Once part of your wages or salary is garnished, it’s gone forever. Unless it’s a “preference.”
No Undoing of Pre-Bankruptcy Wage Garnishments, Right?
The last two blogs have been about using bankruptcy law’s “automatic stay” to stop wage garnishments before they happen and while they are happening. But what about undoing a garnishment after it’s happened? Is there any way to get back the money after it’s already in the hands of the garnishing creditor?
Based on the last two blogs, this doesn’t seem likely. The main consideration in whether bankruptcy stops a garnishment is one of timing: did the bankruptcy case get filed and the automatic stay go into effect before the garnishment went into effect or not? So generally if the garnishment occurs before the bankruptcy is filed, it’s too late—the money’s gone to the creditor.
True. The automatic stay does NOT get applied retroactively to undo a just-completed garnishment. So almost always once a creditor has your money, it’s gone. Except for one limited but potentially very helpful exception.
The Rationale for “Preferences”
Bankruptcy law is designed to discourage creditors from being overly aggressive with debtors who could be on the brink of filing bankruptcy. The theory is that if a debtor is experiencing some financial difficulty but can still perhaps avoid bankruptcy, there’s a tendency for the debtor’s most aggressive creditor(s) to get nervous about getting paid. So they get aggressove to get the debt paid. That in turn makes the other creditors nervous about losing out, so they tend to get more aggressive, too. As a result the suddenly overwhelmed debtor is driven to file bankruptcy when maybe that would not have been necessary, so everybody loses out.
To discourage this “sharks smelling blood” tendency, bankruptcy law creates a disincentive for those overly aggressive creditors: they risk being ordered to return money or property they got out of the debtor during a specific period of time before the bankruptcy was filed. Money or property subject to being returned by creditors in this way is called a “preference.” This includes money gotten by the creditor through garnishment.
The Basic Preference Law
The rules about preferences, found in Section 547 of the Bankruptcy Code, can get quite complicated, especially as they apply to businesses that file bankruptcy. Most of those rules are way beyond what we’re talking about here today.
The main rule, the one that counts for consumer debts, is this: money taken from you by a creditor within the 90-day period before the date of filing of your bankruptcy case may be a preference. This means that the creditor may need to surrender money it received during that period of time. The money to be surrendered would include any it received by garnishing your paycheck.
The Main Limitation
In a consumer bankruptcy case, if the total amount of money a creditor garnishes (and receives by all other means) in the 90-day period before filing is less than $600, the garnished money is considered NOT to be a preference, and the creditor keeps that money. But if it totals $600 or more, the entire amount could be a preference and the creditor could be required to surrender it.
The Preference Money Does Not Get Paid Directly to You
If you file a Chapter 7 “straight bankruptcy” case, the money garnished during the 90 days before filing does not get paid back to you. Instead it is collected by your case’s bankruptcy trustee and is used to pay your creditors.
That may not sound like it helps you but in many situations it would. That’s because under bankruptcy law the trustee pays some of your debts ahead of others, so the ones paid often include debts you want or need to be paid. So this may be is a way for you to take money from one creditor that you don’t care about—the one that garnished your paycheck—to pay another creditor that you do care about—one the trustee would pay ahead of the others.
The usual reason that you would want to favor a creditor in this way is because it is one that would not be discharged (legally written off) in your bankruptcy case. So you’d rather get it paid in part or in full from some source other than later out of your own pocket.
If instead you file a Chapter 13 “adjustment of debts” case, the preference works the same way except that you would likely have a bit more power over where the money retrieved from the creditor would be paid through your Chapter 13 payment plan.
Although the automatic stay has no retroactive effect on wages garnished before the bankruptcy is filed, the preference rules may help. If $600 or more is garnished in the 90 days before the case filing date, the creditor could be forced to surrender that money. Although if that occurs the money won’t come to you directly, it may go to special creditors which you want and need to be paid.