If you have been approved for long-term disability insurance (LTD) benefits after having to leave work due to disability, you likely have a number of financial concerns. One of these in most cases is “Can long-term disability be garnished?” under any of several circumstances, depending on your unique situation. An individual’s options for protecting LTD income from garnishment generally depend on the parties who might potentially seek garnishment. The answer to “Can LTD benefits be garnished by creditors?” is often different when your primary creditors are private enterprises than when you owe significant amounts in unpaid taxes or have a history of arrears in child support payments. Long-term disability payments are protected from private creditors under most circumstances, although you may wish to consult an attorney if you owe money as the result of an unfavorable court judgment. Payments owed for taxes, both state and federal, and for child support, are generally exceptions to the protections against garnishment of long-term disability payments that apply in most other situations.
What Is Garnishment?
Garnishment is the name for a legal process whereby a party who is owed money seizes assets that are held by a third party on behalf of the debtor. Most of the time, garnishment requires the creditor to obtain a court order, but there are certain limited exceptions to this rule. State and federal agencies may be able to order garnishment on their own authority.
Garnished Wages
The type of garnishment with which people are likely to be most familiar is wage garnishment, in which an individual’s employer is ordered by a writ of garnishment to redirect a portion of the employee’s pay to the individual’s creditor. However, garnishment is not restricted to wages.
What Income Is Exempt From Garnishment?
Almost any type of asset can be garnished, although federal regulations protect a portion of an individual’s assets from garnishment under most circumstances. The garnishment process tends to be used more often with financial assets than with other forms of property, but can easily be applied to non-wage forms of income. Protecting LTD income from garnishment is therefore a significant priority for many individuals who rely on their disability benefits to survive.
Can a Collection Agency Garnish Disability Benefits?
Often individuals who have to leave their jobs due to disability accumulate significant debt between their final paycheck and the first disbursement of their long-term disability benefits. LTD benefits replace only a percentage of the insured person’s pre-disability income, so unless the individual has swift access to additional resources the shift from working pay to disability benefits will usually mean a significant change in the person’s financial circumstances.
Can LTD Benefits Be Garnished by Creditors Due to Missed Payments?
The workers most likely to be covered by long-term disability insurance tend to be concentrated in the upper quintiles of income. One implication of this reality is that many of the people who hold long-term disability insurance policies also have lifestyles and regular expenses established with the assumption of a substantial income in place.
Why Debt Accumulates in the Early Stages of a Disability
Although the percentage of long-term disability recipients for whom this broad generalization holds true may have more latitude for reducing expenses by “downsizing” and making other lifestyle changes, as a practical matter these adjustments take time. Even when an individual is proceeding from a clear financial management strategy, any financial obligations that cannot be resolved right away will continue to accrue debt in the meantime. The situation can be especially difficult for those who face initial denials of their long-term disability claims, as even a successful appeal prolongs the period in which the disabled individual is totally without income.
Protecting LTD Income From Garnishment
Given all of these factors, it is not surprising that one of the first questions many people ask when they are finally approved for long-term disability benefits is, “Can LTD benefits be garnished by creditors?” The answer is that in most cases private creditors will find it difficult to obtain writs of garnishment for disability income. However, there can be exceptions for certain types of debt, and states differ in the degree of protection they afford to disability benefits compared to other forms of income.
State and federal agencies can often garnish an individual’s income without first obtaining a court order, so that may be another factor to keep in mind. If protecting LTD income from garnishment is a significant priority for you, you may wish to consider speaking with an attorney who is familiar with the laws regarding garnishment in your jurisdiction.
When Can Long-Term Disability Be Garnished?
Although disability benefits enjoy some degree of protection, the answer to “Can long-term disability be garnished?” is not necessarily no in all situations. Common circumstances under which the law allows for garnishment of long-term disability payments include court-ordered fines, child support obligations, and unpaid taxes.
Can IRS Garnish Long-Term Disability?
The circumstances under which garnishment of long-term disability benefits can be garnished may be limited, but unpaid taxes constitute one of the most common examples of those circumstances. Whether the unpaid tax exception is likely to apply in your particular situation can depend on a few factors.
Income Changes and Tax Liability
Federal income taxes are usually estimated based on an individual’s earnings in the preceding tax year. For individuals who must leave their jobs in the middle of one of these tax cycles due to illness or injury, this can sometimes mean that the year in which they become disabled can result in a significant change in income that may affect their tax liability. On the one hand, a significant drop in income can mean that an individual’s tax estimates exceed their earnings for the year. On the other hand, the weeks or months in which an individual earns no wages due to the onset of disability or lengthy elimination periods will also typically be periods in which the person pays no taxes.
Factors Affecting Tax Liability in the First Year of Disability
Whether you personally see a tax refund vs. owing tax can depend partly on how much of the year you were able to work, the point at which you were approved for short-term disability (STD) or long-term disability benefits, and whether these benefits were themselves taxable in each case. Another factor that can make a difference is whether your pre-disability income saw a substantial year-over-year increase or decrease in earnings per pay period.
The trend in most instances is for employees to accrue periodic wage increases as they advance in their careers, but individuals who are struggling with a disabling condition that manifests gradually often find themselves trying a variety of strategies, such as scaled-back working hours or unpaid medical leave, in attempts to avoid having to leave the workforce altogether. These experiments in disability accommodation can sometimes be reflected in uneven pay over the course of several months.
Is Long-Term Disability Protected From Garnishment?
Individuals wondering, “Can long-term disability be garnished?” can benefit from realizing that the answer is more complicated than a simple yes or no. A different answer may apply to “Can LTD benefits be garnished by creditors?” than will work for the garnishment of long-term disability payments for unpaid taxes or child support obligations. Protecting LTD income from garnishment by private creditors is often possible, with careful financial planning. In many cases, however, any strategies for effectively managing long-term disability benefits will need to take into consideration the fact that both state and federal agencies typically have much greater authority for all forms of asset seizure, including garnishment of long-term disability payments, than will private creditors. State laws may also impact the strategies available for protecting LTD income from garnishment, as well as the likelihood that creditors will be granted writs of garnishment for income sources of all kinds. As you plan for balancing debt resolution with long-term disability financial planning, you may wish to consider speaking with an accountant or disability law attorney who can help you evaluate the options that apply to your personal situation.
