Wage Garnishment in a Chapter 7 Bankruptcy
A wage garnishment is one of the most devastating forms of collecting a debt. General creditors, such as credit cards and medical bills, can often take up to 25% of the debtor’s net pay. Debts owed to taxing authorities, such as the IRS, more may be taken. With many people living paycheck to paycheck, a wage garnishment can ruin a family budget.
Fortunately, the bankruptcy code provides an equally powerful countermeasure. Once a bankruptcy petition is filed, the powerful “automatic stay” goes into effect. The automatic stay is an order of the bankruptcy court for creditors to cease collection efforts on a debt. Since wage garnishments are collection efforts, wage garnishments must cease.
When the Stay Applies.
The stay takes effect when a Voluntary Petition is filed. When filed, a notice is sent to all creditors, informing them of the stay. The notice is usually sent out within a day or two of filing. Rather than waiting, a copy of the Notice can usually be obtained from the Clerk of the Bankruptcy Court where the case was filed. For St. Louis and St. Charles residents, the Bankruptcy Court is located downtown St. Louis.
It can then be hand delivered, faxed or electronically delivered to the creditor. Since an employee’s wages are being garnished, a copy should go to the employer’s HR department. If the debtor’s wages are presently being garnished, it is best to notify the creditor and the employer as soon as possible to stop the garnishment.
The stay remains in effect until the court orders otherwise. Most debts are discharged, so the wage garnishment will cease permanently. If the debt is not dischargeable, such as recent tax obligations, the creditor can reinstitute a wage garnishment. However, the debtor is at least provided breathing space to arrange a payment plan with that creditor.
If the nondischargeable debt is a tax obligation, the debtor may consider filing a Chapter 13 bankruptcy. In those cases, the debtor may pay back the tax obligation, without incurring further interest, through a repayment plan. Those in Missouri may consider consulting a St. Louis bankruptcy attorney for guidance.
When the Stay Does Not Apply.
The stay does not apply to domestic support obligations, i.e. child support and alimony payments. If a wage withholding order is in effect for either of these obligations, the bankruptcy court will not stay the order, and the support will continue to be deducted from the debtor’s wages.
Under the newer Bankruptcy Abuse Prevention Act, if a debtor had a previous bankruptcy dismissed within a year of commencing the present case, the stay will not be automatic. Thus, a garnishment could continue. However, the debtor may file a motion with to extend the stay.
Under the new law, a new petition filed within a year of dismissal of the earlier case is presumed to have been done in bad faith. This is only a presumption and the debtor may demonstrate facts to the court showing that the second filing is done in good faith.
A wage garnishment can be devastating, but there may be methods of stopping it. In Missouri, contacting a St. Charles bankruptcy attorney should be consulted as soon as possible.