The New Jersey Supreme Court decided Big M on July 16, 2010. The issue in the case was whether tips and gratuities are subject to garnishment. As you may recall, a garnishment can happen when a debt collector who has a judgment against you gets a court order to take part of your pay to satisfy the judgment.

Big M involved a waitress working for Texas Roadhouse Holding, LLC whose wages were being garnished. When her creditor, Big M, got a check for only $4.21 from its $672 wage garnishment, it sued her employer. In the course of deciding the case, the trial court judge determined that tips placed on credit cards are garnishable, but cash tips are not. Then the New Jersey Supreme Court considered the case on appeal.

Looking at both New Jersey law and the Federal Consumer Credit Protection Act (CCPA), the court did not find any law directly speaking to the issue of whether tips were subject to garnishment. So it examined an opinion letter and field operations handbook from the Department of Labor, which enforces the CCPA, and found the opinion that tips, whether paid in cash or charged, are not subject to garnishment. Although the New Jersey Supreme Court is not required to follow a Department of Labor opinion, the court chose to give the opinion consideration and deference.

Big M, the creditor, argued that all tips should be subject to garnishment because they are taxable income for state and federal tax purposes. The court did not find this argument persuasive because the process of counting and recording tip income and reporting it for tax purposes does not allow the employer to exercise enough control over tip income to make it garnishable. The whole idea behind wage garnishment is to capture the income while it is still in the employer’s hands, before it gets paid to the employee.

The court held that the amount of control an employer exercises over tip income determines whether those tips are subject to wage garnishment. If the employer pools all the tips and then divides the pooled amount amongst the employees, then tip income could be garnished. But if the tips are generally paid directly to the employee, even if the tips are charged on a credit card, they are not subject to garnishment.

Photo by respres.

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This is what something called “exemptions” are for. The way I explain it to clients is this: When you file for bankruptcy, something called the “bankruptcy estate” is created, kind of like the estate that is created when someone dies. Everything in the that estate temporarily comes under the Chapter 7 trustee‘s control. The trustee can sell estate assets to pay off your creditors. If something is NOT in the bankruptcy estate, it will not come under the trustee’s control.

How do you keep your stuff out of the bankruptcy estate? You list all it in your filing. Then you cite to the statutes allowing you to exempt each item from the estate. The laws allowing you to keep property out of the bankruptcy estate are generally called “exemptions”.

Does that mean you can exempt anything from the bankruptcy estate, no matter how expensive the it is? NO. Unfortunately not. Exemptions are limited. And they vary greatly by state.

How are exemptions limited? Generally, they are limited by type of property and by amount. For example, you might find that the statute that applies to jewelry might be limited in amount to $1500. This means you could exempt only $1500 worth of jewelry from your bankruptcy estate (that’s just an example – I made it up, so don’t rely on that statement for jewelry!). Limitations like this can make it difficult (and sometimes impossible) to exempt very valuable items like real estate, newer cars, or valuable collectors’ items.

How do you value your items? Generally speaking, you value your property by determining its resale value – how much could you get for it at a garage sale or on an auction website?

How do I exempt items that I don’t want to list in my papers? You don’t. Unlisted property is not exempted.

The bottom line is that you need to speak to a bankruptcy attorney in the state where you live to find out what the exemptions limitations are. And don’t make the mistake of transferring property to someone else just to keep it out of the bankruptcy estate.

If you are in New Jersey and need a bankruptcy attorney for a potential Chapter 7, please call Jennifer Weil at 201-676-0722 for a free telephone consultation or email me at jweil@jenlawyer.com.

Photo by infomatique.

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