Wage Assignments in Loans and Credit Contracts

Watch out for contract provisions that allow creditors to deduct past-due loan payments from your paycheck.

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Some consumer loans and credit contracts contain wage assignment provisions – these are contract provisions that allow the creditor to collect overdue debts directly from your paycheck, without first suing you and getting a court judgment. Luckily, wage assignments are prohibited in many types of contracts.  But there are some exceptions.

Be sure to watch for these provision in contracts. In most cases, you probably don't want them.

(To learn about other contract provisions to avoid, see What to Watch Out for in Loan and Credit Contracts.)

Prohibitions on Wage Assignments

Federal law and some states prohibit creditors from including most types of wage assignment provisions in consumer credit contracts. However, there are some circumstances when creditors might be allowed to include a wage assignment provision in your contract.

The contract allows you to revoke the wage assignment whenever you want.  If you can revoke the wage assignment, it will most likely be allowed.

Loans with payments deducted from your paycheck. Wage assignments for past-due payment may be allowed if, when you first got the loan, you set up a payment plan with payments being deducted from your paycheck. This type of payment plan is often used by credit unions. It works like this – each time you are paid, your employer deducts a sum of money from your paycheck and sends it to the lender.

Although this kind of wage assignment is legal, you might find it overly intrusive and prefer to pay on your own. On the other hand, you may be able to get credit from your credit union this way, when you cannot get credit elsewhere.

Real estate purchases. Laws limiting wage assignments don’t apply to real estate purchases.

State Limits on Wage Assignments

Wage assignments are further limited in a number of states. For example, in many states, if you’re married, your spouse must consent before the lender can take a voluntary wage assignment.

To learn about wage assignment limits in your state, get Credit Repair, by Margaret Reiter and Robin Leonard (Nolo).

Parts of this article were excerpted from Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard (Nolo).

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