By the time an individual faces Chapter 7 bankruptcy, he or she may have a couple of judgments against him or her for previous unpaid debts.
In fact, many of these judgments may have already gotten to the point where wages are being garnished from the debtor’s paycheck.
What happens to these garnishments once Chapter 7 bankruptcy is filed?
1. What Is Chapter 7 Bankruptcy?
Two different types of bankruptcy are commonly used by debtors facing tough financial situations. Chapter 13 bankruptcy involves a reorganization of the client’s debt, resulting in a payment plan and eventual liquidation of whatever debts are remaining at the end of the payment period.
Chapter 7 bankruptcy is referred to as “liquidation” bankruptcy. When bankruptcy is filed, an automatic stay is put in place. This automatic stay puts a stop to any legal proceedings or debt collections that are current against the debtor.
At this point, all creditors will receive notice of the filing and the automatic stay and will be given a chance to file a claim with the bankruptcy trustee. The trustee works with creditors on their claims, and any debts that are not exempt or unsecured are liquidated.
2. What Is Wage Garnishment?
Wage garnishment is when money to collect upon a judgment is taken out of an individual’s paycheck. Wages cannot be garnished without a court order authorizing the garnishment.
One of the most typical types of wage garnishments involve child support. However, student loans and taxes are also traditionally enforced through a wage garnishment or income withholding order. Other debts can be collected in this manner, as well, so long as the order is signed and authorized.
After the judgement is obtained, it is then sent to the debtor’s employer and the judgment will then automatically be taken out of the person’s paycheck in the appropriate amount.
Once the debt is satisfied, the withholding ends. Limits do exist as to how much can be taken from the employee’s paycheck so that the entire check is not depleted because of a judgment.
3. What Is an Automatic Stay and How Does It Affect a Bankruptcy?
The automatic stay is one of the benefits of filing for bankruptcy. By the time the debtor gets to filing, he or she is probably at his or her wit’s end in terms of financial stress. This stay is supposed to relieve part of that stress.
The automatic stay keeps the creditors from taking debt collection proceedings against the debtor while the bankruptcy is pending. Since wage garnishments come from collection proceedings, these garnishments are also halted when the automatic stay is issued.
However, not all wage garnishments can be stopped. Child support is the most important of these garnishments that are not allowed to be halted.
Creditors can petition the court to have the stay lifted, but the circumstances for these allowances are limited.
Unless the garnishment comes from a matter where public policy is an issue, such as child support, the garnishment will normally be halted with the filing of a bankruptcy petition.
4. What About The Notice Of The Automatic Stay?
Who has the responsibility of notifying the employer of the automatic stay when it is issued? Will it be the debtor or the bankruptcy court who will inform the company? Normally the bankruptcy court notifies the employer of the automatic stay.
The bankruptcy trustee gets all of the information on who the creditors are, as well as their contact information, and they use this information to provide notice.
5. What Happens To The Wage Garnishment Once The Case Is Closed?
It can be assumed that the automatic stay goes away once the case goes away. A lot hinges on why the income withholding order was issued and what debt is associated with it.
If the wage garnishment came along with a normal collections action and this creditor was included on the debtor’s list supplied to the bankruptcy trustee, the wage garnishment will go away when the debt is liquidation.
However, if the bankruptcy case ends early and unsuccessfully, then the wage garnishment goes back into effect. If the case is closed successfully and the debt is liquidated, so is the garnishment order.
Contact Collins & Arnove Bankruptcy Attorneys Today
Facing a bankruptcy can be an intimidating process. We are here to walk you through it every step of the way. If you need assistance, Collins & Arnove can help you. Call 972-435-9738 today for your free consultation.