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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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Automatic and Immediate Protection from Your Creditors

How does bankruptcy stop garnishments, foreclosures, and repossessions?

 

Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.

“Automatic Stay” = Immediate Stop

“Stay” is simply a legal word meaning “stop” or “freeze.”

“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.

Creditors Need to Be Informed, Sometimes Directly

Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.

However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.

Creditor Action Taken Unexpectedly

But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?

If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.

 

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Advantages of Being in Control of the Timing of Your Bankruptcy Filing

Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.

 

Timing Does Not Always Matter Much, But It CAN Be Huge

Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.

It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.

Today’s blog post covers the first one of those potential timing advantages.

Being Able to Choose between Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.

To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.

The “Means Test” Income Calculation

What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.

So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.

Conclusion

Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.

The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided. 

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Why You Should Not Allow a Creditor to Get a Default Judgment against You

Not responding to a lawsuit by a creditor can harm you in more ways than you think.

 

Three Different Sets of Reasons

Judgments can harm you in three distinct ways:

1) Give the creditor powerful collection tools against you to collect the debt.

2) Force you into filing bankruptcy when it’s not to your best advantage.

3) Makes it harder sometimes to discharge (write off) the debt later in bankruptcy.  

Today’s blog addresses the first one of these. The other two will be covered in my next blogs.

The Temptation to Let a Lawsuit Turn into a Default Judgment

Most lawsuits filed by creditors and collection agencies to collect debts result in judgments against the people being sued. That’s because the main allegations in most of these lawsuits simple argue that the debt at issue is legally owed. And that’s usually not in dispute. So the people being sued understandably figure that there’s no point in responding to allegations that appear to be true.

Practically speaking, most of the time the people being sued are at the end of their financial rope. So they believe that they can’t afford to hire an attorney to find out what their options are, or the consequences of doing nothing.

What ARE the Consequences of Doing Nothing?

You may know that a judgment gives a creditor the right to garnish your wages and bank accounts. You may believe that you can prevent such garnishments from happening to you by keeping your money out of bank accounts and by being paid other than a regular wage or salary (although even those are not practical options for most people).  Perhaps, but the “judgment creditor” usually has other rights against you once it gets that judgment.

The laws differ state by state, but generally a judgment becomes a lien against any real estate you own, or will own in the future. Depending on the facts and applicable law, the creditor may then be able to foreclose on that real estate to get its debt paid. Think about not only property under only your own name, but also your rights to property held jointly with a spouse, parent, or through a trust or estate.

An aggressive creditor usually has other tools available. In most states it can get a judge to order you to go to court to answer questions under oath about what you own so that the creditor can find out what it can take from you. The creditor may be able to get a court order sending a sheriff’s deputy to your home or business to seize some of your possessions for payment of the debt. If someone owes you any money (or anything else), that person can be ordered to pay that debt to the creditor instead of to you.

Similarly, if you own a business, the creditor can force your customers to pay it instead of you. This can be devastating both to your cash flow and to your business reputation. Your business could even be subjected to a “till tap”: a sheriff’s deputy arriving at your place of business to take money directly out of the cash register to pay towards the judgment debt.

Will These Happen to You?

We don’t want to give the impression that these kinds of aggressive collection procedures are used in most cases, or will necessarily be used in yours. Some of these are unusual, taking a fair amount of extra work and fees for the creditor or its attorney, and so likely won’t happen in most simple collection cases. The point is that once creditors have a judgment against you, they have many powerful options against you. We meet all the time with distressed new clients who have been shocked at how creditors with judgments against them have been able to financially hurt them.

Why See an Attorney If You Have No Defense to the Debt?

Flying blind is scary and dangerous. Getting sued and not knowing the potential consequences of just letting the creditor win is like flying blind. Besides potentially finding out about possible defenses to the lawsuit, consulting an attorney gives you the opportunity to consider your broader financial situation, and your options for addressing it. A lawsuit by a creditor is usually a symptom of a broader problem. By consulting with a knowledgeable attorney, you may learn about potential solutions to both the lawsuit AND the rest of your financial problems.

 

Please visit our website again for the next two blogs about the other very important reasons why you should not allow a creditor to take a default judgment against you. 

 

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Bankruptcy Can Solve Your Debt Problems Even If You Can’t Write Off Every Debt

Don’t disregard bankruptcy as an option just because it does not write off the debt which is your immediate big headache. There’s likely some good medicine for that headache after all.

Let’s say you owe a dreadfully large income tax debt from a couple of years ago. The IRS is getting aggressive about collecting it. You know for a fact that bankruptcy doesn’t discharge (legally write off) income tax debts, so you’re not seriously considering that option and have not seen a bankruptcy attorney.

You may or may not be right about whether or not that tax debt can be discharged. That’s almost always a matter of timing. So if indeed you could not discharge your debt a few months ago, that might not be true today, or might not be true a few months from now.)But whether or not the debt can be discharged,  either way, you would probably be wrong about not getting legal advice about it.

Why? Whether that special debt that you know can’t be discharged is a tax debt, back child support, student loans, or some other troublesome debt, here are six reasons you should STILL get legal advice about the bankruptcy  option:

1. Some debts which look like they can’t be discharged actually can. Certain income taxes can be discharged in either a Chapter 7 or Chapter 13 case, depending on how old they are and a series of other factors. Sometime a portion of an otherwise not dischargeable tax debt—such as the penalties—can be discharged, sometimes significantly reducing the amount you need to pay. Student loans are difficult to discharge, but in some unusual situations can be. And even though true child support obligations are not dischargeable, in rare situations a debt which you thought was a support obligation might not fit the legal definition for bankruptcy purposes. It’s certainly worth finding out whether the debt you assume can’t be discharged actually might be able to be.

2. Some debts that can’t be discharged now may be able to be in the future. Almost all income taxes can be discharged after a series of conditions have been met. So your attorney can put together for you a game plan coordinating these tax timing rules with all the rest of what is going on in your financial life. Timing issues can sometimes also be important with student loans, especially if you have a worsening medical condition or are simply getting close to retirement age

3. Even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem.  In many situations your primary problem is the devastating way a debt is being collected. For example, you may want to pay an obligation for back child support but the state support enforcement agency is about to suspend your driver’s and/or occupational license. A Chapter 13 case will stop these threats to your livelihood, and protect you from them while you catch up on the back support.

4. You have more control over the amount of the monthly payments on debts that cannot be discharged. Debts which the law does not allow to be discharged in bankruptcy also tend to be ones that give the creditors a lot of leverage against you. Chapter 13 takes most of this leverage away from them and puts their power on hold while you pay what your budget allows, not what these creditors would otherwise be gouging out of you.

5. Bankruptcy can stop the adding of interest, penalties, and other costs, allowing you to pay off a debt much faster. Unpaid income taxes and certain other kinds of debts are so much more difficult to pay off because a part of each payment goes to the ongoing interest and penalties. Some tax penalties in particular can be huge. Most of these ongoing add-ons are stopped by a Chapter 13 filing, allowing you to become debt-free sooner.

6. Bankruptcy allows you to focus on paying off the debt(s) that you can’t discharge by discharging those you can. You may have both a debt or two that can’t be discharged and a bunch of debts that can be. Even if bankruptcy can’t solve your entire debt problem directly, discharging most of your debts would likely make that problem much more manageable. Under Chapter 7, you would be able to pay off those surviving debts much faster, which is especially important if they are accruing interest or other fees. And under Chapter 13 you would have the benefit of a predictable payment program, one that focuses your financial energies on those nondischargeable debts while protecting your assets and income from them.

So don’t let the fact that you have a debt or debts that can’t be discharged in bankruptcy stop you from getting legal advice about how your overall financial life could still be much improved through one of the bankruptcy options.  

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A Simple Chapter 13 Case

If you have debts that can’t be written off (“discharged”) in a Chapter 7 “straight bankruptcy,” such as back child support or recent income taxes, Chapter 13 can be a much better alternative.

 In my last blog I wrote about the discharge of debts under Chapter 7. I ended by saying that if you have debts that can’t be discharged in Chapter 7, “Chapter 13 is often a decent way to keep those under control.” Here’s how.

The best way to show this is with an example. So let’s say you owe $6,000 in IRS debt for 2009 and 2010, $4,000 in back child support, $15,000 in credit cards, and $3,000 in medical bills. You had lost your job in 2009, tried to run a business during 2009 and 2010 that made a little money but not enough to pay its taxes and to make all your support payments. Then you got a new job a few months ago that pays less than the one you’d lost in 2009, but at least you now make enough to pay your ongoing taxes and support, and your living expenses. However, you’re left with only about $400 left over to pay ALL of your debts. That would not be enough to pay the minimums on just the credit cards, much less anything on the rest of the debts.

A Chapter 7 case would discharge the $12,000 in credit cards and the $3,000 in medical bills, but would leave you with $6,000 owed to the IRS and $4,000 in back support—so you’d still be $10,000 in debt. Although the IRS would likely be willing to accept payments of $400 per month, the problem is that the state support enforcement agency is about to garnish your wages for the back support, trashing any possible arrangement with the IRS. Also, you’re still in the probationary period at your new job and the last thing you want is for the payroll office to get a garnishment order for back child support. Filing Chapter 7 would not stop that kind of garnishment.

But Chapter 13 would. So you file a Chapter 13 case, keep up your ongoing regular child support payments, and put together a plan to pay to the Chapter 13 trustee $400 per month for 36 months. During that period of time neither the IRS, nor the support agency, nor your ex-spouse—nor any of your other creditors—would be able to take any action against you or any of your assets. That is they couldn’t as long as you consistently made your $400 payments, and kept current on your ongoing tax and support obligations. Over those three years you’d pay to the trustee $14,400 ($400 X 36 months), which would pay all the $4,000 of back support and the $6,000 in taxes—usually without any additional interest or penalties from the date of the filing of your Chapter 13 case. The Chapter 13 trustee would also get paid, usually about 5-to-10% of what you’re paying into the plan, as would any attorney fees you did not pay to your attorney at the beginning of your case.  If there is still any money left over (not likely very much in this example), that gets divided pro rata among the credit card and medical debts. After the 36 months of payments, any remaining balances on those debts are discharged, leaving you owing nothing to any of your creditors, and current on your taxes and support payments.

So that’s how a simple Chapter 13 case works.

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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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Preserve Your Ability to File Bankruptcy at the Time You Want

Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge.  The three examples in this blog should convince you that you want to avoid being rushed to file your case because a creditor sued you earlier and is now garnishing your wages. Instead you want to preserve the ability to file bankruptcy at a time that is tactically the best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the “means test.” This test largely turns on a very special definition of “income.” For many people, their “income” under that definition can change every month, sometime by quite a lot. This means that you may not qualify to file a Chapter 7 case one month but then do so the next month. Being able to delay filing your case means being able to file when you will pass the “means test,” or at least more likely would do so, and therefore not be forced to file a Chapter 13 case. This means usually finishing your case in three or four months instead of three to five years, and almost always saving many thousands of dollars.

2. Discharging—writing off—debts:  Getting certain debts discharged is harder if those debts were incurred within a certain amount of time before the filing of your bankruptcy case. So being able to delay the filing of your bankruptcy case makes it less likely the creditor on one of these debts would challenge your ability to discharge that debt. Or if such a creditor would still raise such a challenge, defeating it would be easier.  The amount at stake is the amount of that debt, plus often the creditor’s costs and attorney fees, and your own attorney’s fees.  Avoid or reduce the risk of continuing to owe that after your bankruptcy is over by avoiding getting creditor judgments against you.

3. Choosing property exemptions:  The possessions you are allowed to keep in a bankruptcy depend on which state’s exemption laws apply to your case. If you moved to your present state of residence within two years before your bankruptcy is filed, you will not be able to use that state’s exemptions but rather your former state’s. Especially if you are getting close to the two-year mark, having flexibility about when to file would allow you to pick whichever state’s exemptions were better for you. Otherwise, you may either lose an asset in a Chapter 7 case, have to pay the trustee to be able to keep it, or else even be compelled to file a Chapter 13 case to keep it.

You may sensibly ask: if you do get sued, what are you supposed to do to avoid getting a judgment against you, so that you’re not later rushed into filling bankruptcy at an unfavorable time?  The answer: see a bankruptcy attorney as soon as you get sued to figure out how to deal with that law suit and with your entire financial circumstances. The earlier you get advice, the more options you will have.

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