Chapter 7 Bankruptcy Case and New Jersey Wage Garnishments

Bankruptcy Court Holds Consumer Debtor’s Wages, Garnished Within 90 Day Period Prior to Filing Chapter 7 Bankruptcy, Are a Preference

A recent decision, Tower Credit, Inc. v. Schott (In re Jackson), 2017 U.S. App. LEXIS 4369, is highlights one of the many substantial benefits that a Chapter 7 Bankruptcy debtor may be entitled.   Specifically, where a Chapter 7 debtor has been subject to a wage garnishment to pay delinquent consumer debt, the Bankruptcy Code “automatic stay” will stop the ongoing garnishment of their wages, and may allow them to pursue recovery of wages that were deducted from their earnings during the 90 day period prior to their filing.

New Jersey Wage Garnishments

The garnishment of a debtor’s wages often makes a bad situation much worse for those experiencing serious debt problems. For example in New Jersey, those with consumer debt – such as delinquent credit card debt or medical debt – often have judgments entered against them which then gives the creditor the right to garnish wages.  When an Order for Wage Execution (or wage garnishment) is served on a debtor’s employer, the employer is required by the law to deduct a percentage of the employee’s wages every pay period until the garnishment is paid in full.

New Jersey Wage Garnishments are controlled by state law on the maximum amount which may be garnished via wage execution.

For example, an employee whose pre-tax earnings are $750.00 per week will typically have $75.00 per week deducted from his or her wages.  This garnishment is in addition to all other required deductions for federal and state incomes taxes, payroll taxes, and contributions to benefits.  As a result, the debtor may become delinquent on other essential payments such as rent, mortgage, or motor vehicle loan payments.

Chapter 7 Bankruptcy and New Jersey Wage Garnishments

When a Debtor files a Chapter 7 Bankruptcy, the Bankruptcy Code imposes an “automatic stay” on actions for the collection of a debt.  See 11 U.S.C. §362.  The “automatic stay” applies to stop the continuation of a New Jersey Order for Wage Execution.    Notice is sent by the Clerk of the Bankruptcy Court to the creditors and any other parties requested by the Debtor to receive notice of the filing.

For New Jersey Bankruptcy attorneys, it is best practice to include notice to the judgment creditor, the judgment creditor’s attorney, and, if possible, to the New Jersey Constable who was appointed to execute against the wages.   It is also best practice to send a separate letter to the creditor’s attorney and Constable with the official Bankruptcy Court Notice of Bankruptcy filing to ensure there is no dispute about notice.

The Bankruptcy Code also grants the appointed bankruptcy trustee with various rights and powers.   Among these powers is the right for the Trustee to seek to recover money or assets which were transferred prior to the bankruptcy filing.   Under Bankruptcy Code § 547, the Trustee may recover money and assets “transferred” within the 90 days prior to the filing of the bankruptcy petition as a “preferential transfer”.

Louisiana Bankruptcy Case and Fifth Circuit Opinion

Christon Jackson filed Chapter 7 Consumer Bankruptcy Petition.  Jackson’s wages had been garnished for more than 90 days before the date of filing by the creditor Tower.  Schott was appointed as Chapter 7 Trustee in the bankruptcy case.   Schott moved to require that Tower return the amounts garnished to the Debtor’s Estate as a “preference” to the extent that they were transferred within the 90 day period prior to the filing of a bankruptcy petition.

Tower argued that Tower served the garnishment on Jackson before the 90 day period began and, therefore, Tower acquired a lien against Jackson’s wages before they were paid.  Yes, that really is the argument Tower made.  But it would be a mistake to assume that this argument was something they just made up the night after  a couple of beers.  In fact, three federal appellate courts had adopted this position which, reduced to its essentials, contends that wages are a debtor’s property prior to being earned.  Fortunately, for the sake of reason – if, nothing else –  the Court had subsequently rejected this rationale.

As a result, the Fifth Circuit Panel concluded that wages earned during the 90-day preference period were an avoidable transfer.

The combination of Supreme Court precedent and the overwhelming weight of persuasive authority applying § 547(e)(3) make clear that a debtor’s wages cannot be transferred until they are earned. Thus, we hold that a creditor’s [collection of garnished wages earned during the preference period is an avoidable transfer made during the preference period even if the garnishment was served prior to that period.

Conclusion

As with all serious debt matters, a New Jersey debtor who is subject to a wage garnishment should consult with an experienced New Jersey bankruptcy lawyer to determine how the Bankruptcy Code may provide them with rights to protect their income and assets.