The Extraordinary Tools of Bankruptcy: Recovering Money After It’s Garnished
If you lost money through garnishment during the 90 days BEFORE filing bankruptcy, that money may be returned to you or a favored creditor.
Pre-Bankruptcy and Post-Bankruptcy Garnished Money
Whether a creditor grabbed some money from you by garnishment before or after you file bankruptcy determines how you could go about getting it back. Today’s blog post is about garnishments before filing bankruptcy. The next one will be about garnishments that happen after filing.
The Extraordinariness of “Preferences”
In most respects bankruptcy focuses on your present financial circumstances and, especially with Chapter 13, on your future. Bankruptcy does not care so much about the past—about what happened to you before you filed your case. But one big exception is the law of “preferences.”
A “preference” is a payment or transfer from you to a creditor made within a short time before you file bankruptcy which, under certain circumstances, the creditor can be required to return after you file bankruptcy. That payment or transfer can be voluntary on your part, or involuntary as in the garnishment of your paycheck. The focus here is on money a creditor takes from you through garnishment.
How Can Preference Law Undo a Garnishment Completed BEFORE Bankruptcy?
One of the key principles of bankruptcy law is to treat creditors fairly. Preference law aims to help creditors be treated fairly not just during a bankruptcy case but also before that case is filed—at least for a limited period of time beforehand.
Preference law tries to even the playing field between those creditors who got some money out of a debtor within a short period of time before bankruptcy and all the rest of the creditors. This is done by requiring the creditor who received money shortly before the filing of a bankruptcy case to pay that money back so that all the creditors can share in it. It’s like a parent making an overeager child give back the dessert he had grabbed and saying, “Everyone must share.”
The Key Details of Preference Law
Specifically, if a creditor garnishes your paycheck within the 90 days before your bankruptcy is filed, and gets more than $600, the creditor will be required to pay back the money garnished.
Where that money goes depends on whether it is exempt—protected from your creditors, and thus protected from the bankruptcy trustee who stands in for the creditors. Whether or not the garnished money can be exempted in your particular case is beyond the scope of this blog post. But if that money is exempt, and you and your attorney appropriately complete the bankruptcy documents to so indicate, then the money will be returned to you.
Even If the Garnished Wages Are Not Exempt, the Trustee Do You Some Good
The creditor would pay the money not to you but rather to your bankruptcy trustee, if that money did not fit within any of the exemptions allowed to you. But even if the trustee gets the money instead of you, under the right circumstances this money could still do you some significant good.
Here’s the way it works. If the money garnished is not exempt, it’s the bankruptcy trustee’s job to “avoid the transfer”—to make the creditor give to the trustee the money garnished. Then once the trustee has it, he or she is required by law to then distribute that money in a very specific order. The trustee must pay “priority” debts first before paying anything to your “general unsecured” debts. The main “priority” debts for consumers are back child and spousal support and income taxes. If you owed such “priority” debts, you would almost certainly want them to be paid, because they are debts that are not discharged (legally written off) in bankruptcy. So you would have to pay such debts yourself after the bankruptcy was finished anyway.
Simply put, preference law can make an overeager creditor give up money it grabbed from you shortly before your bankruptcy case was filed, so that this same money can now instead go directly back to you or to pay a special creditor which you very much want to be paid.