Question: An employee who has child support withheld from his pay declared bankruptcy. We received a bankruptcy order that requires us to withhold $330 monthly. However, after withholding taxes and child support, there isn’t enough money left to honor the bankruptcy order without violating the Consumer Credit Protection Act’s (CCPA) rule that not more than 50% of an employee’s disposable pay can be withheld for child support. The bankruptcy trustee said that the 50% limit doesn’t apply, but this seems wrong to us. Who’s correct?
Answer: The bankruptcy trustee is correct. Bankruptcy orders have priority over child support withholding orders. However, dependent children are creditors, and among the employee’s creditors, they get paid first.
Once a bankruptcy is in the works, garnishments for all creditors, including dependent children, are supposed to stop. You should notify the state child support agency of the bankruptcy. For practical reasons, the child support order may continue, though.
Question: To avoid a tax levy, an employee wants to sign a voluntary withholding agreement with the IRS under which the company will withhold $92 every pay period. However, this employee works part time and withholding $92 would exceed the CCPA’s 25% limit. Even more important from the company’s perspective, it would leave him with less than the minimum wage. Can this agreement be honored?
Answer: Yes. Voluntary withholding agreements aren’t subject to the CCPA’s limit on withholding, because the IRS isn’t a commercial creditor. However, since the employee will take home less than the minimum wage, it’s to the company’s advantage to document his understanding of the agreement.