What Happens to a Garnishment Action in Bankruptcy?

What Happens to a Garnishment Action in Bankruptcy?It is very common, especially in the case of a delinquent credit card debt, for the original creditor or a subsequent debt-buyer to obtain a default judgment against the debtor. Most of the time, the address the creditor had on file was old and outdated, so many times the debtor has no idea that there were any ongoing legal proceedings.

The judgment/creditor then usually obtains a writ of garnishment, which authorizes it to seize the debtor’s nonexempt assets to satisfy the judgment. After an asset search, the judgment/creditor often garnishes a checking or savings account. The bank initially freezes the account and then, after a court hearing, turns the money over to the judgment/creditor. What happens if the debtor files bankruptcy?

Preferential transfer

One important thing to remember about bankruptcy is that the court looks not only at the debtor’s financial situation on the day of filing, but also looks back three months in most cases. That look-back period is generally bad news for the debtor, because of the increased scrutiny. But, in the event of a garnishment action, the reverse is true.

Garnishment is an illegal preference under Section 547(b), because the judgment/creditor receives more money than it otherwise would have received. If the garnishee bank still has the money, the funds go back to the debtor because to do otherwise would violate the automatic stay. If the garnishee bank has already transferred the money, the debtor can recover the funds if:

  • The amount exceeds $600, and
  • The judgment/creditor actually cashed the check

For a free consultation with attorneys who know all the ways bankruptcy can help you, contact our office.

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