Bankruptcy kills a garnishment, but only if it’s filed in time.
Why Bankruptcy is Stronger than a Court Garnishment Order
This is a civics lesson that really matters.
Under our federalist system of government, there’s a delicate balancing of federal law and state law. On the one hand, federal law trumps state law in those areas—such as bankruptcy—in which the U.S. Constitution gives Congress the power to write laws. But on the other hand, federal courts—including the bankruptcy courts—respect state law in areas where the states have the power to make laws—about the collection of debts, for example.
So, state garnishment law and federal bankruptcy law butt up against each other when a garnishment and bankruptcy filing happen at about the same time.
Our last blog made the point that bankruptcy stops virtually all garnishments once the bankruptcy case is filed. But this power of bankruptcy—called the “automatic stay”—only becomes effective at the moment of filing, not before that. So if a creditor gets a judgment against you in state court and then a garnishment order is signed by a state court judge and your employer delivers money over to the garnishing creditor just before the bankruptcy case is filed, the garnishment prevails. The bankruptcy law respects the state’s collection law to allow that garnishment. But the automatic stay stops all future garnishments, because now the federal law trumps the power of the state court in the area of law where the federal law is supreme.
The Details of State Garnishment Procedures Can Be Important
Another basic principle of our system of government is that in areas of law that are governed by the states—like debt collection— each state gets to decide what the laws are within its borders. So each state can make whatever garnishment laws it wants to (as long as they don’t butt up against federal fair debt collection and other laws). As a result different states’ garnishment procedures can be quite different in their details.
Bankruptcy law simply says that a bankruptcy filing “operates as a stay” (a stopping) of “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case.” (Section 362(a)(2) of the Bankruptcy Code.) A garnishment is an “enforcement… of a judgment obtained before” the bankruptcy case was filed. “Property of the estate” consists of everything that you own at the time your bankruptcy is filed, including a paycheck that’s been earned but not yet paid to you.
So the creditor is stopped—“stayed”—from garnishing from your paycheck, UNLESS the garnished money no longer belongs to you according to that state’s laws at the moment of the bankruptcy filing. If not, then it does not belong to your new “bankruptcy estate,” and that particular garnishment effort is not stopped by the bankruptcy filing.
Exactly when the garnished money is legally no longer yours depends on your state’s exact garnishment procedure and on its property laws. For example, if your employer has cut the check for the creditor but not yet delivered it to the creditor at the moment your bankruptcy is filed who does the money being garnished belong to—you or the creditor?
As you can see it gets complicated when a garnishment is interrupted mid-stream by a bankruptcy filing.
The Main Lesson
The main lesson here is to avoid these complications and the risk of losing a chunk of your paycheck by having your bankruptcy case filed way before a creditor has the right to garnish your wages—before a lawsuit is filed against you, or for sure before a lawsuit turns into a judgment.