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Wage Garnishments: Can bankuptcy stop them?

Bankruptcy stops wage garnishments instantly, except that different state laws and procedures can affect what happens to the current paycheck.

Bankruptcy is a federal proceeding under federal law, but state law also has a role to play. This question about stopping wage garnishments is a good example of an issue where state law may apply.

Except in rare circumstances (mostly involving income taxes and student loans), your wages cannot be garnished for repayment of a consumer debt until a creditor sues you in court and obtains a judgment. That lawsuit will almost always be in state court, because the jurisdiction of federal courts is limited. Most of the time debtors do not respond to such lawsuits by the court’s deadline, 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 to collect on it.

But states’ garnishment laws vary widely. Most states permit wage garnishment in some form, but a few restrict it to only certain kinds of debts (like child support, taxes, and/or student loans). Other states that do allow wage garnishment for conventional debts, such as New Jersey, often have special garnishment statutes favoring some of those same select debts. State laws also differ on how much of a paycheck can be garnished. And laws differ on the details of garnishment procedure, which is important to the issue of how fast a bankruptcy stops a garnishment.

As soon as your bankruptcy is filed, the “automatic stay” goes into effect. This means that the filing acts as a “stay,” or a stopping, of virtually all collection activity. It operates as an immediate court order against creditors, made effective by the filing of the bankruptcy case, stopping 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 the date 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.

You should consult a bankruptcy attorney regarding the interplay between the bankruptcy code’s automatic stay and state garnishment law for a particular paycheck of yours.

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