Not only will a bankruptcy filing stop a creditor from being able to continue a garnishment, but a bankruptcy filing enables a debtor to recover certain funds that were garnished before the bankruptcy. When a creditor has garnished more than $600 from a debtor in the 90 days before a bankruptcy filing, that can be viewed as a preference and the Bankruptcy Code may allow a debtor to seek return of the garnished funds.
With the filing of a bankruptcy, a debtor should disclose, in the personal property schedules, the amount of garnished funds that were received in the 90 days before bankruptcy and claim an exemption under federal or state law as to those garnished funds. Often, creditors will return garnished funds following notice of a bankruptcy filing, a telephone call, and/or demand letter.
If such requests for return of garnished funds are unsuccessful, a debtor can file an adversary proceeding with the Bankruptcy Court to seek avoidance of the creditor’s lien rights and to recover the preferential transfer (the garnished funds). Depending on where the garnishment action is in the process, it may be possible for a debtor to receive a return of garnished funds of less than $600 through a lien avoidance action. Transfers of more than $600 in the 90 days before filing can be recoverable when the debtor exempts those funds, i.e. the transfer was not a voluntary transfer by the debtor, the property was not concealed by the debtor, the trustee has not attempted to avoid the transfer, and the transfer is otherwise avoidable by the trustee.
Bankruptcy trustees typically do not avoid transfers of exempt funds for the benefit of the debtor and allow debtors to do so instead. Depending on the amount at issue, the recovered garnished funds can go a long way toward helping pay for the related bankruptcy fees and costs.