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.

 

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How Quickly Will Bankruptcy Stop My Wage Garnishment?

Wage garnishments are stopped instantaneously… except that different state laws and procedures can effect what happens to the current paycheck.

Bankruptcy is a federal proceeding governed by federal law, but state law often plays into it as well. This question about stopping wage garnishments is a good example of the mix of federal and state law.

Except in rare circumstances (mostly involving income taxes and student loans), your wages cannot be garnished for repayment of a consumer debt before the creditor sues you in court and gets a judgment. That lawsuit will almost always be in state court, because the jurisdiction of federal courts is limited. The vast majority of the time debtors do not respond to such lawsuits by the legal deadlines, so the 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.

But states’ garnishment laws vary widely. Most states permit wage garnishment in some form, but a few restrict it to only very select kinds of debts (like child support, taxes, and/or student loans). Other states which do allow wage garnishment for conventional debts often have special garnishment statutes favoring some of those same select debts. State laws also differ on what part of a paycheck is subject to garnishment compared to the part that is “exempt,” or protected. And laws differ on the details of garnishment procedure, which can become critical as we return to the topic of this blog—how fast a bankruptcy stops a garnishment.

The moment your bankruptcy is filed, the “automatic stay” goes into effect. The filing itself operates as a “stay,” or a stopping, of virtually all collection activity. It operates as an immediate and one-sided court order against creditors, made effective by the very act of filing the bankruptcy case.  So the bankruptcy filing and the automatic stay stops a wage garnishment in its tracks.

But what if the bankruptcy is filed within just a day or two after the money has been taken out of your wages under a state court garnishment order but not yet turned over by your payroll office to the creditor? What does the Bankruptcy Code’s automatic stay require here 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 consists of all your assets as of when your case is filed. But arguably it’s not your money either as of the time when your case is filed because it was already legitimately taken from you by the garnishment order. So can the creditor get that money that your employer is holding, or would that be a violation of the automatic stay?  

Because different state laws may have different answers to the question of who owns money that has been garnished from your wages but not yet forwarded to the creditor, whether the automatic stay prevents that money from going to the creditor can turn on those different state laws.

Overall, reputable creditors tend to be cautious about violating the automatic stay, and so will usually err on the side of caution to prevent doing so. But other creditors may be more willing to be aggressive, especially if the state’s statutes and/or courts have given them some cover to do so.

The bottom line is that your experienced bankruptcy attorney will be able to tell you two things:

1) what the interplay between the bankruptcy code’s automatic stay and your state’s garnishment law means for a particular paycheck of yours; and

2) whether your specific garnishing creditor tends to be cautious or aggressive about garnishments stopped by bankruptcy.

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“Automatic” Protection from Your Creditors

Many bankruptcy attorney ads say: “Stop garnishments.” “Stop foreclosures.” “Stop repossessions.” So bankruptcy stops all those bad things. But is it as good as it sounds? How does it really work?

 

In my last blog I said that in keeping with getting a fresh start for the new year, I’d get down to basics.  There’s nothing more basic than getting immediate protection for you, your paycheck, your home, and your possessions. You get this protection the minute a bankruptcy is filed for you, either a “straight” Chapter 7 case or an “adjustment of debts” Chapter 13 one. Other than some very rare exceptions, all efforts by creditors against you or your property must come to an immediate stop. You’ll hear this referred to as the “automatic stay.”

“Stay” is just a legal word for “stop” or “freeze.” “Automatic” means that this “stay” goes into effect simultaneously with the filing of your bankruptcy petition. That filing itself, by virtue of the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or grab collateral. It doesn’t take a judge signing an order or even any further action by you or your attorney to impose the stay.

But although the automatic stay is instantaneous, practically speaking the creditors need to know about the filing of your case so that they can abide by the stay. Assuming your creditors are all listed in your schedules of creditors, they should all get informed by the bankruptcy court within about a week or so after your case is filed, without any additional action by either you or your attorney. If you are not anticipating any action against you by any of your creditors sooner than that, usually letting them all be informed by the court is appropriate. But if do expect some quick creditor action, be sure to talk with your attorney about it so you’re both on the same page about informing that creditor.

But what if a creditor unexpectedly takes some action in the days after your bankruptcy is filed but before it finds out about it? The automatic stay is so powerful that if this does happen, the creditor must undo whatever action it took against you, even if it did not know about your bankruptcy filing. So if after your bankruptcy is filed, a creditor, for example, files a lawsuit against you or turns its earlier lawsuit into a judgment, that lawsuit must be dismissed or the judgment must be set aside.

In my next blog I’ll tell you about how long this automatic stay protection lasts. If you can’t wait until that blog, give me a call or set up an appointment to see me. I’ll tell you all about it personally.

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Stopping the Foreclosure of Your Home Temporarily and Permanently through Bankruptcy

Both Chapter 7 and Chapter 13 can help you save your home. Which one is better for YOU?

You have almost for sure heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This blog today tells you more about stopping a foreclosure. My next blog will get into longer term solutions.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your bankruptcy case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway?

As long as your bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure event, then that foreclosure is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the bankruptcy court” is usually actually done electronically from my office, with a date and time-stamped record proving when the court filing took place.)

IF a foreclosure happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure and its documentation. If your lender would fail to undo such a foreclosure after becoming aware of your bankruptcy filing, it would be in ongoing violation of the automatic stay, exposing itself to significant financial penalties. That would be rare.

Does it matter whether your bankruptcy case is a Chapter 7 or Chapter 13 one for purposes of the automatic stay?

No, the automatic stay is the same under both Chapters, and would have the same immediate effect.

On the other hand, how long the protection of the automatic stay lasts can definitely depend on which Chapter you file. That’s because even though you get the same automatic stay, the other tools each Chapter gives you for protecting your home are very different. So your mortgage lender may very well react quite differently depending on the Chapter you file, as well as on what you propose to do about your home and your mortgage within that Chapter. I’ll write about those options  in my next blog.

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The Amazingly Powerful “Automatic Stay”

Don’t take for granted the extraordinariness of bankruptcy’s automatic stay. That’s the federal law that stops creditors from pursuing you, your money, and your other possessions the moment your bankruptcy case is filed.

In my last two blogs, I told you about the relatively rare situations in which the automatic stay does not apply—situations in which certain special creditors, or sometimes even all creditors, can continue collecting their debts. But let me emphasize again–the vast majority of the time, as soon as your bankruptcy case is filed, all creditor efforts against you and your property come to an immediate stop.

The automatic stay is so powerful because it is 1) fast and 2) very broad in what it covers.

Very Fast

Very few legal procedures work as quickly and efficiently as the automatic stay. To get anything done in just about any court usually takes weeks, months or even years. A complaint or motion of some sort needs to be filed, the other side usually has the opportunity to respond, then often there is a hearing of some sort, and finally a judge makes a decision.

But not with the automatic stay. It operates as a one-sided and immediate court order, made effective by the very act of filing the bankruptcy case.  A judge isn’t even involved. The creditors have no immediate say about it. There IS a procedure for creditors to object and ask the judge for “relief from the automatic stay,” in other words, for permission to continue or start pursuing you or your money or property, but that’s after the fact. The automatic stay gives you an immediate breathing spell, whether your creditors like it or not.

Broad Coverage

This breathing spell protects you in just about every possible way from your creditors. It stops all phone calls and letters—“any act to collect, assess, or recover” a debt. The automatic stay stops all court and administrative proceedings against you from starting or continuing. Doesn’t matter if your bankruptcy is filed two minutes before the start of a civil lawsuit trial or the foreclosure of your house, the trial or foreclosure does not happen. If a judgment was entered against you in the past and the creditor is about to garnish your wages or checking account, these garnishments are stopped. If you’ve fallen a couple months behind on your vehicle loan payment and the repo man is looking for your car in the employee parking lot, the automatic stay sends him away empty-handed. If the IRS is about to record a lien against your home and vehicle to collect an income tax debt, the automatic stay stops the tax lien. Or if you already have a recorded tax lien and the IRS is about to grab your vehicle to pay the debt, your bankruptcy filing stops this enforcement of the tax lien.

This IS powerful medicine. 

As with other strong medicine, it should be administered with the right guidance, and with help for dealing with any potential side effects. Stopping your creditors with a bankruptcy would essentially be the end of the story for many of them. But for other creditors—those with rights against your home or vehicles, or with special kinds of debts such as taxes and student loans—the breathing space gives us the opportunity to address each of these special creditors.

Contact me to get the immediate protection you need, along with the long-term financial solution for dealing with all of your creditors.  

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Don’t Get Disqualified from the All-Important “Automatic Stay”

In VERY RARE circumstances, ALL of your creditors can pursue you even if you file bankruptcy. Here’s how to avoid those rare but dangerous circumstances.

In my last blog I listed three special classes of debts for which you can still be pursued in spite of filing bankruptcy. They are exceptions to the automatic stay, the broad protection from creditors that you get immediately when your bankruptcy case is filed.  But in this blog today I’m talking about a circumstance in which the automatic stay does not apply to your case AT ALL, regarding ANY of your creditors. And about another circumstance that you can lose the protection of the automatic stay 30 days after your case is filed. 

Because of the huge importance of the automatic stay, you absolutely want to avoid these circumstances, as rare as they might be.

For anybody who is thinking about filing a bankruptcy and has NOT had a previous bankruptcy case filed in their name in the last year, and then dismissed, you can stop worrying about this. Or if you have already filed a bankruptcy case recently and I’m getting you worried here, stop worrying if you did NOT have a previous bankruptcy case filed in your name, and then dismissed, in the year before your present case was filed.

But, IF you filed TWO OR MORE prior bankruptcies in the year before your new one, AND they were dismissed, the automatic stay does NOT go into effect with the filing of the new case.  The automatic stay CAN go into effect AFTER the case is filed if certain conditions are met.

Or, IF you filed ONE prior bankruptcy in the year before your new one, the automatic stay EXPIRES 30 days after the filing date, unless certain conditions are met before then. 

The details of the conditions for imposing or preserving the automatic stay are beyond the scope of this blog. What IS of immediate and absolute importance is that you must tell your attorney—AT the BEGINNING of your INITIAL CONSULTATION—if you have filed ANY prior bankruptcy cases, and especially any recent ones.

Now if you’re wondering who goes around filing multiple bankruptcy cases in one year?—it happens more often than you might think.  It tends to come up two ways: 1) A person files a bankruptcy without an attorney, gets overwhelmed by the process and doesn’t follow through, so the case gets dismissed. 2) Or a person hires an attorney, signs some papers, and the case gets filed, maybe without the person even realizing it, and then gets dismissed because he or she (or the attorney, for shame) doesn’t follow through. In either case, eleven months later they’ve forgotten all about it. Or don’t think it’s important.

The point of these anti-automatic stay rules is to stop “serial bankruptcy filers,” the very, very small minority of folks who filed multiple bankruptcy cases, arguably abusing the bankruptcy process, usually to repeatedly delay a foreclosure or some other creditor action.  But these rules can also seriously penalize innocent people in situations like the ones I just mentioned.

Avoid this happening to you by 1) thinking carefully about whether there is ANY possibility that you filed a prior bankruptcy case within the last year, and 2) then telling your attorney if there’s ANY chance that you did. If so, there’s a good chance the bankruptcy court can be persuaded to impose or retain the automatic stay, but only if your attorney knows about the issue in advance and determines whether your case so qualifies.

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Creditor Collections NOT Stopped by a Bankruptcy Filing

You can’t count that filing a bankruptcy will instantaneously stop every act against you by every one of your creditors. Or can you?

Isn’t one of the most important benefits of filing bankruptcy the fact that it puts a screeching halt to all collection efforts of your creditors against you and your property? Yes, and in fact in many cases it does exactly that. This benefit of filing bankruptcy is called the “automatic stay,” because at the moment of the filing of your case a legal injunction automatically goes into effect “staying,” or stopping, most actions by creditors against you. But exactly because the automatic stay is something we count on so much, we better know its exceptions.

Today I’m just going to list some of the most important exceptions. Then in the next couple blogs I will explain in practical terms these and other important aspects of the automatic stay.

So creditors CAN do the following in spite of your bankruptcy filing:

1) A district attorney or other governmental authority can begin or continue a criminal case against you, such as an indictment, a criminal trial, or a sentencing hearing. This includes not just felonies and misdemeanors, but also lesser matters like traffic infractions that you might not think of as “criminal.”

2) Your ex-spouse, or about-to-be ex-spouse, or somebody on his or her behalf, can start or continue a variety of divorce and family court proceedings. These include legal procedures to establish paternity of a child, determine or change the amount of child or spousal support to be paid, settle child custody or visitation issues, address domestic violence disputes, and even dissolve the marriage. (Although a marriage dissolution usually cannot include a determination about how assets or debts would be divided between the spouses.)

3) Specifically about child or spousal support, the person owed ongoing support can continue collecting it. If there is back support owed, then in spite of a Chapter 7 filing, the person who is owed the support can in most cases start or continue collecting it. This includes not only collection through wage withholdings and garnishment of bank accounts, but also through seizure of a tax refund and suspension of a driver’s license, an occupational or professional license, or even a hunting or other recreational license. In contrast, a Chapter 13 filing can stop these aggressive methods of collecting back support.

4) Taxing authorities can start or finish a tax audit, can send you a notice that you owe taxes, can demand you to file your tax returns, can assess your taxes and demand you to pay them, and in some situations can even file tax liens against you and your property.

Notice that each of these exceptions involves a special kind of creditor. As I said, the automatic stay stops actions against you by most creditors. But if you are involved in a court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse, be especially aware of these exceptions.

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