How Does Bankruptcy Affect Wage Garnishments and Judgment Liens?

Anytime an individual is sued by a creditor and the creditor prevails in that suit, either by default judgment or after a hearing, i.e., trial, on the merits of the case, the now "judgment creditor" may seek to execute its judgment in any fashion. Most commonly, if the defendant against whom the judgment is entered does not pay the judgment in full to the judgment creditor, the latter may seek to garnish the defendant's wages, up to 25% of the defendant's net income, until the debt is paid off. Assuming the debt is dischargeable, filing bankruptcy will indefinitely stop the wage garnishment, pursuant to the automatic stay. However, the judgment creditor is not required to disgorge the funds it had already successfully garnished. The remaining dischargeable debt would be accordingly discharged in the bankruptcy.

Qualifying for a Chapter 7 Bankruptcy

Before 2005, debtors could qualify for a chapter 7 bankruptcy if they could establish on paper that their actual monthly expenses exceeded their monthly income. This was changed in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act, which enacted an objective "means test" to determine chapter 7 eligibility. The problem was that too many chapter 7 filings were presumed abusive because debtors were inflating their actual expenses to yield negative disposable income, or were living too extravagantly while seeking to discharge their debt obligations.

How Chapter 13 Bankruptcy Works

I'll preface this article with a brief explanation of how a chapter 7 bankruptcy works.  When a debtor files for chapter 7 bankruptcy, she is seeking to "liquidate" her assets and discharge all of her dischargeable debt obligations, without having to pay any additional money to her creditors.  Exemptions in a chapter 7 usually allow a debtor to keep most or all of her property, so long as her assets are not great in value, thereby allowing a discharge of all dischargeable debt obligations without disgorging any property of paying any additional money to her creditors.  Chapter 7 bankruptcy does however have its limitations.  The primary limitation is that many debtors are ineligible for filing a chapter 7 due to excessive income, or the inability to pass the "means test" (more information on chapter 7 qualification can be found here).

The 341 Meeting of Creditors

Every debtor in bankruptcy is required to attend what is called a 341 meeting of creditors. This requirement is codified in section 341 of Title 11 of the United States Code, and although it is collquially called a "meeting of creditors", the primary purpose of the meeting is to allow the interim Trustee appointed to the debtor's case to ask questions under oath. Therefore, debtors must ask the questions truthfully and to the best of their knowledge.

Exemptions in Bankruptcy

When a debtor files for bankruptcy, he has a duty to disclose all real and personal property owned as of the date of filing. An interim chapter 7 or chapter 13 Trustee is assigned to the case once filed, whose duty is to administer what is called the "bankruptcy estate". Technically, when a debtor files for bankruptcy, any and all property owned at the time becomes part of the bankruptcy estate, UNLESS it is exempted from the estate. The trustee has a duty to liquidate all assets of the estate, and pay the proceeds to the debtor's creditors, to the extent they pay down the debt. Cases where the debtor is able to exempt all of his property from the esate are termed "no-asset" cases and are most common.

Regarding Use of Credit Prior to Filing Bankruptcy

This is a common issue that arises subsequent to one's decision to file for bankruptcy.  Is it proper to continue to use credit cards knowing that you will be filing bankruptcy?  There are three specific exceptions to discharge found in the Bankruptcy Code which can make a portion of a debt owed non-dischargeable by virtue of having been incurred just prior to filing.

Getting Rid of a Second Mortgage in a Chapter 13 Bankruptcy

Debtors who file under chapter 13 may have the option of getting rid of a second or third mortgage, or home equity line of credit. This option is generally available to debtors whose properties have dropped significantly in value. If by virtue of the value drop the second mortgage becomes unsecured, meaning there is not enough equity to secure the second mortgage at all, it can be "stripped" from the property.

How Bankruptcy Can Help You Save Your Home

Many people have found themselves falling behind on their mortgage payments, for one reason or another. Usually, a borrower need only miss three payments before the account goes into default. Since most mortgages contain power of sale clauses, the bank may initiate foreclosure proceedings upon default of the borrower, which eventually lead to an actual foreclosure sale, absent any action by a court of law.

The Credit Counseling Requirement

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Among other drastic changes to the Bankruptcy Code (Title 11 of the United States Code) was the requirement that all individual debtors seeking to file bankruptcy under any chapter must complete a pre-filing credit counseling course through a court-approved provider. Likewise, prior to a discharge in bankruptcy, each individual debtor must complete a second financial/budget management course. Both courses are offered online or over the phone.

What Will Filing Bankruptcy Do to My Credit?

This is probably the most common question I’m asked by my clients. Everyone is afraid of the big “B-word”, and rightfully so; filing bankruptcy is a big deal that certainly carries consequences of its own. Most people who end up filing would arguably say doing so was justified, otherwise faced with endless lawsuits and collections. But what effect does it have on one’s FICO credit score?


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