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Garnishment and Bankruptcy

If you have been sued to collect on a debt, you are at risk of a wage garnishment. If you have unpaid bills headed for collections–for medical debt, credit cards, broken lease, auto loan deficiency, personal loans, mortgage deficiency and even unpaid student loan debt—a wage garnishment may be coming your way.

Wage garnishments are used by creditors to collect on debts you aren’t paying voluntarily. They are the way creditors force you to pay back the debt. To get a court order for a wage garnishment, the creditor must first get a judgment against you in court. Once they have a judgment against you for the amount of debt you owe, they can have the court issue a Writ of Garnishment which can be served on your employer, or even your bank account.

Each State has different laws that control how much a creditor can garnish from your wages. Here in Colorado, where I practice debt relief and bankruptcy law, the creditor can take 25% of your paycheck after taxes and insurance are taken out until the entire debt is paid (this includes any interest that has built up over time). Ouch!

Bankruptcy Can Stop Garnishment Immediately

If you are suffering through a wage garnishment you may want to explore whether bankruptcy is a good option for you. Bankruptcy will immediately stop a garnishment (even if already served on your employer and happening to you) and can get you out of other debts that haven’t gotten to the point of garnishing yet. If a wage garnishment is making it difficult or impossible to pay for necessities, like rent or utilities, then you must consider bankruptcy.

Creditors will usually never stop a garnishment voluntarily. They don’t care that you can’t pay the rent or make your car payment, they just want to get paid on the debt. Additionally, your employer cannot refuse to take the garnishment out of your pay. The law says that an employer who refuses a garnishment becomes legally liable for your debt. Again, ouch!

There are only two sure ways to stop a garnishment: pay the debt in full or file bankruptcy. Therefore, the decision to file bankruptcy or not hinges on how the bankruptcy will affect your other property and other debt. For instance, if you are being garnished for a student loan (and here, the 25% rule is different, student loans are only allowed to garnish 15% of your take-home pay) or for most tax debts, you may be able to stop the garnishment temporarily by filing bankruptcy, but since these debts aren’t discharged in bankruptcy it will only be a temporary fix. (For more on discharging taxes in bankruptcy, see http://winkandwink.com/blog/can-i-get-rid-of-taxes-in-bankruptcy/269/ )

This is where I have to advise you to seek a free consultation with a bankruptcy attorney. It is always a good idea and that is what we’re here for, to give you advice and let you weigh your options after learning the facts. If bankruptcy is a good fit for your income and assets and you can stop the garnishment immediately upon filing, that is usually a no-brainer and you will want to get your case filed as soon as possible.

Garnishments Can Create Preference Payments

If you were being garnished prior to your bankruptcy filing, this can create a situation where the trustee in your bankruptcy can go to the garnishing creditor and get back the past 90 days of garnished wages. This is because the Bankruptcy Code does not allow you to pick and choose who gets paid before you file bankruptcy, and it does not allow the most aggressive creditors to benefit by garnishing you before you file bankruptcy. Amounts garnished can be “preference payments” because the garnishing creditor is preferred over other creditors. The Bankruptcy Code casts a wide net here and says that any amount above $600 paid to any creditor on an old (“antecedent”) debt in the 90 days before filing can be recovered by the bankruptcy trustee and distributed to your creditors.

If the garnishment amount paid to the creditor in the 90 days before filing your case totals more than $600, the creditor will have to give the money garnished in the 90 days before you filed bankruptcy to the trustee. The trustee then distributes the recovered funds to your creditors.

Unfortunately, you don’t get the money back. However, the trustee recovery of a preference payment can benefit you. If you have any “priority” tax debt or unpaid domestic support obligations which are not discharged in your bankruptcy, the garnished funds recovered as ‘preference payments’ will go to pay these debts. This is true of any assets collected in your Chapter 7 bankruptcy.
However, the trustee’s recovery of ‘preference payments’ can cause a problem when your non-exempt assets which the trustee could take from you in bankruptcy would otherwise not have been significant enough for the trustee to collect them and turn your case into an “asset” case. In such cases, the recovery of the ‘preference payment’ creates an estate to distribute to your creditors. Once this happens, the trustee will take whatever he/she can from you, however small.

This is the type of nuance a bankruptcy attorney can easily spot and will consider when determining the best timing for filing your case. Usually, it is best to file the case as soon as possible to prevent the garnishment form getting large enough to create a preference payment situation. However, the down side of having a bankruptcy case where assets are collected is usually far smaller than suffering through an extended garnishment.

The bottom line is that bankruptcy can immediately stop a garnishment and that garnishments can make a bankruptcy a bit more complicated. Getting solid legal advice prior to and during your bankruptcy filing is a good idea if you are being garnished. Having an attorney also makes it easy to get the garnishment stopped once your case is filed. Attorneys know exactly what to get to whom to make the painful process come to a screeching halt.