Filing For Bankruptcy to Stop Wage Garnishment

To put it simply, wage garnishment is a pain. Having taxes taken out of your paycheck is an unpleasant part of every worker’s life, but having another big chunk of your wages removed before you ever see it in order to repay debts can make it feel like you’re working for nearly nothing.

If only there was a way to escape that. There is a way, and that’s filing for bankruptcy.

This doesn’t, however, work in all cases, and bankruptcy brings consequences that must be considered before you take that route, but it is an opportunity for some people to stop wage garnishment.

What Is Wage Garnishment?

If you’ve gotten behind in paying a debt and can’t appease the debt collectors, your creditor may seek a court judgment that requires a certain percentage of your wages to be paid to it automatically. This is called wage garnishment and is typically made through a court order, although the IRS or state agencies also may garnish wages for unpaid taxes or other debts owed to the government.

When this happens, you and your employer are notified, and a court-ordered amount of your pay is deducted from your paycheck and sent directly to the creditor until the debt is paid. By federal law, this can be up to 25% of your disposable income (what’s left after legally required deductions such as income taxes and the employee’s share of Social Security, Medicare, and state unemployment insurance taxes).

Imagine trying to make ends meet for expenses like rent, food, car payment, insurance, and medical bill with 25% less money every paycheck!

Debts subject to possible wage garnishment include personal loans, credit cards, medical bills, student loans, alimony, child support and taxes. And while you’ll be able to fight garnishment in court on many debts, no court hearing is required if you’re behind on student loans, taxes, or child support. Employers are required by law to comply with wage garnishment orders.

Clearly, wage garnishment makes a financial situation worse for those living paycheck to paycheck. That can make filing for bankruptcy an attractive alternative.

Does Bankruptcy Stop Wage Garnishment?

In many cases, filing for bankruptcy can stop wage garnishment through an automatic stay, which is a court order that forbids most creditors from continuing debt collection activities. Automatic stays don’t apply if the debt is for alimony or child support that is past due.

Bankruptcy also may not stop wage garnishments for unpaid federal, state, or local taxes, or criminal fines or court-ordered restitution for criminal offenses. Although bankruptcy can stop student loan garnishments during the automatic stay, garnishment may resume after the case is resolved if the debt is not discharged.

Chapter 7 vs. Chapter 13 Bankruptcy for Wage Garnishment

There are two types of bankruptcy that individuals typically file to deal with overwhelming debts.

• Chapter 7 bankruptcy, also called liquidation bankruptcy, means a trustee sells your non-exempt assets, and then uses the money to pay debts. This eliminates most unsecured debts, such as medical bills or credit card debt. If you qualify based on income and other factors, filing can stop wage garnishment immediately.
• Chapter 13 bankruptcy sets up a court-approved payment plan to eliminate debt over 3-5 years. It can stop garnishment, but you will continue to make payments to creditors.

Automatic Stays and Wage Garnishment

When you file for bankruptcy, an automatic stay immediately prohibits most creditors from continuing to collect debts, including through wage garnishments. The federal bankruptcy court can charge creditors with contempt if they do not stop collection actions.

Types of Garnishments That Are Not Stopped by Bankruptcy

Not all payments are stopped when you file for bankruptcy. Domestic support obligations such as child support or alimony are not discharged by bankruptcy, so wage garnishments can continue for these. The same is true for collections of other debts that aren’t affected by successful bankruptcy cases.

These include taxes, mortgage debt, government-funded student loans and debts arising from injuries or death caused by impaired driving. Also, if you’ve filed for bankruptcy multiple times, an automatic stay might be denied or limited to only 30 days. If some of your debt isn’t discharged at the conclusion of your bankruptcy case, creditors would be able to resume wage garnishment for any remaining debt.

If you filed for Chapter 7 bankruptcy, creditors cannot resume garnishing your wages after the debt is discharged. If you don’t get a discharge of the debt, garnishment can resume. In Chapter 13 bankruptcy, garnishment won’t resume because your repayment plan should include a debt repayment plan.

Filing for Bankruptcy to Avoid Wage Garnishment

Regardless of how it affects wage garnishment, bankruptcy has serious consequences, and these must be considered before taking this step. It will drop your credit score by 100 points or more, and bankruptcy will remain on your credit report for 10 years with Chapter 7 and seven years with Chapter 13. A bankruptcy filing is a public record, so don’t expect that you can keep it a secret. It should be considered a last resort to solve financial woes.

» Learn More: Should I File for Bankruptcy?

Before taking this step, consider pre-bankruptcy credit counseling from a nonprofit credit counseling agency. The consultation is free, and the counselor will review your finances and discuss the pros and cons of alternatives to bankruptcy such as debt management plans, debt consolidation loans and debt settlement.

Even if you think you’ll file bankruptcy on your own, consult a bankruptcy attorney. The initial consultation is free, and you may learn important information about what’s ahead.

Filing for bankruptcy means preparing necessary documents, paying filing fees and, probably, hiring a bankruptcy attorney. Bankruptcy court paperwork will include a list of your debts, income, assets, and expenses.

Other Ways to Stop Pay Garnishment

Bankruptcy isn’t the only way to stop wage garnishment, and the other options avoid some of bankruptcy’s negative consequences. Before filing, consider these options.

Debt Settlement

Debt settlement involves persuading the creditor – or, more likely – a debt collector – to accept less than the full amount owed or create a repayment plan that is less onerous than the wage garnishment you’re currently experiencing. If successful, you’ll save money, have a fresh financial start, avoid bankruptcy, and be rid of wage garnishments.

This is not without risk. It can be time-consuming, and creditors do not have to accept your offer. There are debt settlement companies that offer to negotiate on your behalf and advertise results that will be more than worth the fees they charge, but even if successful, your credit score will take a hit because it will show the debt was settled rather than paid in full.

Debt Consolidation

Debt consolidation involves rolling multiple high-interest debts into a single debt that is easier to manage and may actually lower monthly payments. This can be particularly effective in dealing with credit cards.

Consolidation can be done in several ways.

Debt management plans, which are offered by nonprofit credit counseling agencies, can lower credit card interest to 8% or less and create a plan to eliminate debt in 3-5 years.

Another strategy is to transfer the debt to a low-interest balance transfer credit card, which typically offers 0% interest rates for a 12- to 18-month introductory period. If the debt isn’t paid off before the introductory period ends, higher interest rates are charged to your account.

Also, you can borrow to pay off the credit card interest either through a personal loan, home equity loan or borrowing from your retirement account. For a personal loan to be effective, you need a good credit score. It’s important to be diligent in paying off the home equity loan to avoid foreclosure, and there is a penalty for taking out retirement money before age 59.5 years.

Challenge the Wage Garnishment Order

Even if a court orders wage garnishment against you, you can challenge the ruling if you believe the creditor isn’t entitled to the amount that was granted. The written notification you received concerning the garnishment should provide a deadline for filing an objection and instructions on how to do it. When it comes time to make your appeal, you’ll need to provide reasonable justification and evidence for your position that the creditor is demanding too much of your paycheck.

In addition to limiting garnishment to no more than 25% of your disposable income, federal law also prevents garnishments leaving you with less than 30 times the federal minimum wage ($7.20 per hour), or $217.50 a week. If your disposable income totals $217.50 per week or less, no garnishment can take place. If disposable income is $290 per week or more, 25% may be garnished. If disposable income is between those two figures, only the amount above $217.50 and less than $290 can be garnished.

File a Wage Garnishment Exemption

Federal law exempts certain types of income from garnishment, including Social Security benefits, disability benefits and Supplemental Security Income (SSI) benefits. Some states exempt unemployment benefits from wage garnishment and also offer exemptions if you provide more than half the financial support for someone you’re legally or morally obligated to support. Check your state garnishment laws and consult with an attorney to see if your case is worth pursuing. A hearing may be needed with a judge who orders your garnishment to be adjusted or eliminated.

Bottom Line

Bankruptcy is one way to stop wage garnishments, just as a baseball bat is one way to crack eggs. Whether it’s the best way depends on your circumstances. There’s a high price to your credit score if you file for bankruptcy, and it doesn’t prevent every type of garnishment.

Before you file, talk to a credit counselor about your debt. In addition to pinpointing the reasons you’re in debt, a counselor can examine your financial condition and suggest alternatives like helping consolidate your debt or directing you to a debt management program. You don’t want to find any solution – you want to find the right one.