When a creditor receives a judgment against a debtor, it can then ask the court for an order allowing it to garnish his wages to collect the debt that's owed. If the debtor quits or is fired, however, the wage garnishment order has no effect. Creditors can try to collect in other ways, but they must comply with state and federal laws.
Unemployment Compensation Benefits
Generally, creditors cannot garnish unemployment compensation benefits directly, meaning that the money can't be deducted from your benefits before you receive them. State law determines which benefits are exempt from direct garnishment and unemployment benefits are often covered. Even if your state exempts your benefits for most debts, however, it may allow garnishment for some priority debts such as taxes or child support.
Bank Account Garnishment
When a state exempts the direct garnishment of unemployment compensation benefits, it also exempts these funds when they're in a bank account. A bank might freeze the account anyway after it receives a garnishment order, however, even if the account is a joint account. The debtor must file a claim of exemption in the garnishment case if this happens, explaining that a portion of the bank account is exempt because the funds came from unemployment. The benefits portion of the bank account is then released, although the remaining portion of the bank account is still frozen. A joint account holder can also contest the garnishment if he can show that the funds in the account belong to him.
In community property states, a spouse's wages can also be garnished. In these states, all debts contracted for during the marriage are marital debts and both spouses are legally responsible for them regardless of whose name is on the account. Even if a person's unemployment benefits are protected by state law, creditors can usually garnish his spouse's wages instead in these states.
Unlike unemployment compensation benefits paid by the state, severance pay is usually considered wages and is subject to garnishment. Federal law permits garnishments of up to 25 percent of a debtor's disposable wages or 30 times the minimum wage, whichever is less. States can impose stricter laws that limit the amount a creditor can garnish.
Existing Garnishment Order
If an employee's paycheck was being garnished before he was terminated, the garnishment order on his wages is no longer effective. The creditor must ask the court for a new wage garnishment order to try to garnish the employee's bank account or unemployment benefits in states where they may not be exempt.