Cite as: Keith M. Lundin, Lundin On Chapter 13, § 50.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
Garnishments often push debtors into Chapter 13. At the filing of the petition, the automatic stay prohibits continuation of any garnishment of the debtor’s wages,1 but the mechanics of actually stopping a garnishment vary from jurisdiction to jurisdiction.
At the filing of the petition, some bankruptcy courts will issue an ex parte “Order to Release Garnishment” that can be served on the garnishing creditor or on the debtor’s employer to stop the withholding of wages. In other jurisdictions, counsel can get a “Notice of Filing Bankruptcy” from the clerk of the bankruptcy court, and service of that notice is usually sufficient to stop the garnishment. The payroll deduction order issued to the debtor’s employer to commence payments to the Chapter 13 trustee often contains language instructing the employer that no other deductions from the debtor’s wages are to be honored during the Chapter 13 case.2 Elsewhere, a telephone call or letter from counsel is the practice.
Because a Chapter 13 debtor’s postpetition earnings are property of the estate,3 the creditor that refuses to release its garnishment of a debtor’s wages after notice of the filing may violate the automatic stay.4 Recovering wages or accounts that were garnished before the petition may depend on whether the funds became property of the Chapter 13 estate.5
For example, in In re Gunthorpe,6 the debtor could not use § 542 to compel turnover of wages garnished before bankruptcy because, under Alabama law, “condemnation” was automatic at the moment the garnished funds were received by the clerk of the state court and the debtor retained no interest that could become property of the Chapter 13 estate. In contrast, in Rodriguez v. First American Bank (In re Rodriguez),7 because no writ of execution had issued before the petition, the garnishment under Texas law did not transfer title to the garnished funds and the debtor could command turnover of the funds under § 542. In recent years, some state legislatures have rewritten their garnishment statutes to transfer title to garnished funds earlier in the execution process with perhaps the intended consequence that wages subject to garnishment will not become property of a bankruptcy estate and will not be recoverable by a bankruptcy trustee or debtor.8
Recovering money held by the garnishee or clerk of the garnishing court is not always simple. In some jurisdictions, the clerks of state courts that regularly issue garnishments will release money they hold to debtor’s counsel upon presentation of a filed-stamped petition. In other jurisdictions, counsel must file a motion for turnover or a complaint to recover garnished funds.9
If the garnished funds have already been remitted to the garnishing creditor, the debtor may have to file a complaint to avoid the transfer, for example, as a preference. There is disagreement in the reported decisions whether debtors can recover garnishments as preferential transfers.10 Also, with the enactment of the § 547(c)(8) defense, a Chapter 13 debtor will be precluded from recovering garnishments that aggregate less than $600.11 The filing of the Chapter 13 case thus may give the debtor relief from further garnishment of wages but may not provide a ready vehicle for recovery of money paid to a creditor through a prepetition garnishment. If the lien of the garnishing creditor is not subject to avoidance, the debtor may be precluded from recovering prepetition wages that have been paid over to the garnishing creditor and the debtor may face a continuing postpetition lien on wages that must be adequately protected during the Chapter 13 case.12
1 See §§ 68.1 [ Usual Protections ] § 58.1 Usual Protections and 68.2 [ Additional Protection for Postpetition Property and Income ] § 58.3 Additional Protection for Postpetition Property and Income.
2 See §§ 43.1 [ First Test of Debtor’s Good Intentions ] § 44.1 First Test of Debtor’s Good Intentions, 43.3 [ Employer Problems ] § 44.3 Employer Problems and 248.1 [ Order to Debtor’s Employer ] § 125.1 Order to Debtor’s Employer.
3 11 U.S.C. § 1306. See § 46.1 [ Postpetition Earnings ] § 46.3 Postpetition Earnings.
4 See § 75.1 [ Examples of Stay Violations, and Not ] § 62.1 Examples of Stay Violations, and Not.
5 See § 46.2 [ Prepetition Repossession, Levy, Sale or Conveyance ] § 46.4 Prepetition Repossession, Levy, Sale or Conveyance.
6 280 B.R. 893 (Bankr. S.D. Ala. 2001).
7 278 B.R. 749 (Bankr. N.D. Tex. 2002).
8 See, e.g., In re Giles, 271 B.R. 903, 906 (Bankr. M.D. Fla. 2002) (Refusing to release garnishment did not violate automatic stay because legislature amended Florida garnishment statute to create a lien upon service of the writ. Distinguishing In re Mims, 209 B.R. 746 (Bankr. M.D. Fla. 1997), and citing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 116 S. Ct. 286, 133 L. Ed. 2d 258 (1995), “the refusal to release the garnishment (and, in turn, release the lien) takes nothing from the Debtor because the Debtor’s rights in the Bank Accounts are subordinate to Imperial’s lien rights.”).
9 See § 52.1 [ Turnover of Property ] § 50.1 Turnover of Property. The debtor’s employer, the state court clerk, or other garnishee may be a “custodian” (11 U.S.C. § 101(11)), and turnover of garnished wages held by an employer or court clerk would proceed under 11 U.S.C. § 543.
10 See Askin Marine Co. v. Conner (In re Conner), 733 F.2d 1560 (11th Cir. 1984); In re Coppie, 728 F.2d 951 (7th Cir. 1984); Riddervold v. Saratoga Hosp. (In re Riddervold), 647 F.2d 342 (2d Cir. 1981); In re Johnson, 239 B.R. 416, 417–18 (Bankr. M.D. Ala. 1999) (Debtor and trustee can recover wages garnished within 90 days of filing notwithstanding that garnishment lien attached 10 months earlier. “Auto Acceptance relies upon [Askin Marine Co. v. Conner (In re Conner),] 733 F.2d 1560 (11th Cir. 1984) and two bankruptcy court cases which hold that a garnishment becomes a lien which cannot be bested by a creditor on a simple contract who acquires a judicial lien after the garnishment. Section 547(e)(1)(B). This is the co-called ‘continuing lien’ theory of wage garnishments. . . . The debtor/trustee relies upon In re Freedom Group, Inc., 50 F.3d 408 (7th Cir. 1995) and numerous bankruptcy cases which conclude that Section 547(e)(3) requires a finding, under Federal law, that the garnished wages cannot be transferred until earned and payable to the debtor. . . . We cannot imagine a clearer statement of a point of Federal law. While the garnishment may be a state created lien right in property, if it results in a transfer under Federal law within the reach back period, it is subject to attack as a preference. No fiction of state garnishment law should be erected to defeat the purpose of the Federal statute.”); Smoot v. Swann Hill Condo. Unit Owners Ass’n, Inc. (In re Smoot), 237 B.R. 875, 877 (Bankr. D. Md. 1999) (Debtor can recover and exempt wages garnished during the 90 days before the petition that the trustee does not recover. Condominium Association garnished debtor’s paycheck eight times prior to the filing. It was undisputed that the Chapter 13 trustee could recover the funds garnished within 90 days under § 547(b). Creditor argued that the portion of wages it received were not available as an exemption under Maryland law and thus could not be recovered by the debtor under § 522(h). “[T]he avoidance powers of a Chapter 13 debtor are limited to those set out in § 522(h) of the code—that is, to recover potentially exempt property if the trustee fails to act. . . . Here what is being claimed as exempt by the Debtor is not the nonexempt portion of the wage attachment, but the preference proceeds recoverable by the Trustee that the Debtor could have claimed as exempt had the preferential transfer not occurred. The Bankruptcy Code allows the Debtor to seek these funds directly, because the Trustee has no interest in recovering preferential transfers that may then be claimed as exempt by the Debtor.”); Sucre v. MIC Leasing Corp. (In re Sucre), 226 B.R. 340, 347–48 (Bankr. S.D.N.Y. 1998) (Debtor cannot recover funds garnished during the 90 days before the filing of a Chapter 13 petition because, under Riddervold v. Saratoga Hosp. (In re Riddervold), 647 F.2d 342 (2d Cir. 1981), the debtor had no property interest in the garnished portion of her wages and thus there was no transfer of property for purposes of § 547(b).); Harrington v. Limbey (In re Limbey), 70 B.R. 301 (Bankr. S.D. Fla. 1987); Perry v. GMAC (In re Perry), 48 B.R. 591 (Bankr. M.D. Tenn. 1985); Eggleston v. Third Nat’l Bank (In re Eggleston), 19 B.R. 280 (Bankr. M.D. Tenn. 1982). See also §§ 53.1 [ Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances ] § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances and 60.1 [ Avoidance and Recovery Powers ] § 53.12 Avoidance and Recovery Powers.
11 See Electric City Merchandise Co. v. Hailes (In re Hailes), 77 F.3d 873, 875 (5th Cir. 1996) (For purposes of the preference defense in § 547(c)(8), it is appropriate to aggregate the value of several small transfers, and if the aggregate totals more than $600, then the defense is not available. “If each payment or transfer to a single creditor had to be considered individually for purposes of the $600 requirement, the terms ‘aggregate’ and ‘all’ would be meaningless. . . . [Section] 102(7) of the Rules of Construction for the Bankruptcy Code supports the conclusion that multiple transfers to a single creditor should be aggregated under § 547(c)(8). Section 102(7) states that ‘the singular includes the plural.’ Under this rule of construction, the term ‘transfer’ in § 547(c)(8) can mean more than one transfer. Therefore, the aggregate value of several transfers should be considered to determine whether a creditor has received $600 in value. Section 547(c)(8)’s legislative history further supports our conclusion. . . . [I]f we were to consider all transfers to a single creditor within the ninety-day pre-filing period individually in calculating whether the creditor has received $600, a consumer creditor could recover thousands of dollars from a pre-petition debtor under this small preference exception simply by requiring the debtor to transfer $599 in value at a time. Such an interpretation would clearly be contrary to Congress’ intentions.”).
12 See In re Giles, 271 B.R. 903 (Bankr. M.D. Fla. 2002) (Because Florida legislature amended garnishment statute to create a lien upon service of the writ, the refusal to release a garnishment is not a violation of the automatic stay and the debtor’s rights are subordinate to the rights of the garnishing lienholder.); In re Raspberry, 264 B.R. 495, 499–500 (Bankr. N.D. Ill. 2001) (Prepetition garnishment under new Illinois Wage Deduction Act divested the debtor of any interest in 15% of gross prepetition wages; postpetition wages are property of the bankruptcy estate pursuant to § 1306(a)(2) and are protected by the automatic stay, but the lien continues, the lienholder has a secured claim and the lienholder is entitled to adequate protection. “[O]nce the wage deduction order was entered pre-petition, the Debtor was divested of any claim to, or interest in, his pre-petition garnished wages. . . . A different result occurs concerning the Debtor’s post-petition wages . . . . [T]hose wages are expressly part of the bankruptcy estate pursuant to § 1306(a)(2) and subject to the automatic stay under § 362(a). . . . The Judgment Creditor has a continuing lien . . . as to the Debtor’s future wages to secure the unpaid balance owed under the judgment, which will be adequately protected as long as the Debtor makes plan payments and remains employed at the current job and rate of compensation.” Judgment creditor’s lien was not avoided because the debtor failed to bring an adversary proceeding under § 547 and did not claim an exemption in postpetition wages.).