It's an unfortunate fact of life: when you're most down on your luck, creditors tend to pile on, demanding payment and using the law to get it. Wage garnishments occur when creditors go to court and get a judgment against you, allowing them to take what you owe directly from your pay. Your employer is legally obligated to withhold a percentage of your paycheck every week and send that money to your creditor, leaving you even more unable to meet necessary living expenses. Federal law protects you against wage garnishment to some extent.
Chapter 7 Vs. Chapter 13
When you file for Chapter 7 bankruptcy, you're effectively telling the government that there's no way you can possibly repay all your debts based on your income. You must either earn less than your state's median income or pass a means test to qualify, proving that you can't pay your costs of living and meet your debt obligations as well. If you don’t qualify for Chapter 7, you can file for Chapter 13 instead. Some debtors elect this option even when they do qualify for Chapter 7 because it allows them to keep valued collateral, such as their homes or autos. With Chapter 13, the court calculates how much money you have left over each month after paying approved living expenses. You then give this money to the bankruptcy trustee for three to five years, paying off your debts in a court-controlled plan. With both chapters, bankruptcy discharges any debts you can't pay, legally eliminating your liability for them.
Federal Garnishment Laws
Although creditors have an absolute right to get judgments against you for money owed, federal law sets a cap on the amount a creditor can take from your paycheck. Your employer can't fire you because of a wage garnishment unless more than one creditor gets a judgment to garnish your wages. Federal law also restricts the types of income subject to garnishment. Your wages are vulnerable, but unemployment, worker's compensation and retirement benefits are safe from creditors.
The Automatic Stay
Both Chapter 7 and Chapter 13 offer automatic stays, and this is the part of the U.S. Bankruptcy Code that specifically addresses wage garnishments. A stay goes into effect the moment the court receives your bankruptcy petition and files it. It stops all creditor collection actions. If a creditor is already garnishing your wages, it immediately becomes illegal for the creditor to take money from even one more of your paychecks. This applies only to debts you incurred before you filed for bankruptcy protection, however. The stay is lifted when your bankruptcy proceedings are completed, but if the debt is discharged, the creditor cannot resume wage garnishment against you after this point.
Some garnishments fall outside the protection of both federal consumer law and bankruptcy law, most notably child support and other family-related obligations. Although federal law sets a limit on how much a typical creditor can garnish from your pay, limits for child support are greater than this amount. State and federal tax garnishments can also exceed the statutory limits that apply to other creditors. Filing bankruptcy doesn't stop garnishments for child support or alimony. If the IRS or your state is garnishing your pay for taxes owed, the stay does prevent these garnishments – although you may still owe the underlying debt after your bankruptcy is discharged.