Tap to Read ➤

Does Bankruptcy Stop Wage Garnishment?

Scholasticus K Oct 21, 2018
Any person planning to file for bankruptcy would be interested to know whether it puts an end to wage garnishment. Read on to know some useful information regarding some provisions of bankruptcy and their effects on such orders.
There are three prominent ways of stopping wage garnishment. First, you can repay the entire debt; second, you can let the lender take over the security; and third, you can file for bankruptcy. But, would it stop the same? Yes, it can, but there are some exceptions.
The effect of bankruptcy on wage garnishment can be confusing due to the highly versatile conception of the latter. To be specific, bankruptcy is not a method to get rid of it, but it does have certain effects on the same.

What is Wage Garnishment?

Its principle is simple, and it probably is as old as the concept of loans. The basic idea is that the employer of the person, who has not repaid the debt, cuts a desired amount on a monthly basis from the person's monthly income.
This amount is forwarded to the designated authority or directly to the lender. It is often ordered by the courts or a government authority against appeal by requisite receiver or creditor (lender). In some cases, it can be initiated by the mutual consent of the borrower and lender, which is stated to be a voluntary garnishment.
The existence of third-party, which does the 'cutting' of requisite amount from the income of the debtor and forwards it to the payee, is an absolute necessity. Often, the third parties are employers or banks, acting upon the judgment, provided by the court.
Some instances where government and judiciary orders it include tax default cases, loan or credit card bill default cases, child support and divorce compensation cases, fines owed to the government, etc. In theory, a person, company, agency, authority, institute, organization owing money can be subject to it on a voluntary basis upon the court orders.
It must be noted that there are certain rights regarding the rate and also the date of garnishment. Such laws can differ from state to state, though there are several federal laws such as income tax laws that would come into the picture.

The Impact of Bankruptcy

The purpose for which the wages are to be garnished plays an important role in the application of the related rules in your case. Here are some common leads to the effect of bankruptcy on them.
All wage garnishments for creditors get null upon the procedure of bankruptcy. The agreements and mechanisms are dismantled irrespective of the type of bankruptcy. Though depending upon the chapter, they may resume. In case of Chapter 7 (complete liquidation), the garnishments are completely disabled and are resumed in cases of Chapter 11, 12, 13 filings.
Those for state and federal tax usually do not stop except in cases, where the business bankruptcy may be affecting the public interest drastically. Here, dealing with them becomes excessively difficult. Federal agencies such as IRS may suffer some drastic losses. Tax-based wage garnishments that are applicable to individuals are usually not abolished.
Those for child support or divorce contributions are not abolished as a consequence of bankruptcies. Some of them, such as student loan wage garnishment, also do not get abolished, but a temporary stay on the rights of creditors can be brought about by the courts.
Such decisions differ from case to case, and legal systems and the courts often adopt a humanitarian approach in worst-case scenarios.
Thus, it can be said that wage garnishments by creditors and lenders or business garnishments can be stopped by the bankruptcy courts. The Federal and State tax counterparts are however, rarely abolished. Apart from this, the social ones such as divorce compensations or child support cannot be abolished.