• Wage Garnishments and Bankruptcy

    How Bankruptcy Can Stop Wage Garnishments

    If a creditor is garnishing your wages, you may be able to stop the garnishment and even get some of your garnished wages back by filing bankruptcy.

    If a creditor is garnishing your wages, you may be able to stop the garnishment and even get some of your garnished wages back by filing bankruptcy . However, certain exceptions do apply. Read on to learn more about how bankruptcy can help you stop wage garnishments.

    The Automatic Stay

    When you file bankruptcy, an automatic stay goes into effect that prohibits and stops most collection activities by creditors. This means that wage garnishments are also stopped as long as the bankruptcy stay is in effect. If a creditor wants to resume collection efforts, it must ask the court to lift the stay. The court will lift the stay only if the creditor has a valid reason for doing so. An unsecured creditor such as a credit card company simply wishing to resume a wage garnishment is not a valid reason for the court to lift the stay.

    (To learn more, see the articles in Bankruptcy’s Automatic Stay .)

    Exceptions to The Automatic Stay

    The automatic stay does not apply to domestic support obligations such as child support or alimony. These are considered priority debts that are unaffected by the automatic stay and cannot be discharged by filing bankruptcy. So if your wages are being garnished to satisfy domestic support obligations, the garnishment will not stop if you file bankruptcy.

    What Happens to Wage Garnishments After Bankruptcy?

    The automatic stay ends when you receive a discharge, your case is dismissed without a discharge, or when the court lifts the stay. If you receive a discharge and the underlying obligation for the wage garnishment (such as credit card debt) was included in the discharge, the creditor cannot resume the garnishment to collect the debt after bankruptcy. If your case gets dismissed without a discharge, then the creditor can continue the wage garnishment after dismissal.

    Can I Recover Wages Garnished Prior to Filing Bankruptcy?

    If certain conditions are met, you may be able to get back some of your wages even if they were garnished before bankruptcy. You can usually get back wages garnished within the 90-day prior to your bankruptcy filing if they were over $600 in aggregate and you have enough exemptions to cover them. (To learn how exemptions work, see Bankruptcy Exemptions.)

    If you meet these requirements, you can file a complaint in your bankruptcy and ask that the creditor return the garnished wages. If you are represented by an attorney, whether this makes financial sense will depend on how much your attorney will charge for filing the complaint and the amount of wages you are looking to recover.

    Practical Tips For Getting Garnishments Stopped Quickly

    When you file bankruptcy, you are required to list all your creditors so they can be notified of the bankruptcy. However, there is a chance that creditors may not be alerted in time to put a stop on garnishments after the case is filed.

    If you want to make sure the garnishment stops immediately, you should give notice of the bankruptcy to the payroll department of your company. Also, most wage garnishments are handled by the local sheriff’s office. So you should also notify the sheriff or other levying officer of your bankruptcy so he or she can put a stop to the garnishment immediately.

    For more on dealing with debt collectors, check out Nolo’s section Debt and Debt Collectors .

  • Student Loans and Bankruptcy

    Student Loan Borrowers Assistance > Bankruptcy

    Student loans are difficult, but not impossible, to discharge in bankruptcy. To do so, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”

    Courts use different tests to evaluate whether a particular borrower has shown an undue hardship.

    bankruptcy

    The most common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. ( Brunner v. New York State Higher Educ. Servs. Corp. , 831 F. 2d 395 (2d Cir. 1987). Most, but not all, courts use this test.

    If you can successfully prove undue hardship, your student loan will be completely canceled. Filing for bankruptcy also automatically protects you from collection actions on all of your debts, at least until the bankruptcy case is resolved or until the creditor gets permission from the court to start collecting again.

    Assuming you can discharge your student loan debt by proving hardship, bankruptcy may be a good option for you. It is a good idea to first consult with a lawyer or other professional to understand other pros and cons associated with bankruptcy. For example, a bankruptcy can remain part of your credit history for ten years. There are costs associated with filing for bankruptcy as well as a number of procedural hurdles. There are also limits on how often you can file for bankruptcy.

    How to Discharge Student Loans in Bankruptcy

    Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy process. You must file a petition (called an adversary proceeding) to get a determination. This sample gives you an idea of what your complaint should look like.

    If you already filed for bankruptcy, but did not request a determination of undue hardship, you may reopen your bankruptcy case at any time in order to file this proceeding. You should be able to do this without payment of an additional filing fee. Chapter 10 of NCLC’s Student Loan Law publication includes extensive information about discharging student loans in bankruptcy.

    UNDUE HARDSHIP EXAMPLES

    It is up to the court to decide whether you meet the “undue hardship” standard. Here are a few examples of successful and unsuccessful cases.

    1. A 50 year old student loan borrower earning about $8.50/hour as a telemarketer was granted a discharge. The court agreed that the borrower had reached maximum earning capacity, did not earn enough to pay the loans and support minimal family expenses and appeared trapped in a “cycle of poverty.”
    2. A college-educated married couple proved undue hardship and were able to discharge their loans. They both worked, but had income barely above poverty level. The court noted that the borrowers worked in worthwhile, although low-paying careers. One worked as a teacher’s aide and the other as a teacher working with emotionally disturbed children. Even with a very frugal budget, they had $400 more a month in expenses than income. Their expenses included $100 monthly tuition to send their daughter to private school. Relatives paid for most of this and the couple testified that they objected to the public school’s corporeal punishment policy. In agreeing to discharge the loans, the court also found that the couple had acted in good faith because they asked about the possibility of a more affordable repayment plan. Not all courts are as sympathetic to borrowers who work in low-paying careers. For example, one borrower was denied a discharge because he worked as a cellist for an orchestra and taught music part-time. The court suggested that this borrower could find higher-paying work. Another court came up with the same result for a pastor. The court found that it was the borrower’s choice to work as a pastor for a start-up church rather than try to find a higher paying job.
    3. A number of courts have granted discharges in cases where the borrower did not benefit from the education or went to a fraudulent school.
    4. There have been mixed results when borrowers have tried to show that their financial difficulties will persist into the future. For example, one court found that a borrower’s alcoholism was not an insurmountable problem, but some borrowers have won these cases. In one case, a borrower’s testimony about her mental impairment, including evidence that she received Social Security benefits, was enough to convince the court of undue hardship. The court agreed with the borrower that her ongoing mental illness was likely to continue to interfere with her ability to work.
    5. In finding undue hardship in a 2011 case, the judge found that a 58 year old and 60 year old couple’s past employment experience showed no likelihood that their financial circumstances would change for the better before they reached retirement age. The judge also considered accrued post-bankruptcy medical expenses in the amount of $22,000. There was nothing in the record to suggest that the medical debt would be forgiven. Both borrowers suffered from various medical ailments. Although there was no medical expert testimony of disability, the borrower’s own testimony was sufficient to who that their health problems limited future employment prospects.

    Even if you cannot prove undue hardship, you still might want to consider repaying your student loans through a Chapter 13 bankruptcy plan.

    CHAPTER 13 and STUDENT LOANS

    A case under chapter 13 is often called “reorganization.” In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district. For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan. You should discuss these options with a bankruptcy attorney .

    The Resources section has more information about finding a lawyer to help you. When shopping around for a lawyer, make sure that you let the lawyer know that you want to discharge your student loans in bankruptcy. You should ask a lot of questions to see if the lawyer understands this process. It is not as straightforward as filing a regular Chapter 7 bankruptcy petition. You should assume the lawyer is not knowledgeable in this area if he tells you that student loans cannot be discharged in bankruptcy. The truth is that you can discharge your student loans if you can prove undue hardship. You should always have an opportunity to talk to a lawyer before you pay anything. Make sure you have a clear idea of what the lawyer will do for you and what you will be charged.