Use Bankruptcy to Stop Wage and Bank Account Garnishments

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Did you know that a creditor can sometimes get access to your wages or bank account to get a debt paid? Did you know that bankruptcy can help stop it? It's called a garnishment.

What is a garnishment?

A garnishment is a collection device employed by a creditor to collect on a judgment.

A creditor to whom you owe a consumer debt will have to file a lawsuit and obtain a judgment. Once the judgment is entered by the court against you, the creditor can ask the court to issue a turnover order to an employer, a bank, or most any other entity that has control over money owed to you.

The turnover order, also often called a levy or attachment, obligates the money-holder to take the money from the paycheck or the bank account and give it to the judgment creditor.

Some creditors are not required to file suit and obtain a judgment before they can garnish your wages or bank account. These include debts for child support, federal taxes and federally backed student loans. But even so, they are required to notify you of their intent to garnish before they do it.

For most levies of bank accounts or other pools of cash, the money-holder turns over the amount of the levy up to the amount of the balance in the account. In the case of wages, federal law limits the amount that can be taken from wages to 25% of the employee's disposable earnings. In this case, "disposable" is what's left over after the legally mandated deductions, like state and federal taxes and mandatory retirement..

Learn more about garnishments with this fact sheet from the Department of Labor:  Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act's Title 3 (CCPA)

In the case of wages, the garnishment continues until the debt is paid in full with interest. Bank account garnishments are not usually continuing events because the depositor will often close the account and open a new one to prevent the creditor from gaining immediate access to the next deposit.

NPR's Highlights

A couple of year ago, NPR ran excellent stories on the hardship a garnishment can place on a borrower. Here are some highlights: 

  • One in ten working Americans between the ages of 35 and 44, or about 3 percent of all employees, are dealing with a wage garnishment. 
  • At the behest of ProPublica, the payroll services provider ADP determined that roughly half of those garnished in 2013 owed child support. The remainder were garnished for consumer debts, like credit cards, medical bills and even student loans.
  • Creditors are filing more lawsuits than ever before on consumer debts.
  • For those earning $25,000 to $40,000 a year, more people were garnished for consumer debt than for child support, which NPR reports is a "dramatic" change from the past. 
  • States in the Midwest show higher rates of garnishment than other areas of the country. States in the Northeast had the lowest rate.
  • Four states largely prohibit wage garnishment for consumer debt: Texas, Pennsylvania, North Carolina and South Carolina.
  • Most states allow a judgment creditor to seize 25% of a debtor's wages. But, most states allow the judgment creditor to have access to all of a deposit account, up to the balance on the judgment.

    How can bankruptcy help with garnishments?

    When you file a bankruptcy case, the automatic stay will prevent a garnishment that has not yet been accomplished or will stop one that has already gone into effect. For instance, if you have been notified that the creditor intends to garnish your wages, a prompt bankruptcy filing should stop the employer from taking the money from your paycheck. But it is necessary that you make sure the creditor and the employer are notified of the filing.

    The automatic stay usually goes into effect the moment a bankruptcy case is filed. If this is not your first bankruptcy case, the automatic stay may be delayed. 

    There is sometimes a lag between the time the employer takes the money from you and the time the employer turns the money over to the creditor. Likewise, the bank may place a hold on your account for the garnished funds for a period of time before the money is actually transferred to the creditor.

    If you have been notified that a garnishment has gone into effect, but the money has not been turned over to the creditor, it may be possible for you to get that money back after you file your bankruptcy case. Your attorney will have to act quickly to petition the court for the turnover of those funds.

    When the automatic stay goes into effect, the employer should immediately cease pulling the garnished funds from your check. If the employer fails and allows the money to be taken from your pay, or the bank takes the money from your account even though it has been notified of the bankruptcy, the employer or the bank could be liable to you for damages.

    Here's more information about how bankruptcy and garnishments work:

    Using Chapter 7 Bankruptcy to Stop a Wage Garnishment