the debtor, you must complete and deliver the written disclosure indicating this fact to the creditor and debtor.
Further, do not terminate the debtor-employee. While it may be frustrating to deal with a garnishment action against your employee, Virginia law prohibits employers from terminating an employee because of the garnishment. However, it does allow for some (albeit nominal) recourse: You may collect a fee of up to $10 for processing the garnishment summons.
Given the continued uncertainty and challenges facing the small business community surrounding the COVID-19 pandemic, it is safe to assume creditors will continue to engage in aggressive debt collection efforts. Contact Perkins Law at 804.205.5162 or [email protected] with your small business transaction, contract, and compliance needs.