Will Bankruptcy Stop Wage Garnishments?

The short answer is yes.   Once your case is filed, creditors are no longer entitled to garnish your wages for debts that existed at the beginning of the case.  The only exception may be for on-going child or family support ordered by a court.  This is a function of the automatic stay. The filing of a bankruptcy case, under any chapter of the Bankruptcy Code, triggers an injunction against the continuance of any action by any creditor against the debtor or the debtor's property.  11 U.S.C. 362.  In Chapter 13, the stay even protects co debtors who are liable with the debtor on consumer debts. The automatic stay gives the debtor protection from his creditors, subject to the oversight of the bankruptcy judge, and brings all of the debtor's assets and creditors into the same forum, the bankruptcy court, where the rights of all concerned can be balanced.

The 2005 amendments to the Bankruptcy Code instituted limitations on the duration of the stay in the case of repeat filers: debtors who had a prior case pending in the last year which was dismissed get a stay of 30 days; debtors with two or more cases pending in the past years but dismissed get no stay at all. The debtor in those situations must seek a stay from the court in order to have the protection of the automatic (or not so automatic) stay.  Once the automatic stay expires, the discharge of the underlying debt will forever eliminate a creditor's right to garnish your wages on account of that debt.

A Chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause." If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

Problems can arise when a Chapter 13 debtor has their plan confirmed, only to find that their mortgage payment increases because of a variable rate mortgage.  On March 24, 2009, the U.S. Bankruptcy Court for the Eastern District of Michigan amended Local Rule 3001-2 in order to "clarify the procedures for administering post-confirmation changes in mortgage payments in chapter 13 cases," amended Local Rule 3001-2.  The Rule, as amended, states that in a Chapter 13 case, "a creditor with a claim secured by a mortgage on real property shall file and serve on the debtor a statement of any proposed increase or decrease of periodic payments and file a certificate of service."  The creditor must file such a statement no less than 45 days before the proposed effective date of the adjustment of the payment amount. The Rule requires that the statement "fully disclose the calculations on which the adjustment is based."  Once such a statement is filed, the debtor (the individual seeking Chapter 13 protection) then has 21
days to object. If an objection is filed, the court will schedule a hearing with notice to the debtor, the creditor and the trustee. Within 14 days after the Court resolves any objections (or within 14 days after the deadline for filing objections passes, whichever is later), the trustee shall file a notice stating whether the plan will still be adequately funded with the current plan payment amount and if not, stating the necessary increase in plan payments.  If necessary, the debtor may be required to file a plan modification under Local Rule 3015-2(b) to assure adequate funding of the plan.  The Rule, as amended, also creates certain exceptions for creditors whose mortgage payments are "subject to change more frequently than once every six months."

If you are considering bankruptcy, it is important to consult with an attorney who is familiar with your jurisdiction's local rules.  Although the Federal Rules of Bankruptcy Procedure are the same throughout the United States, each federal bankruptcy court is also authorized to adopt local rules which clarify or fill voids left by the Federal Rules.  The failure to follow local rules can have damaging effects on a bankruptcy proceeding.

If the debtor's domicile has changed in the last two years, the determining factor for exemption law purposes will be where the debtor resided for the 180 day period preceding the two year period. In other words, we look back two years plus 180 days. Wherever the debtor spent the majority of the 180 day period will be his or her exemption state. The plot thickens when the debtor's exemption state requires that a debtor be a resident to take advantage of its laws. Some states such as Goergia limit their exemption laws to domiciliaries (defined as someone who lived in Goergia longer than anywhere else in the 180 day period preceeding the bankruptcy filing).

So what becomes of the debtor who lived in Goergia for 10 years but moved to North Carolina 1 year ago? Let's run through the analysis. Since the debtor has not lived in North Carolina for the last two years, North Carolina exemption law is not applicable. We turn to the Goergia bankruptcy exemptions. But wait! Goergia law mandates residency in Goergia in order to claim its exemptions. Have we created the Yasir Arafat of bankruptcy debtors? No protection from any bankruptcy exemption laws. Thankfully, No. If the effect of this complicated residency scheme is to render the debtor ineligible to claim any exemptions, the debtor may elect to exempt property under the federal exemptions, even if the state of the debtor's domicile is an opt out state.

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