Not only will filing bankruptcy immediately stop a creditor from continuing to garnish your paycheck—in some cases bankruptcy will actually allow you to get some of your money back! If a creditor has garnished more than $600 from a debtor in the 90 days before a bankruptcy filing, that can be viewed as a preference. In those circumstances, the Bankruptcy Code may allow a debtor to seek return of the garnished funds.
A debtor should disclose in his/her bankruptcy petition the amount of funds that were garnished within the 90 days before bankruptcy. The debtor should then claim an exemption under federal law as to those garnished funds. Often creditors will return garnished funds following notice of a bankruptcy filing, a telephone call, and/or demand letter.
If a request for return of garnished funds is unsuccessful, a debtor can file an adversary proceeding with the Bankruptcy Court to seek avoidance of the creditor’s lien rights and to recover the preferential transfer (the garnished funds).
Bankruptcy trustees typically do not avoid transfers of exempt funds for the benefit of the debtor. Instead, trustees typically allow the debtor to do so for the debtor’s benefit. Depending on the amount at issue, the recovered garnished funds can go a long way toward helping pay for the related bankruptcy fees and costs. If you’re dealing with garnishment issues, please call and we can have a strategy session that will give you the information you need to decide what is best for you.
To better understand how the rules regarding recovering garnished funds work, here are a few examples:
Example #1: Your paychecks have been garnished for the past 2 months for a total of $800 and you file a Chapter 7 bankruptcy tomorrow. The first two criteria are met (within 90 days and over $600) so you stand to regain all $800.
Example #2: Your paycheck has been garnished for the past 6 months for a total of $1,500 and you file a Chapter 7 bankruptcy tomorrow. You qualify to recover SOME of your money– but only the portion taken within 90 days will be eligible – which let’s say totals $700. The creditor is entitled to keep the other portion ($800).
Example #3: You were garnished, but the garnishment stopped over 4 months ago. When you file a Chapter 7, the garnished wages cannot be recovered. Remember it has to be within 90 days of filing your bankruptcy case.
Example #4: You were garnished last week for $250 and file bankruptcy tomorrow. Yes, it’s within 90 days but it’s less than $600. The garnished wages cannot be recovered.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.