When a creditor starts to take a chunk out of your pay cheque it will make a bad situation worse.
From the creditor’s point of view, wage garnishment is one of the most immediate and effective forms of debt collection. When it occurs, a portion of your income is taken directly from your pay before you receive it. For most Canadians this wll result in instant financial chaos – how will you pay your rent, buy food, make car payments without 20% to 50% of your take home pay?
In Canada, wage garnishments can be initiated by different types of creditors
Understanding how garnishments work and how they can be stopped is an important step toward regaining control of your financial situation.
What Is a wage garnishment?
A wage garnishment is a legal process that allows a creditor to collect money directly from your employer. Your employer is required to send a portion of your wages to the creditor instead of paying In Canada the amount varies by Province (for example in Ontario the maximum s 20% but in BC it is 30%). However, CRA can take up to 50%. Deductions for family support obligations are a separate area not addressed here. You should speak with a family law lawyer or a licensed insolvency trustee is you are being garnisheed for family support obligations.
Wage garnishments in Canada can happen in two different ways:
All creditors (except CRA for taxes and other monies owed to the Crown) can issue a garnishment order under the Income Tax Act without the need for any court order. Other creditors require a court order before they can garnish wages. This process involves legal proceedings that you can defend against and therefore takes time. These are known as judgment creditors.
The Canada Revenue Agency has broader powers and can initiate garnishment without a court order. This means that they did not have to prove to a judge that you owed the money. CRA can (and does) move very once a tax debt is outstanding.
Because of these differences, CRA garnishments are often more difficult to manage through informal means.
Why garnishments occur
CRA garnishments generally occur after a period of missed payments in any tax payment arrangement you may have made or unresolved debt or failure to respond to CRA (e.g. file returns, deal with notices of assessment and demands for payment, contact the collections officer, file an objection to a tax assessment or appeal) in a timely manner. That is, if you stick your head in the sand and hope CRA will go away you are likely in for an unpleasant garnishment surprise.
For other unsecured creditors, garnishment usually follows collection activity (letters, collection agency involvement) that does not bear results and ends in a law suit against you. Many folk, unfortunately, do not defend the lawsuit (logically, these folk are likely short of cash to hire a lawyer, do not have the skills to file the court papers and attend in court alone) and end up with a default judgment. That default judgment comes with or is quickly followed by the right to start a garnishment.
In both cases, garnishment is typically not the first step. It is the result of a situation that has escalated over time.
Immediate impact on financial stability
The most significant impact of a wage garnishment is the reduction in available income.
When income is reduced, fixed expenses such as rent and utilities do not change. This can create a gap between income and expenses that must be managed.
For many individuals, this leads to:
- Increased reliance on credit
- Missed payments on other obligations
- Ongoing financial stress
- An accelerating debt spiral
At this stage, the focus shifts from managing debt to stopping the garnishment and stabilizing income.
Once the wage garnishment has started how do you STOP it?
There are several ways, including:
- Pay the debt – by selling something you own or taking a new loan (which could lead us to a whole other discussion that debt generally does not solve debt)
- Enter into a repayment plan that is acceptable to the creditor. Unfortunately, you are bargaining from a veery weak position – the creditor already has the garnishment and spent time and money to get there. They are unlikely to give it up for lower payment unless they get something else (e.g. a guarantor or security)
- Credit counselling plans – but these are voluntary for the creditors so the same challenge as in repayment plans kicks in.
- Orderly repayment of debts – this is only available in Alberta but can be an effective tool if you can pay 100% of all your debts in a time frame acceptable to the courts.
- File for protection under Federal law that can be in place in 24 hours and provides full and instant protection stopping most garnishments (CRA is stopped but not, for e.g. family support obligations or criminal fines).
How bankruptcy stops wage garnishment
Filing a Canadian bankruptcy stops most wage garnishments related to unsecured debts, including those initiated by the Canada Revenue Agency or through court orders.
When bankruptcy documents are filed by a Licensed Insolvency Trustee, a legal protection known as a stay of proceedings immediately takes effect.
This stay requires creditors to stop all collection actions, including wage garnishments and lawsuits. There are a few creditors that are outside of this so check with the Licensed Insolvency Trustee.
When the bankruptcy is filed, the Licensed Insolvency Trustee will send a notice to your payroll department, the creditor and/or the court that ordered the garnishment instructing them to stop.
By addressing other debts through bankruptcy, it usually become easier to manage any remaining obligations (such as family support obligations).
How a consumer proposal stops wage garnishment
A Canadian consumer proposal can also stop wage garnishment.
Like bankruptcy, a proposal creates a stay of proceedings when it is filed. This legal protection requires creditors to stop collection activity, including garnishments. The same process as described above stops the garnishment.
The difference lies in how the debt is resolved.
A consumer proposal allows you to repay a portion of your debt through structured payments over time. This can be an appropriate option for individuals who have income but cannot maintain current obligations.
Stopping the garnishment is only part of the solution. The proposal also provides a structured way to address the underlying debt.
The importance of acting quickly
Timing is critical when dealing with wage garnishment.
Once a garnishment is in place, each pay period is affected. The longer it continues, the greater the financial impact on you.
Taking action early can:
- Reduce the total amount collected through garnishment
- Prevent further financial disruption
- Create a structured path forward
Delaying action may limit available options and increase financial strain. It also causs your employer to have to do work they would rather not do – deduct the funds and remit as instructed by the court (or directly to CRA).
What happens after garnishment stops
Stopping a garnishment is usually not the final step. It is often the beginning of a structured solution.
Once the garnishment is stopped through either a consumer proposal or bankruptcy, the focus shifts to resolving the debt itself.
This involves:
- Completing the requirements of the chosen process
- Maintaining any agreed upon payments
- Reestablishing financial stability
The goal is not only to stop collection activity but to prevent it from recurring.
A practical example
Consider an individual who has fallen behind on tax obligations and unsecured debt.
If the CRA initiates a wage garnishment, a portion of their individual’s income is paid “off the top” to the CRA/ This would likely reduce the ability to cover rent and other essential expenses.
By filing a consumer proposal, the garnishment can be stopped, and the debt can be restructured into a manageable monthly payment.
Alternatively, if a settlement proposal is not feasible, filing a Canadian bankruptcy will stop the most garnishments and eliminate the debt after completing required duties.
The appropriate option depends on the individual’s financial situation. Speak to a LIT to understand all your options. These consultations are available at no cost by a licensed professional.
Why informal solutions may not work
Some individuals attempt to stop garnishments through informal arrangements with creditors.
While this may be possible in certain cases, it has limitations.
Creditors are not required to stop garnishment unless a formal legal process is in place. Even if an agreement is reached, it may not provide the same level of protection as a consumer proposal or bankruptcy.
For CRA garnishments, informal arrangements are particularly difficult because of the agency’s collection powers.
The role of a licensed insolvency trustee
Licensed Insolvency Trustees are the only professionals authorized to file a consumer proposal or bankruptcy in Canada.
They are required to help you understand your financial situation and explain how each option would affect your income, your assets, and your obligations.
Their role is to provide a clear understanding of your options so that you can make an informed decision.
Understanding your options
When facing a wage garnishment, it is important to understand that there are solutions available.
Moving forward
Wage garnishment can feel immediate and difficult to manage, but it is not without resolution.
Understanding how garnishments work and how they can be stopped provides a starting point.
From there, the focus shifts to selecting a solution that aligns with your financial situation and allows for long term stability.
Acting early and seeking accurate information can make a significant difference in the outcome.