Both California law and federal law have long protected a portion of a consumer’s wages from debt collectors. While a judgment creditor can request a wage garnishment order from the court, garnishment can’t exceed 25% of the debtor’s earnings. For many working people, the protection is even greater. That’s because the creditor can only garnish the lesser of 25% or 50% of the debtor’s disposable earnings in excess of 40 times the minimum wage.
That sounds a bit complicated, so here’s a quick example. Imagine that a Los Angeles worker earns $650/week. Based on the 25% rule, $162.50 could be garnished from that employee’s weekly wages. But, in the city of Los Angeles, the minimum wage is $15/hour. $15/hour x 40 hours = $600. That means the employee has only $50/week left over after 40 times the minimum wage is protected. And, the creditor can only garnish half that amount. So, a Los Angeles worker earning $650/week is only subject to a garnishment of $25/week.
The limit is intended to ensure that working people retain enough of their income to pay basic living expenses. While creditors don’t like the rule, it’s actually good for everyone. An employee whose wages are garnished too deeply won’t have an incentive to continue to work–in fact, may be unable to keep up with the expenses required to continue doing the job. But, until this month, there was a big loophole.
While a significant percentage of wages were protected from garnishment, that money became fair game when it was deposited into the consumer’s bank account. A California law that took effect on September 1 changes all that.
California’s New Debt Collection Law
SB 616 was signed into law last October, but didn’t take effect until September 1, 2020. The statute makes “money in the judgment debtor’s deposit account in an amount equal to or less than the minimum basic standard of care for a family of four for Region 1” exempt. Like the wage garnishment exemption, this one is automatic, meaning that the debtor doesn’t have to make a claim to protect the funds.
The amount deemed necessary to the basic standard of care is determined based on annual figures provided by the State Department of Social Services. As of July 1, 2020, that amount is $1,788. It’s important to note that the law protects $1,788 per debtor, not per account. Keeping sums below the threshold in separate accounts doesn’t mean a larger amount is exempt.
This protection takes on new importance for many California families who might never have anticipated needing it before the pandemic. Though California’s unemployment rate dropped in August, it’s still considerably higher than pre-pandemic: 11.4% in August of 2020, compared with 3.9% during the same month in 2019.
Bank Account Levies Can Have Catastrophic Effects
The key concern about bank account levies is obvious to most people: if a judgment creditor levies your bank account, the money you were likely counting on to pay your bills and buy food during the coming weeks disappears. That’s bad enough and certainly reason enough for the new legal protection. But, it’s far from the only devastating impact bank account levies that wipe out an account can have.
First, the result of a creditor zeroing out your bank account can be a balance well below zero. Imagine, for example, that before your bank account was drained you wrote checks for your rent and utilities. Depending on your bank and the type of account you have, those checks may have been honored–leaving you significantly in the red–or returned. In either case, you’ll likely pay an overdraft or returned item fee.
If you’re thinking “It’s 2020! No one writes checks,” you may be surprised. While check usage is certainly on the decline, the most recent payment methods data from the Federal Reserve shows about 14.5 billion checks written annually. But, even if you’ve never written a check in your life, you’re facing the same risk. Many electronic payments take a couple of days to process; some online orders aren’t processed until they ship, which means it may be a week or more after you made the payment. And then there are all those small auto-payments, for Netflix and Spotify and your Google drive upgrade.
The average overdraft fee in the U.S. is just over $33, meaning that a $5 item presented twice could cost you $66. If you have a few outstanding checks or debits when the account hits zero, you could easily find yourself hundreds of dollars in the red.
It’s bad enough to be struggling with debt and then find yourself even further behind. But, that’s not the end of the road. Often, people whose accounts are emptied and then face overdraft and returned item charges lose their bank accounts. And, banks report accounts left without sufficient funds, which means it can be difficult or impossible to get another account. The inability to have paychecks direct deposited and make debit transactions from a checking account can create additional practical and financial obstacles.
In short, the new law protects many families in Los Angeles and throughout California from a financial shock that can both create an immediate crisis and have a long term impact. But, of course, it’s not a full solution. The underlying debt remains, and judgment creditors have a variety of options available to them, including wage garnishment and garnishment of any sums in a bank account that exceed the protected amount.
If you have outstanding judgments or are facing a debt collection lawsuit and are looking for a longer-term resolution, contact Borowitz & Clark today. We’ve been helping people resolve their debts so they can build better financial futures for decades. You can schedule your free, no-obligation consultation by calling 877-439-9717 or filling out the contact form on this page.