A creditor taking money out of your paycheck to repay a debt (called a garnishment) can throw your finances into a tailspin, and the sudden loss of funds can quickly have a cascading effect on your budget. If you can’t pay off the creditor, rest assured that you can file for bankruptcy—even if the garnishment has already started. In fact, filing for bankruptcy might be the quickest and cheapest way to stop a wage garnishment. Be aware, however, that certain exceptions apply.
How Bankruptcy Stops Garnishments
After filing bankruptcy, a protection called the automatic stay—a court injunction that requires creditors to stop making collection attempts during an active bankruptcy case—goes into effect. The power of the automatic stay extends to garnishments, even ones that have already started. And creditors aren’t just required to stop garnishing—most must also return any money garnished during the 90 days before the bankruptcy filing. Under bankruptcy law, it’s considered an unfair advantage for some creditors to get more money than other similar creditors and the returned money will likely be distributed among all creditors in equal shares (but possibly not—speak with your attorney).
Even though the automatic stay applies as soon as you file your bankruptcy case, it will take some time for creditors to receive notification from the court and stop garnishing. Once you’ve filed your case, it’s best to fax a notification of case filing immediately to the creditor and the agency collecting the garnishment (usually the county sheriff).
Garnishments Stopped by the Automatic Stay
Bankruptcy won’t stop all garnishments. For instance, a wage garnishment for child support will continue despite a bankruptcy filing. Here’s what you can expect to happen with other garnishment types.
- Court judgments. Most wage garnishments occur because a creditor sued you in court and took a judgment against you. A judgment is a court order stating that you owe the debt in question. It permits the creditor to take your money or property to satisfy the judgment. Although filing for bankruptcy will wipe out your personal responsibility to pay most court judgments, if the creditor used the judgment to place a lien on your property, the lien will stay in place unless you prevail on a motion to wipe it out. (The lien allows the lender to use the property to pay off the debt.) Therefore, timing your bankruptcy case is important (more below).
- Debts that won’t go away in bankruptcy. Nondischargeable debts, like student loans and most taxes, don’t go away in bankruptcy. The automatic stay will stop the collection of such debts during your bankruptcy, but collection will likely resume after a Chapter 7 bankruptcy case ends. You’ll also still owe the payments that were due during the case, with interest; however, filing the case can give you an opportunity to work out a better payment arrangement with the creditor. By contrast, in Chapter 13 bankruptcy, you can pay back a nondischargeable debt over three to five years.
If you’re filing for bankruptcy to stop a wage garnishment, the best time to do so is before the garnishment starts. Preferably, even before the creditor takes a judgment against you. If a creditor sues you, the lawsuit can’t go forward while the automatic stay is in place (in most cases). Also, you don’t end up with a judgment on your credit record, or, more importantly, a lien against your property.
Sometimes people end up with a garnishment against them due to a lawsuit they didn’t know about. This can happen if the creditor served the papers on an outdated address, for instance. If you find yourself in this situation, speak with an attorney. You might be able to unwind the action based on improper service.
Also, if you are not a good bankruptcy candidate but need to stop a wage garnishment, you might have grounds to set aside the judgment for other reasons. Set-aside motions can be complicated, and you’ll probably need to hire an attorney to assist you.
Questions for Your Attorney
- What’s my best option for dealing with my wage garnishment?
- Am I a good bankruptcy candidate?
- How do I work out a payment plan with the Internal Revenue Service?