Can 401K Funds Be Subject to Garnishment for Credit Card Debt?

Credit card debt collectors have a reputation for making all kinds of threatening remarks when they are trying to squeeze money out of borrowers who fall behind on payments. Some threaten to garnish wages to pay an unpaid balance. But fortunately for credit card consumers who are overwhelmed by credit card debt, garnishment laws do not apply to any money they have in a qualified employee 401k account.

Protected Asset

401k retirement plans are protected by federal laws under the Employee Retirement Income Security Act, or ERISA. ERISA plans are regulated by the Internal Revenue Service and the Department of Labor. The federal government does not allow private creditors to garnish any assets in a 401k plan for any reason. ERISA plans are completely protected from credit card companies with no limit on how much money is in the account. But all bets are off if you happen to owe money to the federal government for unpaid taxes. The federal government does have the power to garnish 401k funds under certain conditions.

Garnishment

In most states, garnishment of wages can only be authorized by a court. That process is started when a credit card company gets fed up with sending collection letters and making calls and decides to file a lawsuit against the consumer to recover the unpaid debt. If a judge rules against the consumer in court, the judge may grant the credit card company the right to garnish the consumer's property, bank accounts or wages. The judge cannot, however, issue an order to garnish any funds from a 401k.

Bank Seizure

Credit card companies will ask for a judgment to garnish a debtor's wages after winning a court battle. But if the debtor does not have a job, the credit card company might ask the judge to order the debtor's bank to freeze the account.

Other Protected Funds

Federal lawmakers wanted to make sure consumers did not end up retiring penniless due to credit card companies seizing money from 401ks for unpaid debt, and Congress extended that protection to include other forms of income. Social Security, disability and veterans' payments also are protected from garnishment by credit card companies. The federal government reserves the right to garnish these sources of income for unpaid taxes or other debts owed to the federal government.