The Extraordinary Tools of Bankruptcy: Cancelling All (or Almost All) Garnishments
Most garnishments are stopped immediately if you file bankruptcy. But you don’t want to file too late.
The “Automatic Stay”
You’ve likely heard that the filing of a bankruptcy case stops virtually all collection activity by your creditors against you, your money, and your property. That it stops creditors’ phone calls, foreclosures, lawsuits, vehicle repossessions, and, yes, paycheck garnishments.
And you’ve also heard that garnishments are stopped instantaneously.
But there’s more to this story.
Garnishments Arising from Judgments
Most paycheck garnishments occur after a creditor sues its debtor and gets a judgment in court stating that the debtors owes the creditor a certain amount of money. Most judgments by creditors are entered “by default,” meaning that the person allegedly owing the debt does not file an “answer” to the lawsuit’s complaint. So the court grants to the creditor a judgment for what the creditor asked for it its complaint.
The judgment enables the creditor to get the court to issue a garnishment order to be sent to your employer. That order requires your employer to pay a portion of your paycheck to the creditor to go towards satisfying the amount stated in the judgment. The garnishment is said to enforce the judgment.
Garnishments from Judgments ARE Virtually All Stopped
Details about the garnishment process—how much can be taken from your paycheck, the exact procedure to be used, and such—differ from state to state. What IS the same throughout the country is that virtually all garnishments like this are stopped by a bankruptcy filing.
Federal bankruptcy law says that the very act of filing a bankruptcy case operates to stop “the enforcement, against the debtor [the person filing bankruptcy], … of a judgment obtained before the commencement of the [bankruptcy] case….” Since garnishment is a form of enforcing a judgment, bankruptcy stops such garnishments.
Acting Affirmatively to Stop Garnishments
The statement that garnishments are stopped immediately needs to be clarified. Once your bankruptcy case is filed in the bankruptcy court, and the creditor is so informed, it may not take any action to garnish wages. In fact the creditor (or its attorney) must affirmatively act to stop a garnishment it has previously put into motion. For example, if the state’s laws provides for continuous garnishment—a single order acts to garnish each successive paycheck until the judgment is paid in full—the creditor is obligated to do whatever is required to terminate that order, instead of just doing nothing and allowing the garnishments to continue.
Timing Is Critical
When trying to stop a garnishment with a bankruptcy filing, timing is everything. What if at the time your bankruptcy case is filed your employer has received the garnishment order, it has deducted the garnished amount from your paycheck, but has not yet mailed that amount to the creditor? Can the creditor demand the money because the paycheck was garnished before your bankruptcy was filed? Or what if your employer has already sent the money to the creditor who simply hasn’t yet deposited it? Can the creditor keep the money or must it return the money to your employer and thus to you?
Generally, if the money is still in the hands of the employer at the time of the bankruptcy filing, the employee get it. But if the money has reached the creditor before the filing, the creditor is entitled to keep it.
However, the answers to these and related timing questions may depend on different state’s garnishment laws and procedures, and on differing bankruptcy court interpretations about how the automatic stay applies to the particular facts of a case.
The practical solution—whenever possible—is to file your bankruptcy case sooner rather than later to avoid any such hair-splitting, to ensure that the garnishment is stopped and you get your full paycheck.