Reversing Wages Garnishments and other Seizures in Bankruptcy
The bankruptcy automatic stay, which in most cases goes into effective immediately upon filing a bankruptcy case, stops collection activity by creditors. This includes stopping ongoing wage garnishments and preventing threatened levies and seizures. We in North Carolina are fortunate that wage garnishments aren't typically available for creditors, but they do happen, especially in the case of creditor with an out-of-state judgment or collecting some sort of special debt, such a certain government debts.
However, the assistance bankruptcy can offer to a person struggling with having his or her wages garnished is not limited to preventing in the immediate future. It's also possible, in some cases, to get the money back from the creditor who seized it. In considering whether this remedy is available, there are two sets of questions: (1) can the transfer be reversed and (2) does the money go back to the person who filed bankruptcy or does it go to the bankruptcy trustee.
Can the Transfer be Reversed?
In bankruptcy, a payment to creditor shortly before bankruptcy is filed that makes that creditor better off than it would have been in the bankruptcy is termed a preferential transfer. The law promotes fairness that creditors shouldn’t be rewarded for aggressive actions in the days and weeks leading up to a bankruptcy filing.
While there are handful of factors that a court must evaluate under 11 U.S.C. 547 for determining if a transfer is preferential and avoidable (able to be reversed), a few are especially relevant for garnishments and other levies.
- Timing: For non-insider creditors, the transfer or transfers must have occurred within 90 days of the filing date of the bankruptcy petition. A garnishment transfer further in the past would not be avoidable as preferential transfer under Section 547.
- Amount: For a person with consumer debts, at least $600 in the aggregate must have been seized by the creditor, within the time period above.
- Preferential Nature: A less common issue, but if a garnishing creditor would have been paid the same amount in a hypothetical chapter 7, the garnishment isn’t preferential as to that creditor.
Who Gets the Reversed Transfer?
The preferential transfer statute is set up to typically allow the bankruptcy trustee to get money back to be distributed to creditors according to bankruptcy distribution rules. However, for many garnishments, the person who filed bankruptcy can get the money back instead. There are again several statutory requirements, under 11 U.S.C. 522(g) and 522(h). The key ones can be summarized as follows:
- Exemptible Funds. To be eligible to get the funds back, the debtor must be able to claim them as exempt under the exemption laws applicable to his or her case. Exemptions function as allowances, and if a debtor needs all of the allowances for some other property he or she wants to keep, there might be no way to exempt the garnished funds from the bankruptcy estate and use by the trustee.
- Involuntary Transfer. Debtors cannot undo for their own benefit transfers they voluntarily made. In the case of garnishments and levies, this is seldom a problem.
- Non-concealment. The garnishment must be disclosed in the bankruptcy papers.
There is also a procedural question of whether the trustee wants to attempt to reverse the transfer for benefit of the debtor prior to the debtor directly attempting to do so.
How to Reverse the Garnishment
A garnishment that is reversible as discussed above can be reversed in any chapter of bankruptcy, including chapter 7 bankruptcy and chapter 13 bankruptcy. The amount and timing requirements can make determining when exactly to file bankruptcy very important. When a garnishment is pending, prompt advice from a bankruptcy attorney can make a significant difference in the ultimate outcome of the case.
Many creditors will return a garnishment on demand after a bankruptcy has been filed. Sometimes, it will be necessary to institute an adversary proceeding within the bankruptcy case to accomplish the return of funds.