How Fast Can the “Automatic Stay” Stop a Wage Garnishment?

Bankruptcy stops a wage garnishment instantly. Except local laws and the exact timing determines what happens to any current paycheck.

 

Federal Bankruptcy Law and State Garnishment Law

Bankruptcy is in the U.S. Constitution, which was ratified 226 years ago this month. The Constitution gives Congress the power to make laws about bankruptcy. So it’s a federal proceeding governed by federal law. But we live in a federalist form of government, meaning that governmental power is shared between the national government and that of the various states. The impact of state law on wage garnishments with the filing of a bankruptcy is a good example of the mix of federal and state law.

The Necessity of a Judgment

Except in rare circumstances (involving income taxes and student loans, mostly), your wages cannot be garnished to take money from you in payment of a consumer debt until after the creditor sues you in court and gets a judgment. That would almost happen in state court. A large percentage of the time when debtors are sued in this way, they do not respond by the legal deadlines, so creditors win their judgments by default. Once your creditor has such a state court judgment in hand, it must then follow state law in collecting on it.

Diverse State Laws

States’ garnishment laws vary widely. Most states permit wage garnishment in some form, but some restrict it to only special kinds of debts (like child support, taxes, and/or student loans). Other states which permit wage garnishment for most debts nevertheless may favor some of those same special debts. State laws also protect paychecks for debtors to a different degree through “exemptions.” And finally state laws differ on their timing details and other quirks of garnishment procedure, which are often critical for the question being faced here: how fast a bankruptcy filing stops a garnishment.

The “Automatic Stay”

Simultaneous with the filing of your bankruptcy case, the “automatic stay” goes into effect. The filing itself operates to stop virtually all collection activity against you. It operates as an immediate and one-sided court order against creditors, stopping the enforcement of a wage garnishment.

Complications of Timing

What if a bankruptcy case is filed at court within just a day or two after the money has been taken out of your wages under a court garnishment order but not yet turned over by your payroll office to the creditor? What does the automatic stay require when it says that the bankruptcy filing stops “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case”? (Section 362 (a)(2) of the Bankruptcy Code.)

Money that was taken out of your paycheck before your bankruptcy case was filed is not “property of the estate”—which is essentially all your assets at the moment your case is filed. But arguably it’s not your money to keep either because it was already legitimately taken from you by the garnishment order at the time your bankruptcy case was filed.

So can the creditor get that money that your employer is holding, or would that be a violation of the automatic stay? The answer likely turns on a careful reading of your state garnishment law—the statute itself plus possibly how the state’s courts have interpreted that statutory language.

Practically Speaking

Many creditors tend to be cautious about violating the automatic stay, and may back off when there is some legal ambiguity about whether it is entitled to funds from a garnished paycheck. Other creditors are more willing to be aggressive, especially if the state’s statutes and/or courts have given them some cover to do so.

To state the obvious, do what you can to avoid this whole situation by seeing an attorney in time so that your bankruptcy case can be filed before your payday, so that the wage garnishment can definitely be stopped in time.