Bank Account Garnishments: Using Bankruptcy to get your money back and your account un-frozen
I regularly represent clients who have been sued by debt collectors who have obtained judgments and have garnishments on bank accounts for people who live in York, Hanover, Harrisburg, Lancaster, Lebanon, Gettysburg and Carlisle.
When a creditor obtains a judgment against you, a common collection method is for the creditor to obtain a “Writ of Execution.” This is essentially a “hunting license” issued by the Court that permits the judgment creditor to go out and try to find assets that belong to you. If the creditor finds a bank account (typically the creditor knows where you bank because of payments made to them), then a garnishment is initiated and your bank account is frozen. After some time passes, your bank will turn over the funds in the creditor who issued the garnishment. Until the garnishment is dissolved, any funds (such as your paycheck) will continue to be subject to the garnishment.
If you file a bankruptcy case before the money leaves your bank account, the Automatic Stay imposed by the bankruptcy case will stop the funds from leaving your bank account. But happens if your money has already left your bank account and been transferred to the garnishing creditor? What happens then? Can filing bankruptcy help get the money back? YES! (Provided it was an “involuntary” transfer, i.e. you did not make a voluntary payment.)
Non-Voluntary Preferential Payments: A Brief Overview. Non-voluntary preferential payments are payments made by a debtor to creditors within the 90-day period before filing for Chapter 7 bankruptcy. These payments are labeled as "non-voluntary" since they occur involuntarily, without the debtor's control. The concern arises from the potential unfair advantage these payments could give certain creditors over others during the bankruptcy proceedings, leading to an unequal distribution of assets.
If you are facing a bank account garnishment, you should immediately Contact Me to discuss your options. Because there are time limitations for retrieving the garnished funds, don’t wait until the last minute.
Example: The Involuntary Garnishment
Consider the case of David Debtor, who had been struggling with mounting debts and was unable to keep up with his credit card payments. Unbeknownst to him, one of his creditors obtained a court order to garnish his bank account to recover the outstanding debt. Facing financial hardships, David eventually had no choice but to file for Chapter 7 bankruptcy. Within the 90-day period before his bankruptcy filing, the garnishing creditor managed to collect a significant portion of the debt from his bank account. In this example, the funds involuntarily garnished from David's bank account could be considered non-voluntary preferential payments since they were made within the specified time frame before the bankruptcy filing. The bankruptcy trustee or David would have the authority to reclaim these payments and distribute them fairly among all his creditors.
Preference Avoidance - How it works, legally.
Individual debtors can avoid non-voluntary preferential payments through the "preference avoidance" provision outlined in the Bankruptcy Code. , section 522(h) provides:
“The debtor may avoid a transfer of property of the debtor ... to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.”
Thus, section 522(g)(1) allows a debtor to exempt property the trustee avoids if the transfer was not a voluntary transfer, and the debtor did not conceal the property. 11 U.S.C. § 522(g)(1). Thus, if meeting all these requirements, a chapter 13 debtor can avoid transfers through section 522(h). In re Hansen, 332 B.R. at 13 (holding that Congress limited avoidance by chapter 13 debtors to the narrow situation of avoiding involuntary transfers of exempt property); In re Rothenbush, 8:16-BK-02521-RCT, 2017 WL 933019, at *2 n. 6 (Bankr. M.D. Fla. Feb. 28, 2017) (“In chapter 13, [the power to avoid a preferential transfer] and other avoidance powers remain with the chapter 13 trustee, except to the extent authorized in section 522(h).”). Congress knew how to give debtors avoidance powers (as evidenced by § 522(h)); Congress could also have expressly given ‘debtors’ the avoiding powers of § 544, § 545, § 547, § 548, and § 549.” In re Hansen, 332 B.R. at 13. See In re Klingbeil, 119 B.R. 178, 181 (Bankr. D. Minn. 1990) (describing debtor's avoidance powers under section 522(h) as “derivative”). In re Wright, 649 B.R. 625, 628 (Bankr. D.N.J. 2023), reconsideration denied, stay granted, No. 20-12415-ABA, 2023 WL 3560551 (Bankr. D.N.J. May 18, 2023).