We garnished wages from a debtor and now they are requesting the money back?

Recently on our legal forum a user asked, “What happens if I have a court-ordered wage assignment against a debtor and then that debtor files for bankruptcy protection? We recently had the debtor’s attorney contact us and tell us we had to send some of the money back. I want to know if this is true, and if so, how do I get my money?”

Debtors file for bankruptcy protection

It’s not unusual for a client to decide to file for bankruptcy protection after a creditor has obtained a judgment and starts garnishing their wages. If this occurs, the Chapter 7 bankruptcy court will assign a trustee to sell the debtor’s non-exempt assets and repay some of the creditors.

Additionally, the bankruptcy filing will also initiate what is called an automatic stay which will stop most wage garnishments. Creditors may request that the court restart the wage garnishment but they must have a valid reason. It’s important to note, however, that wage garnishments for domestic support obligations will not be affected by a bankruptcy filing.

What happens to wages that have already been garnished?

In some cases, to avoid preference for repayment under 11 U.S.C. § 547(b), the trustee can sue to recover wages which were garnished prior to the bankruptcy filing and redistribute funds more fairly amongst all of the debtor’s creditors after paying their own fees thereby avoiding the chance that one creditor might get more than they ordinarily would have received but for the transfer.

In other cases, however, if the debtor is able to protect the garnishment using their bankruptcy exemptions, they have listed this preference on the Statement of Financial Affairs and on Schedule B and have exempted it on Schedule C of their bankruptcy petition, they may request the creditor to repay them wages which were garnished 90 days prior to the bankruptcy filing if the amount was $600 in aggregate and the debtor has enough bankruptcy exemptions to cover them.

More specifically, the debtor can request garnished wages be refunded if the following are true:

(1) The transfer was involuntary
(2) The debtor can exempt the property recovered
(3) The trustee does not attempt to avoid the transfer

Getting the money back requires the debtor to file a lawsuit against the garnishing creditor in bankruptcy court through an adversary proceeding. Unfortunately, this process can be expensive if the debtor has to hire a lawyer and may cost more than the money they are trying to recover.

How Is the Automatic Stay Lifted?

No doubt this information is very frustrating for most creditors. In fact, most unsecured creditors have very few options after a debtor has filed for bankruptcy protection. As noted above, not only will you have to cease all collection actions after the bankruptcy filing, it’s unlikely that the court will lift the automatic stay and let you continue your garnishments.

Additionally, in some cases, the debtor or trustee may also have the legal right to recover some of the money you may have already garnished and you will have to pay the debtor or trustee back.

Bottom Line:

Unfortunately, without more information it sounds like you will have to repay the money which the debtor is requesting. Most creditors would argue that many of the current bankruptcy laws favor debtors and not creditors attempting to collect past debts.

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