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Stopping A Wage Garnishment

One of the most common economic events that will push a person into filing bankruptcy is a wage garnishment. An individual’s financial situation is often in some sort of disarray by the time he or she meets with an attorney and decides to declare bankruptcy. By then the bankruptcy case may contain a repossession, foreclosure or one or more judgments. For a family already struggling with debt, a wage garnishment can spell disaster.

Fortunately, the federal bankruptcy law will immediately stop a wage garnishment and could return some or all of the garnished wages to the individual. I’m sensing a lot of people are reading this with a sigh of relief and I don’t blame them.

An automatic stay stops the garnishment

When you file bankruptcy, the federal automatic stay takes effect. The automatic stay is a powerful legal injunction that stops all collection actions cold.

Any pending legal action, such as a wage garnishment, must also immediately end. As a practical matter, it will take some time for the issuing court, the collecting agency (often the county sheriff), the creditor or its attorney, and your employer to receive notice of the bankruptcy case filing. Attorneys generally send these notices immediately after filing but it’s the creditor’s responsibility to ensure that no further collection action takes place while the automatic stay is in effect.

Most courts see “doing nothing” to stop a wage garnishment is effectively a violation of the stay injunction and is penalized by contempt of court. Good news isn’t it?

What happens to garnished money?

Once the wage garnishment is stopped, the next question debtors tend to ask is, “Can I get my money back?

The Bankruptcy Code generally permits recovery of garnished wages as a “voidable preference,” but there are conditions. The transfer of the debtor’s interest in property (your wages) must be:

  1. more than $600
  2. to or for the benefit of a creditor
  3. for a prior debt of the debtor’s (called an “antecedent debt”)
  4. at a time when the debtor is insolvent, and
  5. within 90 days prior to the filing of the bankruptcy petition. 11 USC §547(b)(1-4).

The most important question in the “voidable preference” calculus is usually when the transfer was made. Most courts hold that the transfer of funds held by an employer occurs when the employer is served with the garnishment order, not when the funds are delivered to the creditor.

Example 1: On September 1, creditor issues a garnishment order on the debtor’s employer. $700 is collected on September 1. On November 15, the debtor files bankruptcy. The debtor filed bankruptcy within the 90 day preference period, so the garnished wages are collectible from the creditor.

Example 2: On September 1, creditor issues a garnishment order on the debtor’s employer. $700 is collected on September 1. On December 15, the debtor files bankruptcy. The debtor filed bankruptcy outside the 90 day preference period, so the garnished wages are not collectible from the creditor.

Example 3: On September 1, creditor issues a garnishment order on the debtor’s employer. $500 is collected on September 1. On November 15, the debtor files bankruptcy. The debtor filed bankruptcy within the 90 day preference period, however the garnished amount is less than $600, so the garnished wages are not collectible from the creditor.

The Bankruptcy Code states that the transfer of the property can only be made when the debtor has acquired rights in the property transferred. 11 USC §547(e)(3).

Most courts hold that the 90 day preference period is measured from the time the garnishment lien actually takes effect. Since the debtor does not acquire rights in wages until they are earned, a previously issued garnishment has no effect on the property until it belongs to the debtor. See Morehead v. State Farm Mutual Automobile Insurance Company (In re Morehead), 249 F.3d 445, (6th Cir.2001).

Example 1: On September 1, creditor issues a garnishment order on the debtor’s employer. The debtor’s payday is September 14, and $700 is collected. On December 5, the debtor files bankruptcy. The debtor filed bankruptcy within the 90 day preference after the wages were earned, so the garnished wages are collectible from the creditor.

Example 2: On September 1, creditor issues a garnishment order on the debtor’s employer. The debtor’s wages are garnished on September 1 for $200, September 8 for $200, and September 15 for $201. On December 5, the debtor files bankruptcy. Less than $600 was garnished within the 90 day preference period, so none of the garnished wages are collectible from the creditor.

Who can collect?

The Bankruptcy Code grants a Chapter 7 Bankruptcy Trustee or a Debtor in Possession the power to avoid preferential transfers. Typically, the debtor identifies the garnished wages in the bankruptcy schedules, then uses federal or state exemptions to protect the funds.

In some cases, a small preferential transfer, such as $620 garnished within the 90 days before bankruptcy, is not enough for the trustee to seek recovery, open an estate, and pay creditors. In those cases, the debtor should request that the trustee abandon his or her interest in the property, and the debtor can seek the return of the funds. 11 U.S.C. § 522(h).

The take home

Can it be done? Can a bankruptcy stop a wage garnishment? Yes, as long as certain conditions mentioned above are met. Most of the time they are, but always remember to speak with your bankruptcy attorney who will help you get everything in order and in a timely fashion – that is one of the main keys to stopping wage garnishments.