If you have been sued by a creditor and they are garnishing your wages, an option worth considering is whether to file for bankruptcy protection either under chapter 7 or chapter 13. The bankruptcy filing triggers an automatic stay at the moment of filing. This automatic stay is powerful and forces the creditors to stop any collection action, including phone calls, letters, lawsuits, repossessions and any other collection action. If your wages are being garnished by the creditor, the filing of the bankruptcy will stop the garnishment.
When a client has a wage garnishment, my first action after the case filing is to contact the law firm representing the creditor to provide notice of the bankruptcy and demand the release (lifting) of the writ of garnishment. The creditor must then issue a release of the writ and forward it to my client’s employer. If the creditor receives garnished wages after the case filing, they just return it due to the automatic stay. Depending upon the circumstances, my client may have a claim to the garnished fund from the past 90 days. The wage garnishments received by the creditor must before $600 or more in order to pursue what is known as a “preference action” action against the creditor. My client must also have the ability to “exempt” the garnished wages, meaning that my client must have a specific bankruptcy exemption available under federal or Washington state law that allows them to pursue and keep the garnished funds.
When I consult with a potential or actual client about a wage garnishment, I am looking into several issues. How much is the debt? If the potential client owes only a few thousand dollars on a judgment, I am going to recommend against filing for bankruptcy. Is the debt dischargeable in a bankruptcy (meaning will my client no longer be legally responsible for such debt)? For instance, if my client has their wages garnished by a creditor for traffic infractions, a chapter 7 bankruptcy will temporarily stop the garnishment but he debt will not be discharged and the creditor will resume garnishment after the completion of the case. In this situation, a chapter 13 case may be a better option since non-criminal traffic tickets are dischargeable in a chapter 13 case. I am also going to determine whether the garnished wages can be recovered and paid to my client under the particular circumstances. If the creditor ignores the bankruptcy automatic stay or refuses to return garnished wages (which occasionally happens), it may be necessary to file a motion or lawsuit (known as an adversary proceeding) against the creditor.
Under Washington law, a judgment is valid for ten years. Within 90 days prior to the expiration of the judgment, the creditor can renew the judgment for an additional ten years. Interest would accrue during this time. A creditor may choose to do nothing for several years while the interest accrues interest and then seek to garnish wages or a bank account. For garnishment of the bank account, the person owing the money will not receive notice prior to the garnishment of the account.
The judgment can also become a lien against real property. If you own a home and it considered your homestead (which generally means that you reside in the property but under certain circumstances can mean that you intend to reside in the real property), the creditor must record the judgment with the county recorder. For instance, if you reside in Pierce County, the creditor must record the judgment with the Pierce County Recorder. The judgment then becomes a lien against the real property. If you then sell the home, the lien needs to be satisfied (paid in full or negotiated at a lesser amount). It is possible to avoid (remove) the judgment lien in a bankruptcy case, but you must file a motion with the bankruptcy court to avoid the judgment lien. In order to avoid the judgment lien, the lien must impair or interfere with a bankruptcy exemption, which usually would be the homestead exemption. An example may be helpful. At the time of the bankruptcy filing the debtor’s home is worth $300,000, the mortgage balance is $250,000, with equity of $50,000 without considering any selling costs. The debtor exempts the home under the Washington homestead exemption of $125,000. If there is a judgment recorded against the property, the court should approve the motion to avoid the judgment lien because the lien impairs the debtor’s homestead exemption. If in the same example the home is worth $400,000 instead of $300,000, with equity of $150,000, and if the judgment lien is $10,000, the judgment lien would not be avoided/removed because the judgment lien is not impairing the debtor’s homestead exemption.