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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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Dramatic Examples of How Bankruptcy Can Be a Good Idea Even if It Can’t Write Off Every Debt

Here’s how bankruptcy actually works, and works well, even when a significant debt or two can’t be written off.

The last blog gave six reasons why it’s worth looking into bankruptcy even if you know that you can’t discharge (write off) one or more of your most important debts. Today here are concrete examples how the first three of those could work for you.

The first two reasons we’ll cover together. First, sometime debts which you might think can’t be discharged actually can be, and second, some debts that can’t be discharged now may be able to be in the near future.

Let’s say you currently owe $10,000 in federal income tax for the 2008 tax year. You filed that tax return on October 15, 2009 after getting an extension. You’ve been making monthly payments to the IRS on a payment plan, but because of that you did not make adequate tax withholdings or quarterly estimated payments for 2011. You know that once you file your 2011 tax returns (by October 15, 2012, because you got an extension) you’re going to be in trouble because you will owe a lot for that year as well. You know the IRS will cancel the payment plan for 2008 because of your failure to keep current on your ongoing tax obligations. You’re pedaling as fast as you can, but October 15 is less than two months away and you don’t know what to do. You are quite certain that the $10,000 tax debt cannot be discharged in bankruptcy.

You’d be right about that… but only for the moment. Because under these facts that 2008 tax debt could very likely be discharged through either a Chapter 7 or 13 bankruptcy case filed AFTER October 15, 2012. (Whether you’d file a Chapter 7 or 13 would depend on other factors, including how big your 2011 and anticipated 2012 tax debts will be.) Instead of being in a seemingly impossible situation, you would avoid paying all or most of that $10,000—plus lots of additional interest and penalties that you would have been required to pay. Instead you would be more than $10,000 ahead on paying off the 2011 and 2012 taxes!

Now here’s an example to go with the third reason to consider bankruptcy: even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem.  

Change the facts above to make that $10,000 debt one owed for the 2009 tax year instead of 2008. Since that tax return was also filed with an extension to October 15, 2010, that $10,000 would not be dischargeable until after October 15, 2013. But in this example you’ve already defaulted on your monthly payment agreement. So you are appropriately expecting the IRS to file a tax lien on all of your personal property and on your home, and to start levying on (garnishing) your financial accounts, and on your paycheck if you’re employed or on your customers/clients if you’re self-employed.

With all that the IRS can do to you, you can’t wait until October of next year to discharge that $10,000. But if you filed a Chapter 13 case now the IRS would not be able to take any of the above aggressive collection actions against you. You would have to pay the $10,000 (and any taxes owed for 2010 and 2011) but you would have as long as 5 years to do so. And most importantly, throughout that time you’d be protected from any future IRS collection action on any of those taxes, as long as you complied with the Chapter 13 rules.

As for the 2012 tax year, you would likely be given the opportunity to pay extra withholdings or estimated payments during the rest of this year, which you would be able to afford because of temporarily paying that much less  into your Chapter 13 plan.

So instead of being hopelessly behind and deathly scared about everything the IRS is about to do to you, within a few days you could be on a financially sensible path to being caught up with the IRS. And then within three to five years you’d be tax debt free, AND debt free.

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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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