Bankruptcy

Wage Garnishment After Bankruptcy: Is Employer Required To Withhold Post Petition Paychecksk, Or Is Doing So A Stary Violation ?

By Jonathan Alper

Here?s a real bankruptcy situation I dealt with last week; the issues resolved, so I can use the case for a blog post. I?ll simplify the facts. A creditor serves a wage garnishment on the debtor?s employer. The employer garnishes the next paycheck (" Paycheck One"). Then, the debtor files Chapter 7 bankruptcy. The Friday following the bankruptcy filing the employer garnishes a second paycheck ("Paycheck Two"). We serve a suggestion of bankruptcy to the creditor and the employer. The employer refuses to release to the debtor any part of Paycheck Two (post filing) until the bankruptcy trustee sends the employer a letter releasing any claim against the money as part of the bankruptcy estate.

The employer believed that wages due to the debtor?s employment prior to the bankruptcy filing are part of the bankruptcy estate (if not otherwise exempt). Therefore, the employer would not release any money until the bankruptcy trustee decided what portion of Paycheck Two was earned pre-petition. The issue is whether a debtor?s pay is earned when worked or earned at the end of the pay period when the paycheck is due.

I?m pretty sure the employer in this case is wrong, and that the garnishment of Paycheck Two after filing is a violation of the automatic stay by the creditor and maybe by the employer as well. There are bankruptcy court decisions which have held that wages are not subject to garnishment until the paycheck is due. Courts have sanctioned creditors for garnishing paychecks due after a bankruptcy is filed. Because Paycheck Two was due after the bankruptcy no part of the debtor?s earnings during the pay period preceding bankruptcy is subject to garnishment or is subject to the trustee. Otherwise, every employer will have to withhold the next paycheck due to any employee who files bankruptcy to see if any part of money earned prior to the bankruptcy filing date is part of the trustee's estate.

That the creditor served the wage garnishment prior to bankruptcy is no defense. Bankruptcy courts have held that failure to undo a garnishment after bankruptcy is filed is a willful violation of the stay; creditors must take affirmative action to dissolve a wage garnishment when a debtor files bankruptcy.

In fact, some attorney representing either the employer or the creditor eventually saw the light. My client sent my secretary an email stating that the issue is resolved, and that the employer sent the debtor all the garnished money including Paychecks One and Two.

Full post as published by Florida Bankruptcy Law on June 10, 2010 (boomark / email).