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Posted by: Walter Metzen
Bankruptcy Stops Wage Garnishment
The minute a bankruptcy cases filed, an injunction called the automatic stay is issued, which prohibits creditors from trying to collect on debts that were included in the bankruptcy.
The Ninth Circuit Court of Appeals has called the automatic stay “one of the most important protections in bankruptcy law.”
The automatic stay is self-executing, effective upon the filing of the bankruptcy case and requires that all collection calls, lawsuits and garnishments must stop immediately.
Creditors who continue with collection efforts face stiff fines and penalties from the bankruptcy court.
Section 362(k) of the Bankruptcy Code provides:
An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
Creditors who wage garnish after bankruptcy are in big trouble
The case of IN RE WOZNY-McCULLOUGH pitted a chapter 7 debtor in Montana against the Los Angeles creditor who had been garnishing his wages.
Despite receiving notice of the debtor’s bankruptcy filing, which clearly warned against further collection efforts, the creditor continued with garnishment, intercepting the debtor’s pay twice after his bankruptcy case had been filed.
When the debtor complained about the garnishments, the creditor inaccurately told the debtor that is was his responsibility to “contact the Los Angeles Sheriff and tell them to stop the garnishment.”
In turn, the debtor filed a motion for sanctions seeking punitive damages against his former creditor for willful violation of the automatic stay. This means they asked the court to punish the creditor by issuing a stiff financial penalty.
Was the Violation Willful?
While the protections of the automatic stay are broad, courts will generally only punish creditors who have “willfully” violated its terms. Thus means it’s obvious they violated the law on purpose.
The test for a willful violation of the stay is twofold:
- The creditor must have known that the automatic stay was in effect
- The creditor’s actions which violated the automatic stay must have been intentional.
In this case, the court found that the violation of the automatic stay was willful, and that punitive damages against the creditor were warranted, because the stay was violated on two occasions. The first violation occurred prior to the creditor receiving notice of the debtor’s bankruptcy filing and was therefore innocent. However, another garnishment occurred a month after official notice was received and the creditor did not return payment of the wages after it learned of the debtor’s bankruptcy. With knowledge of the stay, the creditor intentionally garnished wages. These collection efforts rose to the level of willful conduct and the creditor was sanctioned $1,500 as a result.
Timing Your Bankruptcy to Get Garnished Wages Back
While the McCullough case mentioned above dealt with garnishment after bankruptcy, the bankruptcy code also provides a mechanism for recovering wage garnishment that occurred prior to filing for bankruptcy.
In order to qualify, you must of had $600 or more garnished from your paycheck within the 90 days leading up to the filing of your case.
If you’re considering bankruptcy due to impending wage garnishment, or if you’ve just started having your wages garnished, it might make sense to delay the filing until you hit the $600 threshold.
After all, if you’ve had $599.00 garnished and have exemptions available, it is probably a good idea to wait and allow your creditor to garnish one more paycheck so you break over the $600 line. This way, with the help of your attorney, you can recoup funds from the creditor who has been reaching into your pocket.
Good luck out there!
Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.