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Does Bankruptcy Stop Wage Garnishment?
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Debts have a way of creeping up on you, no matter how hard you might try to escape them. Ignore them for long enough and a creditor could get a court order forcing your employer to withhold a portion of your pay so that the debt can be resolved — this is called a wage garnishment. In some cases (if the unpaid debts are for taxes, student loans or child support, for example), the creditor might have the right to begin garnishing your wages without first taking the matter to court.
One question that many have upon seeing the effect of garnished wages on their paycheck is whether declaring bankruptcy can help stop the garnishment. To answer that question, let’s take a closer look at how Chapter 7 and Chapter 13 bankruptcy can impact wage garnishments.
How to stop wage garnishment through bankruptcy
With a reported 7% of U.S. employees having wages garnished and the average non-garnished worker earning about 25% more per year than those with a wage garnishment, it’s not surprising that people are searching for a means to possibly reorganize or discharge debt and, as a result, stop wage garnishments. Bankruptcy is one possible solution, but it’s not a fix-all.
Generally speaking, filing for bankruptcy (either Chapter 7 or Chapter 13) prompts an automatic stay on all collections and foreclosure actions, including certain wage garnishments. So if you have debt collectors calling and the bank is ready to foreclose on your home, filing for bankruptcy can force those actions to stop, at least for a little while. The automatic stay usually lasts until a bankruptcy case is closed or the debts discharged, unless the debtor has declared bankruptcy multiple times within a year, in which case the stay might last only 30 days or not be issued at all.
The steps to declaring bankruptcy will depend on many factors, including your state and the chapter of bankruptcy you need to file. In the case of filing Chapters 7 and 13, the initial steps for petitioning the court and getting the automatic stay are the same:
- Get a credit counseling briefing: The provider must have been approved by your state.
- Look up your district court: You’ll need to get any location-specific instructions.
- Complete Form B 2010: This is the required notice for individuals filing bankruptcy.
- Complete the following: Form 101, Form 121, Form 119, and Form 2800.
- If you need to pay the bankruptcy fees in installments: Complete Form 103A. For Chapter 7 filers who want them waived, complete Form 103B.
- If there’s been an eviction action against you: Complete Form 101A and/or 101B.
- Send in the above: You’ll submit the forms along with a certificate of completion for your credit counseling, plus a full list of all your creditors — which should include those who are garnishing your wages.
Why bankruptcy won’t stop all wage garnishments
There are some debts that simply aren’t dischargeable through a Chapter 7 bankruptcy, including child support, some taxes and student loan debts. Thus, declaring Chapter 7 doesn’t change or delay your requirement to pay them or stop related wage garnishment.
This changes in a Chapter 13 bankruptcy, however, where the goal is to create a repayment plan to pay off debts over a period of three-to-five years. Since this is the case, the garnishments will stop as long as you’re in compliance with the Chapter 13 plan. That doesn’t mean you won’t have any wage garnishment, however — the court can still order that the repayment plan is fulfilled through wage garnishment.
FAQ: Wage garnishment and bankruptcy
How will my employer know to stop garnishing my wages?
Once the court receives a compliant bankruptcy filing, they will issue the automatic stay motion immediately. This notifies your employer to stop garnishing wages and lets the creditor know they will no longer receive these payments. Note that the automatic stay only works for those creditors you’ve listed in your bankruptcy filing and, when filing Chapter 7, for those debts that are dischargeable.
How soon after I file will the garnishment stop?
Because the court immediately issues the automatic stay after receiving a compliant declaration of bankruptcy, the next paycheck should have all eligible garnishments removed. However, it can take some time for the notice to be received, so you might want to let your employer and the garnishing creditor know about the filing ahead of time. Even that isn’t foolproof, however — if a creditor files a form to have the automatic stay lifted, or if you’ve filed for multiple bankruptcies, the garnishment may be permitted to continue.
Are there any exemptions to the shortened stays?
If your automatic stay has been shortened because of multiple bankruptcy filings, but you have reason to believe you should be granted an exemption for a qualified reason (such as a substantial change in your personal financial situation or the excusable dismissal of a prior bankruptcy filing), then your state may allow you to complete a Motion in Individual Case for Order Imposing a Stay or Continuing the Automatic Stay form. Doing so can help you to get the stay lengthened or in some cases, started when it otherwise wouldn’t be.
I’ve never declared bankruptcy before, yet one of my creditors got the automatic stay lifted. How did this happen?
Creditors can file a motion for relief from the automatic stay to be exempted from the automatic stay and continue with wage garnishments. If this request is granted by the court, then the debtor will get a notice that the automatic stay for the debt in question has been lifted.
What should I do if my employer/creditor violates automatic stay and continues with the wage garnishment?
The first step would be to notify your employer and creditor of the bankruptcy filing, since it’s possible the violation is due to an oversight or unreceived court notice. Once they know you’ve filed, the withheld funds should then be returned to you. If the garnishment continues and no funds are returned, you can notify the court by filing a motion for violation of the automatic stay. Check with your state court to see if there is an official form to file.
Will my garnishments continue after my Chapter 13 reorganization plan has been accepted?
It depends. In many cases, the garnishments for debts included in the plan will stop. However, the court may order the Chapter 13 debt repayment amount to be garnished from your wages, which means a whole new garnishment would commence.
What happens after my bankruptcy is discharged?
If it’s a Chapter 7 and your garnished debts are dischargeable, then they will likely be wiped out and you can continue getting your whole paycheck. If the debts were not dischargeable, then you will continue paying them through garnishment until they are paid off or you settle with the creditor. If these were dischargeable debts and you filed Chapter 13, then the debts would be repaid or discharged through your reorganization payment. If the reorganization payment was payable through its own wage garnishment, then that will end once the bankruptcy does.
Other ways to end wage garnishment
Before we talk about additional methods to end garnishment, it’s a good idea to review what your rights are under the Consumer Credit Protection Act (CCPA).
The CCPA limits to the amount that can be garnished from your disposable earnings, that portion of your pay after legally required deductions (such as Social Security) are taken. Of that remaining disposable income, the weekly maximum amount that can be garnished for a non-support or non-tax garnishment, regardless of the number of wage garnishments you have, is the lesser of:
- 25% of your disposable income; or
- The amount above 30 times federal minimum wage
In other words, if your check is $500 after legally-required deductions, 25% of that is $125. Thirty times the current federal minimum wage ($7.25) is $217.50, which leaves the amount above that as $282.50. Since the garnishment must be the lesser of those two amounts, then the maximum garnishment would be $125.
Once you understand what creditors can and can’t do in terms of garnishing your wages, you can monitor what’s taken from your paycheck and make sure it’s compliant with the CCPA. If it is, but you still want to end the garnishment without declaring bankruptcy, here are some options:
Pay the debt off/settle. Creditors garnish wages in an effort to get back the money they are owed. In many cases, a creditor might agree to take a reduced, single lump-sum payment rather than taking months or years of garnished wages. Using emergency savings or home equity can give you the funds you need to reach a settlement that not only ends the wage garnishment but also results in a smaller total repayment amount.
Get the judgment overturned. If you missed a court date, didn’t receive any papers about the complaint that ended up with garnishment, or have a good reason why the creditor should not have won the case allowing them to garnish your wages, you may be able to get the wage garnishment order overturned or vacated. After completing your state’s Motion to Vacate form within the allotted time frame, you can expect to attend a hearing to present your case.
File an exemption for hardship. No matter what limits CCPA imposes on wage garnishments, the amount taken from your check can stretch the limits of your budget and make it difficult for you to stay current with other bills. When this is the case for student loans and tax debts, you may be able to object to the garnishment by completing required Education Department forms or calling the IRS. For other creditors, filing your state court’s Motion to Quash form might be necessary.
File a head-of-household exemption. As the main source of financial support for your family, you may be able to claim an exemption that reduces your wage garnishments. This is called a head-of-household exemption and to qualify, you need to be providing at least 51 percent of the support for a dependent (including your spouse). Check your state’s court website to find the appropriate form. Once that’s completed, you’ll be expected to attend a hearing where you can present evidence of your financial obligations and income.
The best defense to wage garnishment is a good offense, which means taking the steps to settle debts or set up repayment plans before wage garnishment starts. Doing so means talking with your creditors as billing notices, late notices and collection notices come in to find out if you can make a payment arrangement or settle for a one-time lump sum payment before the collection attempts escalate.