Must Judgment Creditor Dissolve Bank Account Garnishment When Debtor Files Chapter Bankruptcy?

One of my bankruptcy clients had approximately $700 in a checking account just prior to filing Chapter 7 bankruptcy. Before we filed the bankruptcy petition one of the judgment creditors listed on the bankruptcy petition called my office to complain that one of the debtor’s judgment creditors garnished the checking account. The debtor called the creditor and asked them to release the writ of garnishment. They refused. Then, the debtor called our office complaining that the creditor was violating the automatic stay by refusing to release the garnishment on the checking account. Is the creditor violating the bankruptcy stay by maintaining a garnishment after the account owner files bankruptcy? I think not.

The writ of garnishment creates a judicial lien on the debtors bank account when the garnishment is served on the bank. Courts have found that the debtor has no affirmative duty to dissolve the bank account garnishment. Further actions in state court to get the money after the bankruptcy filing would probably constitute a stay violation. If the debtor claims an exemption of the bank account funds because, for example, the money represents wages of a head of household debtor, the judgment creditor would have to release the money to the debtor unless the exemption is timely and successfully challenged in bankruptcy court. If the money is non-exempt, then the money becomes part of the bankruptcy estate to be distributed equally among all unsecured creditors. If the judgment creditor had already received the money prior to the bankruptcy by virtue of the garnishment the bankruptcy trustee could claim the money back from the judgment creditor because the garnishment would have produced an unallowable preference. A bankruptcy trustee can void the judicial lien of the garnishment if necessary to recover the preferential payment to this creditor.

The judgment creditor’s duty would be different if this were a wage garnishment. Wage garnishments apply to future wages which are owed to the debtor for his employment after the debtor filed bankruptcy. The debtor’s future wages are not part of the bankruptcy estate and are not available to pre-filing creditors. Courts have held that judgment creditor have an affirmative duty to dissolve a wage garnishment against a bankruptcy as soon as the bankruptcy is filed.