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

If you are an independent contractor or freelancer, a judgment creditor cannot garnish your wages. But it may be able to get some of your income through a non-earnings garnishment.

By , Attorney

Yes, in many cases, a judgment creditor can use a non-earnings garnishment to get to your business income, but the creditor's ability to do so will depend on:

  • your status as an employee or independent contractor
  • whether you can exempt (protect) some of the funds, and
  • how you've structured your business.

Other collection tools can reach other property you own, too. One way to avoid collection actions is by wiping out debt in Chapter 7 or Chapter 13 bankruptcy. It's also important to learn 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. But don't rest easy just yet. Judgment creditors have another way to get your income—they can use a "garnishment for property other than personal earnings" or "non-earnings garnishment."

Here's how wage and non-wage garnishments differ:

  • A non-wage garnishment is a one-time attachment of compensation received for services rendered, such as commissions, receivables from a particular source, or a contract payment. Wage garnishments are usually continuous, being withdrawn from each paycheck until paid.
  • Up to 100% of your expected compensation can be garnished. Wage garnishments are limited to no more than 25% of your disposable income under federal law—possibly more under state law.
  • Much like a bank account levy or property seizure, a non-wage garnishment can reach your bank accounts and other property. A wage garnishment attaches to your disposable income only.

Keep in mind that a judgment creditor has other methods of debt collection, too, such as hiring the sheriff to take funds out of a business cash register (till tap) or through property seizure.

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 (you as a 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.

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

Factors that could weigh in favor of you being an independent contractor have traditionally included the following:

  • You control the hours you work, where you work, 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 other costs).
  • You don't receive employment benefits, such as 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 as Californians know (see below), rules change. So you shouldn't rely on this list without first verifying your local employment laws.

Is Any of Your Income Exempt From Collection?

Employees can exempt (protect) a certain amount of wages from creditors; however, your state's laws might not allow self-employed people to exempt income. Even so, federal law might still provide some relief. The Consumer Credit Protection Act ("CCPA") defines earnings broadly and could cover some of your self-employment income. Specifically, a judgment creditor can only garnish the lower of:

  • 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 50% or 60% of your disposable earnings are subject to garnishment, and exemptions are reduced for student loan debts or federal tax garnishments.

Keep in mind that some types of property are also exempt. (Most states' bankruptcy exemptions are the same as its general collection exemptions.)

Is a Business Entity Involved?

If your business is a separate legal entity, such as a corporation or limited liability company, the creditor can't go after the property owned by the company. The creditor can only collect against your property—funds earmarked for you as an individual, such as distributions or some other type of asset. That means, however, that 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 want to be aware of a couple of other things, too.

  • 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. In some states, a judgment creditor cannot garnish a member's LLC income. 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, whenever you're facing property loss, it's prudent to consult with a lawyer. A local debt or bankruptcy attorney can explain your options and help you choose the best course of action.

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