Wage Garnishment After Bankruptcy: Is Employer Required To Withhold Post Petition Paychecksk, Or Is Doing So A Stay Violation ?

Here’s a real bankruptcy situation I dealt with last week; the issues resolved, so I can use the case for a blog post. I’ll simplify the facts. A creditor serves a wage garnishment on the debtor’s employer. The employer garnishes the next paycheck (" Paycheck One"). Then, the debtor files Chapter 7 bankruptcy. The Friday following the bankruptcy filing the employer garnishes a second paycheck ("Paycheck Two"). We serve a suggestion of bankruptcy to the creditor and the employer. The employer refuses to release to the debtor any part of Paycheck Two (post filing) until the bankruptcy trustee sends the employer a letter releasing any claim against the money as part of the bankruptcy estate.

The employer believed that wages due to the debtor’s employment prior to the bankruptcy filing are part of the bankruptcy estate (if not otherwise exempt). Therefore, the employer would not release any money until the bankruptcy trustee decided what portion of Paycheck Two was earned pre-petition. The issue is whether a debtor’s pay is earned when worked or earned at the end of the pay period when the paycheck is due.

I’m pretty sure the employer in this case is wrong, and that the garnishment of Paycheck Two after filing is a violation of the automatic stay by the creditor and maybe by the employer as well. There are bankruptcy court decisions which have held that wages are not subject to garnishment until the paycheck is due. Courts have sanctioned creditors for garnishing paychecks due after a bankruptcy is filed. Because Paycheck Two was due after the bankruptcy no part of the debtor’s earnings during the pay period preceding bankruptcy is subject to garnishment or is subject to the trustee. Otherwise, every employer will have to withhold the next paycheck due to any employee who files bankruptcy to see if any part of money earned prior to the bankruptcy filing date is part of the trustee's estate.

That the creditor served the wage garnishment prior to bankruptcy is no defense. Bankruptcy courts have held that failure to undo a garnishment after bankruptcy is filed is a willful violation of the stay; creditors must take affirmative action to dissolve a wage garnishment when a debtor files bankruptcy.

In fact, some attorney representing either the employer or the creditor eventually saw the light. My client sent my secretary an email stating that the issue is resolved, and that the employer sent the debtor all the garnished money including Paychecks One and Two.

Comments

[Vang]

thank you very much sharing these valuable information for us. I've just subscribed to your blog.

[Steve Sanchez]

I had to file for bankruptcy protection because I just had too much debt and I cannot possibly pay it off in years. Fortunately I did not have to deal with wage garnishment, but someone that I met at the 341 meeting did. He told me that the creditors actually petition to have 30% of his salary taken out and that is causing extra strain on his finances.

Bankruptcy is not a laughing matter and should be handled with care. Bankruptcy lawyer is your best resource to get your bankruptcy case resolved and get your life back on track.

[Declaring Personal Bankruptcy]

Wage garnishment laws include attaching wages, bank accounts and student loans in default. The law does not describe how to stop wage garnishment! The best way to prevent wage garnishment actions is to be pro-active when dealing with creditors and debt collectors....Declaring Personal Bankruptcy

[Dokemion]

Many people wonder what they can expect in bankruptcy court. The first thing that occurs is the meeting with a bankruptcy trustee. The meeting could take place in the trustee's office or a room in the courthouse. After this first meeting, you will receive a notice about the first meeting with the creditors. This part requires that you answer questions under oath. Creditors will ask you any questions that they need answered truthfully. The meeting does not take very long. Sometime it is less than twenty minutes.

[Declaring Personal Bankruptcy]

Nice posting...I want to add few from myside...

Personal bankruptcy is the process of freeing yourself from overwhelming debts so you can make a fresh start, subject to some restrictions; and selling your high value assets so money can be shared out fairly among the people who money is owed to. Anyone can go file for personal bankruptcy, including individual members of a partnership.

Bankruptcy attorneys practice two basic types of bankruptcy proceedings: liquidation under Chapter 7, and debtor rehabilitation involving a court-approved plan of reorganization and payment of the debts over a period of time using future earnings under Chapters 9, 11, 12 and 13....Declaring Personal Bankruptcy