The Collision between State Garnishment Law and Federal Bankruptcy Law

Posted by Kevin on July 10, 2013 under Bankruptcy Blog | Be the First to Comment

Bankruptcy quashes a garnishment, but only if it’s filed in time.

It’s all about federalism. OK.  Take a deep breath.  This is a little technical, but we can get through it.

Under our federalist system of government, first, federal law trumps state law in those areas of law—such as bankruptcy—in which the U.S. Constitution gives Congress the power to write laws. But second, federal law respects state law in areas of law where the states have the right to make laws—about the collection of debts, for instance.

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.

Bankruptcy stops virtually all garnishments once the bankruptcy case is filed. But this power of bankruptcy—called the automatic stay—only kicks in at the moment of filing, not before that. So if a garnishment order is entered by the state court and your employer delivers money over to the garnishing creditor the minute before the bankruptcy case is filed, the garnishment is not prevented by the automatic stay.   But the automatic stay stops all future garnishments, because now the federal law is trumping state court in the area of law where it reigns supreme.

So it’s a race between a creditor completing a garnishment in the state court, and you filing a bankruptcy in bankruptcy court.

Close Calls Depend on the Details of State Garnishment Procedures

More about the automatic stay.

Bankruptcy law simply says that a bankruptcy filing “operates as a stay” (a “freezing”) of “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case.” 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 from garnishing from that paycheck, UNLESS according to that state’s laws at the moment of the bankruptcy filing the garnished money no longer belongs to you, and thus, not to your new “bankruptcy estate.” Exactly when that happens depends on that state’s exact garnishment procedure and on its property law. For example, who does the money being garnished belong to—you or the creditor—if the employer has cut the check for the creditor but not yet delivered it to the creditor at the moment the bankruptcy is filed. You get the idea how complicated this can get.

The Main Idea

Regardless how these hair-splitting issues would be resolved in your state, the main lesson here is to avoid this problem by having your bankruptcy case be filed well before a creditor has the right to garnish your wages. Yes, in the real world that may be harder said than done, but you can see why it makes sense.

In the next blog, we will re-visit this issue