The Extraordinary Tools of Bankruptcy: Preventing Resumed Garnishments
Most garnishments are stopped immediately if you file bankruptcy, but some may be able to continue later. Here’s how to prevent that.
What Happens to Garnishments After They Are Stopped by Bankruptcy?
Almost all paycheck garnishments are stopped by the “automatic stay,” the federal law preventing the collection of debts, which goes into effect immediately when your bankruptcy case is filed. But the automatic stay expires at or near the end of your case. What then?
Most of the time the debt for which your paycheck was being garnished will be “discharged”—legally written off—in your bankruptcy case, making any further collection of the debt illegal. That includes garnishment.
But what about those unusual debts not discharged in bankruptcy? Among the most common debts not discharged in bankruptcy are 1) back child and spousal support, 2) relatively recent income taxes, 3) student loans, and 4) debts incurred by fraud.
1) Child and Spousal Support Arrearage
Let’s first distinguish between ongoing monthly child and spousal support and support arrearage (support past due as of the day your bankruptcy is filed). Bankruptcy does not affect ongoing support—neither Chapter 7 nor Chapter 13 stops ongoing support. The “automatic stay” does not apply.
As for support arrearage, neither Chapter 7 nor 13 can discharge this kind of debt. Also, the automatic stay protection does not stop collection of support arrearage in a Chapter 7 case. However, a Chapter 13 case WILL do so. In other words, if you are behind on support payments at the time your bankruptcy case is filed, under Chapter 13 you can stop a wage garnishment for the back support (but not for the ongoing monthly support obligation). To prevent the garnishment for back support from being reimposed while your case is open, you must keep current on your ongoing support, as well as arrange to pay the back support in full through your Chapter 13 plan. Otherwise your ex-spouse or support enforcement agency can quickly get the bankruptcy court to give permission to start garnishing your paycheck again for the support arrearage.
2) Recent Income Taxes
A Chapter 7 “straight bankruptcy” can discharge some (generally older) income taxes, but cannot discharge other (generally younger) income taxes. If you have some income taxes which are not going to be discharged, then as soon as the discharge is entered in your case—usually no more than about 4 months after your case is filed—the automatic stay will end. At that point the IRS and/or state taxing authority can either resume or start garnishing your paycheck. You may well be able to prevent this by proactively entering into a monthly payment program or by offering to settle the debt.
Or you can file a Chapter 13 case instead of a Chapter 7 one. This “adjustment of debts” option keeps the automatic stay in effect throughout the 3-to-5-year length of the case, giving you time to pay it under very flexible terms without the IRS/state being able to garnish your paychecks. By the end of the Chapter 13 case you are required to have the taxes paid in full (the ones that can’t be discharged), although usually without any additional interest and penalties.
3) Student Loans
Discharging student loans under either Chapter 7 or 13 is very difficult, requiring a showing of “undue hardship.” That’s much harder to do than it may sound.
Assuming you do not qualify for “undue hardship,” if you file a Chapter 7 case any wage garnishment will stop during the 3-4 months or so that the case is open. But as soon as the discharge (of other debts) is entered (and usually the case is closed) a garnishment can resume or a new one can start.
Similar to the discussion above about non-dischargeable income taxes, if you instead file a Chapter 13 case the automatic stay usually remains in effect throughout the length of the case, preventing any collections, including garnishment. But unlike recent income taxes, there is no obligation to pay the student loan in full during the course of the case.
As a result, you can usually put payments on your student loan(s) on hold during the 3-to-5-year Chapter 13 case, and also prevent any garnishment of your paychecks and other collection activity. But as soon as your case is completed, you would be in serious default on the student loan(s), and likely owing a substantial amount of additional interest and fees.
One other alternative is to use the extended protection of Chapter 13 to get to a point in life when you would have a better chance of qualifying under the “undue hardship” standard, if you have a worsening medical condition, or perhaps if you are approaching retirement age.
4) Fraudulent Debts
Under either Chapter 7 or 13 a creditor can challenge your ability to discharge a debt based on allegations that you entered into the loan or purchase through some material misrepresentation or fraud. If such a creditor has gotten a court judgment against you and is garnishing your paycheck at the time your bankruptcy case is filed, it must stop this ongoing garnishment immediately. Then it must file a formal complaint in bankruptcy court—even if it had already prevailed in a court case—raising the fraud/misrepresentation allegations. The creditor must convince the bankruptcy judge that the facts of the case justify not discharging the debt. If the judge declares that the debt is not discharged, then the creditor can start or resume wage garnishment. However, creditors are usually willing to work out payment arrangements instead.
If a creditor believes it has grounds for preventing discharge of the debt, it must file the complaint within a quite short timetable—generally within about 3 months of the filing of the bankruptcy case (specifically, within 60 days of the “meeting of creditors”). If a creditor which received notice of your bankruptcy case fails to file its complaint by the due date, it forfeits its right to object to the discharge of the debt. In this situation the debt would get discharged, it could never pursue the debt, and so could not garnish ever again.