Can Creditors Get Your Income If You Are Self-Employed?

If you are an independent contractor or freelancer, a judgment creditor might be able to get some of your income through a non-earnings garnishment.

By , Attorney · University of the Pacific McGeorge School of Law

Yes, in many cases, a judgment creditor can seize self-employment income. Still, whether a creditor can take your business income will depend on your status as an independent contractor, how you've structured your business, and whether you can protect or "exempt" some of the funds.

A creditor can also use a money judgment to reach property other than the earnings of a self-employed individual. One way self-employed debtors can avoid collection actions by creditors is by wiping out debt in Chapter 7 or Chapter 13 bankruptcy. Self-employed people should also know when a small business bankruptcy makes sense.

How Creditors Can Get Self-Employment Income

A judgment creditor can't use a traditional wage garnishment against someone self-employed because most states define a "wage" as compensation paid from an employer to an employee. A wage garnishment allows the creditor to require an employer to withhold a percentage of earnings from each paycheck until the debt is fully repaid.

A wage garnishment isn't available because a self-employed individual doesn't earn wages paid by an employer. Instead, a creditor with a money judgment can ask the court for an order to seize other property types, including money owed to a self-employed individual (often called "accounts receivable").

The specific order name will depend on your state laws but will likely include "garnishment" or "seizure." Once a creditor has a money judgment, most courts will issue garnishment or seizure orders for run-of-the-mill collections, like bank levies, after filing the appropriate forms at the counter. However, the court might require a special hearing before ordering more unusual seizures.

Other Ways to Collect From Self-Employed Business Owners

A self-employed person essentially operates in a business capacity, and depending on the business, a creditor has several debt collection options. For instance, a judgment creditor could garnish or levy against bank accounts or seize property, including money or accounts receivables owed to a self-employed person.

If the business owner has a physical storefront or works shows and craft fairs, the judgment creditor can hire the sheriff (or the official responsible for debt collection in the area) to take funds out of a business cash register known as a "till tap."

Why Creditors Want Self-Employment, Income, and Property Information

The collection tools available to a judgment creditor will depend on who owns the business property—the sole proprietor or another business entity—and the name on the money judgment. Specifically, the two must match.

For instance, a judgment creditor with a judgment against John Doe, an individual, will not be able to tap the till of Donuts, LLC, even if John Doe holds an interest in the bakery. But the creditor might be able to use a non-wage garnishment to intercept any payment Donuts, LLC, makes to John Doe. So determining how a creditor could get to your money starts with identifying your role.

Could You Be (or Collecting From) an Employee?

Someone who is an employee will have more earnings protections. Start by evaluating employee status, then review the possible protections. Also, most state bankruptcy exemptions provide employees and the self-employed some property protection against collection actions.

Are You Receiving Income as a Self-Employed Independent Contractor?

Factors establishing an independent contractor status have traditionally included the following:

  • You control your work hours, where, and how you do your job.
  • You are responsible for paying taxes and other expenses (the hiring company isn't responsible for withholdings or to reimburse you for tools, equipment, supplies, or additional costs).
  • You don't receive employment benefits like insurance, vacation, or a pension.
  • The hiring company doesn't restrict you from having other clients or pursuing other business opportunities.
  • You aren't performing broad or continuous services that are core to the employer's business.

People in the following professions have traditionally fallen into the category of self-employed individuals who might not be subject to standard wage garnishments:

  • freelancers, writers, photographers
  • musicians, performers, painters, and other artists
  • barbers, hairstylists, manicurists, masseuses
  • truck drivers, delivery persons, taxi drivers
  • commission-only based professionals, such as sales agents or realtors
  • doctors, attorneys, engineers, consultants, and
  • landscapers, plumbers, repair experts, and general contractors.

But laws vary. So you shouldn't rely on this list without verifying your local employment laws.

Is Any Income Exempt From Collection?

Employees can exempt (protect) a certain amount of wages from creditors. And federal law dictates that a creditor can only garnish the lower of the following:

  • 25% of disposable earnings (gross pay minus taxes and mandatory deductions), or
  • disposable earnings minus 30 times the federal minimum wage.

If you owe child support or alimony, up to 65% of your disposable earnings are subject to garnishment. Also, exemptions are reduced for student loan debts or federal tax garnishments.

But before you can use these protections, your earnings must qualify. If you're unclear, talk with a local attorney.

Is a Business Entity Involved?

If your business is a separate legal entity, such as a corporation or limited liability company, and the money judgment is against you, the creditor can't go after the property owned by the company. The creditor can only collect against property owed by you in your name. However, a judgment creditor might be able to foreclose on your property interest in the company itself—the shares or interest you own in the corporation or LLC.

You'll also want to be aware of a couple of other things.

  • You could be an employee of the corporation or LLC. If you are paid income as an employee of the company, then you'll still be subject to wage garnishment because the entity is your employer.
  • LLCs can provide more protection. A judgment creditor cannot garnish a member's LLC income in some states. Instead, a judgment creditor must go through a special proceeding and receive a "charging order" before getting member distributions.

Learn about bankruptcy for small business owners.

Protect Income From Creditors—Meet With a Bankruptcy Lawyer

Because state laws aren't consistent, it's prudent to consult with a lawyer whenever you're facing property loss. A local debt or bankruptcy attorney can explain your options and help you choose the best action.

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