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The Limited Power to Force a Creditor to Surrender Your Garnished Wages

Once garnished, that portion of your wages or salary is forever gone. With one exception.



No Undoing of Pre-Bankruptcy Wage Garnishments, Right?

The last two blogs have been about stopping wage garnishments before they happen and while they are happening. But what about undoing a garnishment after it’s happened? Is there any way to get back the money after it’s already in the hands of the garnishing creditor?

Based on the last two blogs, this doesn’t seem likely. The main consideration in whether bankruptcy stops a garnishment is one of timing: did the bankruptcy case get filed and the automatic stay go into effect before the garnishment was executed? So of course if the garnishment occurs before the bankruptcy is filed, it’s too late, right?

Right. The automatic stay does NOT get applied retroactively to undo an earlier garnishment. So almost always once a creditor has your money, consider it gone.

With one limited but potentially very helpful exception.

The Rationale for “Preferences”

Bankruptcy law is designed to discourage creditors from being overly aggressive with debtors who could be on the brink of filing bankruptcy. The theory is that if a debtor is experiencing some financial difficulty but can still perhaps avoid bankruptcy, there’s a tendency for the debtor’s most aggressive creditor(s) to get nervous about getting paid. So they pull out the stops to force to get the debt paid. That in turn makes the other creditors nervous about losing out, so they tend to get more aggressive, too. As a result the suddenly overwhelmed debtor is driven to file bankruptcy when maybe that would not have been necessary, so everybody loses out.  

To discourage this “sharks smelling blood” tendency, bankruptcy law creates a disincentive for those overly aggressive creditors:  they risk being ordered to return money or property they got out of the debtor during a specific period of time before the bankruptcy was filed. Money or property subject to being surrendered by creditors in this way is called a “preference.” This includes money by gotten by the creditor by garnishment.

The Basic Preference Law

The rules about preferences, found in Section 547 of the Bankruptcy Code, are quite complicated, and most of them are beyond the scope of this blog. But in a nutshell, money taken from you by a creditor within the 90-day period before the date of filing of your bankruptcy case—including by garnishment—is a potential preference. The creditor may need to surrender those funds.

The Creditors’ Safe Harbor

In a consumer bankruptcy case, if the combined amount of money a creditor garnishes in the 90-day period before filing is less than $600, the garnished money is considered NOT to be a preference, and the creditor keeps that money. But if it totals $600 or more, the entire amount could be a preference and the creditor may need to surrender it.

Who Gets the Preference Money?

If you file a Chapter 7 case, the money garnished during the 90 days before filing does not come back to you. Instead it is collected by the bankruptcy trustee and is used to pay your creditors.

So how does THAT do you any good? Because under bankruptcy law the trustee pays some of your creditors ahead of others, often including debts you want to be paid. So what this amounts to is a mechanism for you to take money from one creditor that you don’t care about to pay another creditor that you do care about. The usual reason that you would want to favor a creditor in this way is because it is one that would not be discharged in your bankruptcy case. So you’d rather get it paid in part or in full from some source other than your own pocket.

If you file a Chapter 13 case, it works the same way except that you would likely have a bit more discretion about where the money retrieved from the creditor would be paid through your Chapter 13 plan.

The Bottom Line

Although the automatic stay has no retroactive effect on wages garnished before the bankruptcy is filed, the preference rules may have. If $600 or more is garnished in the 90 days before the case filing date, the creditor could be forced to surrender that money. Although if that occurs the money won’t come to you directly, it may go to special creditors which you want and need to be paid.

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