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Using Bankruptcy to Save Your Income: Garnishment

By Columbia – Lexington Bankruptcy Attorney Lex Rogerson

garnishmentState laws vary as to when creditors can garnish earnings, but bankruptcy can often prevent or stop the interception of your pay.

In our last post, we looked at how bankruptcy can prevent the federal government from reducing social security benefits in order to collect past-due taxes and delinquent federal non-tax debts. This article deals with the more common problem of wage garnishment.

General consumer debts

Most states permit garnishment of earnings for ordinary debts like credit cards, finance companies, medical bills, etc. The creditor obtains a writ or order from a court requiring the employer to send a certain amount of an employee’s pay to the creditor. The theory behind this procedure is that money owed to a debtor, including the wages due an employee, is a type of property and, except to the extent it is protected through exemptions, is answerable for the employee’s debts.

Depending on the applicable state law, wage garnishment generally requires that the creditor first file suit and obtain a judgment, although in limited situations pre-judgment garnishment is permitted. Most states also limit the amount of earnings a creditor can take, and federal law also provides a cap; a typical maximum might be 20 – 25%. But for people having financial difficulty, losing even a small percentage of income can prevent paying the mortgage, rent, or utilities.

Five or six states, including South Carolina, do not permit wage garnishment for ordinary debts, but that doesn’t mean their citizens are safe. If the debtor works for an employer located outside the state, the law of that state, and not the state where the employee lives, may determine whether wages can be garnished. The creditor can sometimes domesticate (transfer) its judgment to another state like Georgia or North Carolina where the employer has its payroll office (or conceivably any other office) and use that state’s laws to garnish the earnings.

Wage garnishment can be a strong reason to consider bankruptcy, because ordinary debts that can lead to garnishment are generally dischargeable. The automatic stay provision in the Bankruptcy Code means garnishment must stop as soon as the debtor files a bankruptcy case. When the case is completed, the discharge order then prevents the creditor from collecting the debt, by garnishment or by any other process, in the future.

Special debts

Even in non-garnishment states like South Carolina, wages can be intercepted to pay debts like delinquent taxes, child support, and alimony. Because these debts are typically not dischargeable in bankruptcy, filing Chapter 7 would likely protect the employee’s pay check only temporarily. But Chapter 13 can permit the employee to spread the payments out over a several years and sometimes reduce the amount that must be paid. For a fuller discussion, click here.

U.S. Treasury Department can also garnish wages for debts other than taxes owed to the federal government. The Debt Collection Improvement Act of 1996, which we discussed in relation to social security offsets, also authorizes administrative wage garnishment of up to 15% of an employee’s disposable income. Because federal non-tax debts are usually  dischargeable, either chapter 7 or chapter 13 can be a useful way to make sure you and your family, not the government, get your pay.

When to act

The variation in state laws makes it difficult to generalize, but often a creditor must give advance notice before money starts to come out of your paycheck. Once your earnings are withheld, it can be difficult or impossible to get them back. So if you want to consider bankruptcy, it’s important to contact a qualified bankruptcy attorney as soon as you learn a garnishment may be on the horizon.

 

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