How Wage Garnishment Laws Affect Many Texans

Although wealthier Texans may build up significant savings and retirement accounts by middle age, most residents must keep working far longer to meet their individual and family needs. And if unexpected family or medical crises occur creating new financial emergencies, some people may face wage garnishments. Fortunately, Texas offers strong protection against many types of creditors.

Here’s a brief review of the most common types of wage garnishments pursued in Texas, basic terms you’ll need to know regarding this field – and references to special concerns you may need to discuss with your Houston business law attorney to fully protect your rights.

Important terminology related to attaching employee wages

  • Wage garnishments. In Texas, this term is often used interchangeably with “wage attachments” and refers to court orders directing employers to withhold certain amounts of money from employee paychecks to satisfy certain debts;
  • Administrative garnishments. These usually refer to federal government back taxes or student loans now in default – and they do not require a court order to be activated. Once debtors have student loans in default, they’ll normally be contacted by the U. S. Department of Education and told which collection agencies will be collecting their debts. (Note: Students loans can almost never be discharged by a bankruptcy filing);
  • Disposable earnings. This refers to the amount of money you have left in your paycheck after all mandatory deductions have been made for federal taxes, disability insurance, union dues, unemployment insurance, nondiscretionary retirement deductions, workers compensation and health insurance.

Types of debts often leading to wage garnishment

Texans are very fortunate compared to citizens of other states since Texas only honors a very limited number of garnishable debts.

  1. Unpaid child support and alimony (in arrears)
  2. Current court-ordered child support and alimony
  3. Government debts owed to the IRS (back taxes) — and all related fines and penalties
  4. Unpaid student loans (in arrears)

Note:  In light of Article IV of the U. S. Constitution, Section I (requiring each state to honor the “public acts . . .  and judicial proceedings of every other state,” certain other limited creditor debts referenced in judgments obtained outside of Texas may also be garnishable.

Be sure to speak with your Houston business law attorney whenever you receive any notice of an order to garnish your wages.

Fixed garnishment limitations that benefit Texas debtors

  • Total amount that can be garnished (based on all court orders). This is equal to 50% of your disposable earnings;
  • Percentage allowed for tax debt. This varies, based on your current deduction rate, the number of your dependents and other factors;
  • Student loans. The Department of Education can normally only garnish up to 15% of your disposable income from each paycheck;
  • Spousal support. The most your wages can be attached for this obligation is either $5,000 or 20% of your average monthly gross income – whichever is less.

Priority of wage garnishment orders

Although unusual factors might be able to change the list below, employers must normally prioritize their payment of garnishment orders in the following manner.

  • Unpaid child-support
  • Spousal support
  • Back taxes
  • Student loans

Texas employers are not allowed to discriminate against employees with wage garnishments

This has long been a concern of many employees since handling wage garnishments can take up a considerable amount of an employer’s time. Texas doesn’t allow those with wage attachments to be treated unfairly when it comes to hiring, promoting, demoting, reprimanding and firing (among other actions).

How creditors can still reach your money – apart from using wage garnishment

Even if your wages cannot be reached, regular creditors can still gain access to your money by obtaining court orders to freeze one or more of your financial accounts – and place liens on certain types of real property you own.

Please contact our law firm with any questions you may have about the proper handling of court orders to garnish wages — or any other types of administrate tasks regarding employees.

Is Notice to the Address of Record in the Loan Agreement always Sufficient? We'll See…

Many years of past precedent had established that a lenders notice to the debtor’s address of record in the Loan Agreement was almost always sufficient. However, one case from the Texas Supreme Court, and another in which Petition for Review has been filed may change established law.

In July 2015, in a landlord verses tenant case, (“Katy Venture v. Cremona Bistro”) the Texas Supreme Court ruled that because the landlord had used an outdated “registered” address even though it knew of a new “unofficial” mailing address, a fact issue was presented to defeat Landlord’s Motion for Summary Judgment in a bill of review proceeding after default judgment was entered against the Tenant.

Following the “Katy Venture” decision, the Fort Worth Court of Appeals, in a Lender verses Guarantor case, the Court held that the Guarantor raised a genuine issue of material fact to defeat a summary judgment. The Court held that because some summary judgment evidence exists that the Bank knew the Guarantor’s current address but nonetheless utilized an outdated “official” address in its certificate of last known address, a fact issue exists precluding summary judgment. This is true even assuming the Bank conclusively established the Guarantor’s negligence in failing to update his contractually-agreed-to address for notice.

Petition for review has been filed to the Texas Supreme Court. We’ll see in the coming year how the law of adequate notice evolves.

Practice point: Send notices to the borrowers and guarantors “official” address of record, but also send notice to ay other addresses which the bank knows, or with reasonable diligence and investigation should have known, where the borrowers and guarantors receive their mail or reside.

Pay-if-Paid – What It Means for Subcontractors

Subcontractors Unite!  Do not sign a subcontract that shifts the risk of non-payment by the owner on you.  My advice is to strike out such provisions in any proposed subcontract and negotiate a reasonable time in which the Contractor has to pay regardless of whether the Owner pays.

Contractors are always trying new ways to “shift the risk” of non-payment by the Owner.  What this means is that General Contractors do not want to pay a subcontractor or supplier unless the Contractor has received payment from the Owner.

This is true even when there is no objection to the work performed or material supplied.

Contractors first tried inserting “pay-if-paid” and “pay-when-paid” provisions in their subcontracts.   The provision can be as simple as stating: “Contractor will pay Subcontractor within 7 days of Contractor’s receipt of payment by the Owner”, or as specific as, “It shall be a condition precedent to Contractor’s obligation to make each payment to Subcontractor (including but not limited to progress payment, final payment, payment for extra work or changed work), if the funds for such payment have first been paid by the Owner to Contractor.”

The Legislature took care of the “pay-if-paid” provision with the contingent payment clause statute that allows an unpaid Subcontractor to reject the enforcement of the provision when the reason for non-payment by the owner has nothing to do with the work of the Subcontractor.  Knowledge of Chapter 56 of the Texas Business and Commerce Code is essential.

Chapter 56 does not apply to a “pay-when-paid” clause if the payment is to be made within a reasonable time.  The problem is that “reasonable time” is not defined in the statute.

To get around the “pay-when-paid” reasonable time standard, Contractors are now defining “reasonable time” in the subcontract.  A typical definition might be as follows:

In the event of non-payment by the Owner, the parties agree that Contractor shall pay Subcontractor within a reasonable time.  For the purposes of determining the timing of payment under these circumstances, the parties acknowledge and agree that a reasonable time for payment to Subcontractor is within 30 days after Contractor has exhausted all available rights and remedies in connection with recovery of payment from the Owner.

When considering how long the litigation process can take including appeals, Subcontractors could be waiting up to 10 years for payment under this definition.  When negotiating the timing of payment, I would suggest the following:

In the event of non-payment by Owner, Contractor acknowledges it will be obligated to pay Subcontractor with a reasonable time for work completed in accordance with the Contract Documents, and for which Owner has no complaint.  A reasonable time period for non-payment to Subcontractor shall be 120 days from the date Subcontractor submitted its application for payment, or 90 days from the date the project reaches substantial completion, whichever occurs first.

However, Contractors have devised an even more sinister way to avoid payment.  They are now getting the Subcontractor to assume the risk of non-payment by the Owner and accepting the risk that the Owner may not pay for the work performed.  This language could be devastating in a suit to collect the amount owed for canopies installed at a project.  A typical provision might say:

It is agreed by the parties that, if payment from the Owner for all or a portion of the Subcontract work is never received by Contractor, then Contractor will never have any obligation to pay the Subcontractor for such portion of the work not paid by Owner.  Subcontractor expressly assumes the risk of Owner nonpayment.

Never agree to such a provision.  The Contractor is always in the best position to determine the financial strength of the Owner, or the Owner’s creditworthiness.  It is the Contractor who has met with and worked with the Owner concerning the plans and construction budget.  The risk of non-payment by the Owner should always fall on the Contractor because it is the Contractor who can elect not to contract with the Owner if the Owner lacks funds or credit.

In many instances a Subcontractor elects whether or not to subcontract on a job because of the Contractor’s reputation.  Most Subcontractors do not elect whether or not to subcontract on a job because of the reputation of the Owner.  Most often the Subcontractor has no intimate knowledge about the Owner.

Murray | Lobb, PLLC. represents subcontractors in their negotiations with contractors and helps in collecting payment for work performed and materials supplied to a construction project.

New Technologies & Forbidden Debt Collection Practices

When the Fair Debt Collection Practices Act (“FDCPA”) was enacted back in 1977, it was designed to help the federal government protect consumers’ privacy rights, while monitoring and enforcing proper debt collection activities. It was also passed to protect the rights of “ethical debt collectors” whose lawful efforts were sometimes confused with those of competitors who took abusive shortcuts to recover outstanding debts.

Like most states, Texas has enacted its own similar statute entitled, The Texas Fair Debt Collection Practices Act, passed in 1997. It’s located in Title 5, Chapter 392 of the state’s Finance Code.

New Technologies Are Clearly Challenging the FDCPA’s Viability

During the past decade, various legal scholars and others have urged the federal government to update the FDCPA in light of the many new and emerging communication technologies. However, no agency could readily respond since Congress never conferred any future rule-making authority on the government entity when it first enacted the law.

Fortunately, after the Dodd-Frank Act was passed “in response to the financial crisis of 2008,” all FDCPA enforcement duties [including rule-making authority] were transferred to the new Consumer Financial Protection Bureau (CFPB).

At present, the CFPB is working hard to address the problems that are surfacing as debt collectors contact putative debtors by using automated dialers, Internet emails, text messages – and even Internet platforms such as Facebook and MySpace. At times, these new technologies appear quite appealing to debt collection agencies.

In fact, one company reported “increased payment rates by nearly 100% within five days” when text messaging was used. However, some privacy violations may have occurred and even prompted lawsuits. In another case, a debt collector used poor judgment when he posted a message on Facebook to the page of a putative debtor’s friend.

The FDCPA Is Responding & New Rules May Be Announced in the Near Future

As of November 2013, the Consumer Financial Protection Bureau (CFPB) took a “first step toward considering consumer protection rules for the debt collection market.”  In addition, the Federal Trade Commission (FTC) has remained heavily involved. In fact, at one point, the FTC sponsored a workshop so it could solicit suggestions from consumers, debt collection agencies, and others about the types of new rules required to address the many new technologies.

However, CFPB Director Richard Cordray is clearly leading the way. His bureau has been communicating with the public since late 2013 to draft new rules. (See the CFPB’s Advance Notice of Proposed Rulemaking, published in 12 CFR Part 1006).  Although an official publication date has not yet been announced, it’s very likely that new FDCPA rules will be issued during the next six to twelve months.

What Types of General Changes Are We Likely to See?

Broad FDCPA terms like “communication” will have to be expanded to include all new technologies. In addition, the FDCPA’s “disclosure requirement” will have to be “applied to new communication platforms that pose a threat to consumer privacy.”

The CFPB will also probably prevent debt collectors from forcing putative debtors to accept certain new forms of contact — without first obtaining their “express written consent” to such contact — especially when it “may cause consumers financial harm.”

Until new rules are released, debt collectors must remain cautious when contacting debtors via new technologies since the courts are quite sensitive to reasonable privacy concerns.

Will the Courts Remain Open to Debt Collectors’ Tech Dilemmas in the Future?

While new legal shifts can always occur, debt collectors appear pleased with the recent decision handed down in the New York case of Zweigenhaft v. Receivables Performance Management LLC. Stated succinctly, this case involved a young man who heard a voicemail left for his father. It made him aware that his father owed a debt.  The young man then returned the call and answered questions regarding his identity and the phone number he was using to place his call.

Claiming that the voice mail and conversation with his son “violated the FDCPA’s prohibition on third-party communications,” the father filed a lawsuit. In ruling against the father, the court held that to do otherwise “would place an undue restriction on an ethical debt collector in light of our society’s common use of communication technology.

Recent opinions like Zweigenhaft indicate that many courts remain eager to properly balance out the needs and concerns of both debt collection agencies and consumers. This type of unbiased approach remains crucial since so many people owe money in this country. In fact, during 2012, “approximately 30 million individuals, or 14% of American adults, had debt that was or had been subject to the collections process (averaging approximately $1,500).”

Conclusions

While we await the release of new rules to supplement the FDCPA, both common sense and conservative courtesies should continue to guide debt collection agencies as they use new technologies to contact putative debtors.  In addition, every effort must be made to reach the correct debtor directly. If messages are left, it’s always safest to avoid stating that any money is owed by the party you are trying to contact.

The Texas Margin Tax – H.B. 500

In 2013 the Texas Legislature enacted H.B. 500 which provided for a temporary margin tax rate reduction, a new minimum deduction, expanded deductions, new credits for certain taxpayers, and customer-based sourcing for Internet hosting receipts. The law went into effect January 1, 2014.

A franchise tax (or margin tax) is imposed on all taxable entities. Under H.B. 500 a “taxable entity” means a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity. The term includes a combined group. A joint venture does not include joint operating or co-ownership arrangements meeting the requirements of Treasury Regulation Section 1.761-2(a)(3) that elect out of federal partnership treatment as provided by Section 761(a), Internal Revenue Code.

For all taxable entities under this legislation, the revised tax base is the taxable entity’s margin defined as the lowest of the following:

  1. Total revenue less cost of goods sold;
  2. Total revenue less compensation; or
  3. Total revenue times 70%.

The margin tax is imposed at 0.5% on retail and wholesale trade businesses and 1% on all other taxpayers. The rate could be reduced provided the probable revenue estimates as certified by the Comptroller are calculated to offset any revenue lost by the rate reduction. In that event, H.B. 500 establishes temporary rate reductions as follows:

  1. 2014 – 0.4875% for retailers or wholesalers, and 0.975% for other taxpayers.
  2. 2015 – 0.4750% for retailers or wholesalers, and 0.950% for other taxpayers.

The rate for reports due in 2014 was actually reduced as indicated above. It is estimated by the Comptroller that probable revenue for the fiscal period applicable to 2015 will be sufficient to also allow for the rate reduction for 2015.

A taxable entity is primarily engaged in retail or wholesale trade if: (1) the total revenue from its activities in retail or wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trade; and (2) less than 50% of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and (3) the taxable entity does not provide retail or wholesale utilities, including telecommunication services, electricity, or gas.

Under H.B. 500, the retail or wholesale trade definition was expanded to include automotive repair shops, equipment rent-to-own transactions, and rental or leasing of tools, party and event supplies, furniture, or heavy construction equipment.

H.B. 500 adds certain deductions from margin tax apportioned to operations in Texas, including deductions for cost of solar energy devices, cost of clean coal projects, and relocation costs by certain taxable entities. H.B. 500 also provides for certain exclusions from revenue and amends the calculation of cost of goods as it applies to pipeline companies under certain circumstances, and as it applies to movie theaters. There is also a $1 million deduction from total revenue for small businesses.

The new sales sourcing rule for internet hosting companies provides that, for reports due on or after January 1, 2014, receipts are considered derived in Texas only if the consumer of the service is located in Texas.

The enactment of H.B. 500 created many changes to the margin tax and cost of goods rule, most of which are favorable to certain businesses. As a result of the more complicated margin tax and cost of goods sold calculations under this legislation, affected taxpayers should review these matters for previously filed returns, audits and future returns for potential refund claims and/or tax savings.

Collections – Pointers For Success

The first step in Collections is knowing your customer. And we mean, REALLY knowing your customer.

Collection of any debt starts at the very beginning of the debtor/creditor relationship.  Many of you may not think of yourselves as a creditor, but any time you sell a good or provide a service that is not paid via cash or credit card….that is a credit transaction.  Any time you invoice for your goods or services, you are extending your customer credit.  You are betting that your customer will pay per the agreement you have in place, usually net 10 or 30 days.

Too often only a name and address is obtained…however, have you actually verified this information?  For instance, the name “ABC Services” may not have any direct relation to the actual company name.  Here are some examples:

  •  “ABC Services” could be a partial name for the correct business, ABC Services and Construction, LLC. There could be numerous ABC Services.  You must know which one is your customer.
  • “ABC Services” could be an assumed name for John Doe.
  • “ABC Services” could be an assumed name for XYZ, Inc. or worse XYZ, L.P.

And what about that address?  Very often 123 Main is nothing more that a private postal mailing center.

Here are some pointers:

  • When dealing with an individual, get his/her full name and driver’s license number.
  • If you are dealing with a business, get the actual full name and ask what type of business entity they are.  A business entity will typically end with “Inc.”, “LLC”, or “LP”.
  • “Inc.” indicates a corporation.  Find out where it was incorporated and obtain its registered agent and registered address.  Never solely rely on a P.O. Box.  Always obtain a physical address.  If the registered agent is a corporation such as CT Corporate Systems, also get at least one officer’s name and physical address.
  • “LLC” indicates a limited liability company.  Obtain the same info as a corporation.  In this case you also need to ask for the manager’s name and address and its members names and addresses.
  • “LP” indicates a limited partnership.  Obtain the same information as for the other entities, and also obtain the name and address of the general partner.  A general partner of a limited partnership is jointly and severally liable for the debt.  Be aware that the general partner is often a corporation or a limited liability company.  In that case, obtain the requisite info for that entity.
  • Obtain the name and address of a bank reference where they maintain their bank account.  Always keep a copy of any checks received from the customer.  At “crunch time” in the collection process, you might be able to garnish the bank to collect your debt.

These simple beginning steps will go a long way to help you when your customer doesn’t pay and you have to start the collection process.  Being able to give this information to your attorney will save you time and money.  If you need assistance in collecting a debt, please keep Murray-Lobb, PLLC in mind.