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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Bankruptcy isn’t just for winding up after the end of a business.  It can help keep your business around for longer.

Bankruptcy saves a lot of companies.  Companies can get out of a lot of debt, restructure their operations, and save a lot of jobs.  If you own and run a small business, bankruptcy may be able to save your job, too.

Let’s assume you have a small, simple business.  One so simple that you did not form a corporation or any other kind of legal entity when you set it up.  And let’s assume that you don’t have any partners – that is, you have a sole proprietorship.

In a sole proprietorship, you and your small business are treated as a single unit—unlike a corporation, which is legally separate from you and which owns its own assets and has its own debts.  In the right circumstances, a sole proprietorship can be easier to handle in a bankruptcy.

A Chapter 7 liquidation is seldom a good option if you own a business that you want to keep operating during and after the bankruptcy.  You can discharge your debts in return for liquidation—the surrender of your assets to the trustee to sell and distribute to your creditors. Except that in most Chapter 7 cases everything you own is protected–“exempt”—so that you lose nothing or very little. But if you own an ongoing business, you are likely to have some non-exempt assets.  So the Chapter 7 trustee could take some important parts of your business to sell off or otherwise shut down.

Instead, a Chapter 13 case— sometimes called a “wage-earner plan”—is much better designed to enable you keep your personal and business assets.  You get immediate relief from your creditors under the automatic stay, and for a much longer period of time, usually with a significant reduction in the amount of debt to be repaid.  So Chapter 13 can help both your immediate cash flow and your long-term prospects.  It is also a good way to address tax debt, which is often an issue for struggling businesses.  Overall, it can be a relatively inexpensive tool that combines the discipline of a court-approved payment plan with the flexibility of continuing the operation of your business.

Please understand that when you own ANY kind of business, solving your financial problems will be more complicated.  This is because you are  not dealing merely with the size and timing of a paycheck, but instead with all the financial and practical aspects of running a business.  In addition,  timing issues are often more important in business bankruptcy cases and they require more pre-bankruptcy planning to plot out the best path for you.  So, no matter how small your business, be sure to get thorough legal advice as soon as possible.

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Both Chapter 7 and Chapter 13 can help you save your home. But how does a bankruptcy stop foreclosure?

You have undoubtedly 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 post tells you more about how bankruptcy stops a foreclosure.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your 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 filed at the court BEFORE the foreclosure sale, then that sale is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the 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 sale happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure sale and its documentation. If your lender would fail to undo such a sale 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 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 depend on which chapter you file. That’s because even though you get the same automatic stay, the other tools each chapter provides for protecting your home are very different. So your mortgage lender or servicer 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.

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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 posts, I discussed 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 re-emphasize–most of the time, once your bankruptcy case is filed, all creditor efforts against you and your property stop immediately.

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

Very Fast

Few legal procedures work as quickly as the automatic stay. To get anything done in most courts usually takes weeks, months, or years. A complaint or motion of some sort needs to be filed, the other side usually has the opportunity to respond, then there’s often a hearing, 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 from your creditors in almost every way. It stops all phone calls and letters—“any act to collect, assess, or recover” a debt. Except for those situations spelled out in my prior posts, the automatic stay stops all court and administrative proceedings against you from starting or continuing. It does not 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 should not happen. If there is a judgment against you and the creditor is about to garnish your wages or levy on your checking account, these collection efforts are stopped. If you’ve fallen a couple of 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 handling 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 vehicle, 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.

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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 post 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 case is filed.  But in this post 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 in which 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 post. 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 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 file multiple 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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Isn’t a bankruptcy filing supposed to stop all your creditors’ collection efforts against you and your property? Yes, and in fact in many cases a bankruptcy filing does exactly that. Stopping collection efforts is a benefit of filing bankruptcy called the “automatic stay,” because at the moment of the bankruptcy filing, a legal injunction automatically goes into effect “staying,” or stopping, most creditors’ actions against you. But because the automatic stay is something we count on, we had better know its exceptions.

Today I’m just going to list some of the most important exceptions. Then in the next couple of posts 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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One way to get your creditors to stop harassing you is by filing for bankruptcy. But how does filing for bankruptcy stop creditor calls and letters? Through something called the “automatic stay”.

The automatic stay in bankruptcy can be a powerful benefit for debtors who feel that they are being hounded by creditor phone calls and letters. It can prevent further harassment from debt collectors.

After a bankruptcy is filed, creditors must stop attempting to collect on debts as a result of the automatic stay, which takes effect just after filing. Practically speaking, you should wait until creditors receive notice of the filing before they know to stop contacting you.

Or, your lawyer may send out letters of representation to your creditors, which can put a stop to the creditor calls and letters for a while prior to your bankruptcy filing. For example, if the credit card companies are really annoying you, have a talk with your lawyer and see whether letters of representation can be arranged.

Exactly what does the automatic stay protect the debtor from? Debt collection calls, wage garnishment, lawsuits, foreclosure sales, and repossessions.

What types of actions are NOT stayed? Actions regarding family support, such as child support or alimony; criminal prosecutions; and tax assessments or audits.

How long does the automatic stay last? Until the debtor’s bankruptcy discharge comes through or until a creditor asks a judge and successfully gets the automatic stay lifted.

What happens when a creditor violates the automatic stay? Then that creditor may be subject to civil penalties, such as the payment of damages.

If you have a question about bankruptcy, feel free to contact the Hoboken Bankruptcy Attorney at 201-676-0722 or at jweil@jenlawyer.com.

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