Wage assignment is the act of taking money directly from an employee’s paycheck to pay back a debt obligation. This automatic withholding plan can be used for various debt obligations, including back taxes, defaulted student loans, and child or spousal support payments.
Key Takeaways
- A wage assignment directly takes funds from an employee’s paycheck to settle a debt.
- Regulations on wage assignments vary by state, with some states allowing voluntary child support agreements.
- Wage garnishment differs from wage assignment; it’s an involuntary deduction and requires a court order.
How Wage Assignment Works
Wage assignments usually come into play for long-unpaid debts. Employees can also opt for a voluntary wage assignment to handle payments like union dues or contributions to a retirement fund.
The wage assignment is processed by the employer’s payroll system. The employee’s paycheck is reduced by the assigned amount, which is noted on their pay stub.
For lenders, a wage assignment is often the last resort for debt recovery. Though useful for collecting unpaid debts, they may sometimes be linked with predatory lending practices. If you’re overwhelmed with debt, it’s wise to consult debt relief companies or credit counseling agencies for assistance before circumstances necessitate a wage assignment.
What Makes Wage Assignments Voluntary?
In a voluntary wage assignment, an individual requests their employer to withhold a portion of their paycheck for debt repayment. Sometimes, loan agreements may include a voluntary wage assignment clause in the event of loan default.
Payday lenders often incorporate voluntary wage assignments into their loan agreements to improve their chances of repayment. Legal regulations concerning wage assignments differ by state.
- In West Virginia, wage assignments are capped at 25% of a worker’s take-home pay. Both the employee and employer must sign the agreement, which must be renewed annually.
- In Illinois, lenders can’t use wage assignments until the debt is 40 days overdue. The assignment cannot last more than three years, and the employee can halt the assignment anytime.
Wage Garnishment
Involuntary wage deductions, or wage garnishments, require a court order. They are primarily used to collect court-ordered spousal and child support payments but can also be imposed for unpaid court fines or defaulted student loans.
For voluntary child support agreements, several states permit individuals to sign up as long as both parents concur on a plan. Then, a voluntary wage assignment can begin. If a child support or welfare agency is involved, their approval might be necessary.
How Long Can I Have a Wage Assignment?
Being voluntary, the duration of a wage assignment can vary. Specific loans that include wage assignment clauses will define the terms. State regulations also dictate particular conditions for wage assignments.
How Much of My Income Can Go to Wage Assignments?
State laws vary, but typically, 15–25% of your disposable income can be diverted to wage assignments.
Is Wage Garnishment the Same as Wage Assignment?
Although similar, wage garnishment and wage assignment are distinct. Wage garnishment is an involuntary paycheck deduction, generally used for repaying child support, student loans, tax debt, or bankruptcy. Conversely, wage assignment is voluntary and typically repays consumer debt.
The Bottom Line
Wage assignments can be a practical tool to help manage debt repayment. They are voluntary, but clauses may sometimes hide in the fine print of loan products. Reading your loan agreement thoroughly before signing and understanding your state’s regulations is crucial.
Related Terms: Wage Garnishment, Debt Counseling, Payroll Deductions, Predatory Lending, Debt Relief.
References
- West Virginia Division of Labor. “Wage Payment and Collection (WPC) Act: Payroll Deductions and Wage Assignments”, Page 3.
- Illinois General Assembly. "(740 ILCS 170/) Illinois Wage Assignment Act".
- U.S. Department of Labor. “Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA)”.
- Illinois Legal Aid. “Understanding Wage Assignment”.
