Comparing Garnishments and Voluntary Wage Assignments

For as long as I’ve practiced consumer bankruptcy law, a common issue that has confused my clients is the difference between court-ordered garnishments and voluntary wage assignments. Garnishments and wage assignments are both methods of creditor collection where monies owed are taken directly out of a person’s paycheck. The pivotal difference between the two is that one is mandatory while the other is voluntary.

Garnishments: If your employer, payroll department, or human resources department receives a court-ordered (and usually court-stamped) notice of wage deduction, this means that a collection judgment has been entered against you and the creditor who sued you is exercising their legal right to collect the money owed to them via your paycheck. Your employer must comply with this court-order, or they themselves can be held in contempt of court and subject to fines, etc. Depending on the jurisdiction on which you live and pursuant to any instructions on the order, your employer much start the garnishment coming out of your check typically within two to four weeks after receiving the order. Being mandatory, the only way to stop a pending garnishment in most cases is either by filing Chapter 7 or Chapter 13bankruptcy, or by paying the creditor off in full via a lump sum payment.

Voluntary Wage Assignments: A voluntary wage assignment is a contract that a person signs at the time they apply for a loan or credit. These are typically used by creditors to assure that they have a way to collect on a borrower (often with less-than-perfect credit) should that person default on the loan or credit they’ve extended to them. The contract states that if the borrower should not make their payments to the creditor timely, the borrower gives the creditor the right to submit the voluntary wage assignment to their payroll for collection. (Payday Loan places, jewelery and furniture stores that extend people credit directly are the creditors that use wage assignments the most often from my experience.) While filing a bankruptcy is the only way to stop a court-ordered garnishment, a written revocation is all that’s necessary to stop a voluntary wage assignment. A simple letter from you or your bankruptcy attorney notifying your employer and the creditor who issued the wage assignment is all that’s needed to prevent or stop any further funds from coming out of your paycheck.

Transfers of Real Estate and Bankruptcy

Last night I had a consultation with a prospective client who in the previous year had lost his good-paying job and had been forced to take part-time work at much lesser pay to make ends meet. Because of his decrease in income, he’d resorted to overspending on his credit cards and now has $60k of unsecured debt that he can not repay.

Unfortunately, I wasn’t able to help this individual because of actions he had recently taken before coming into my office.

In January, 2007, my prospective client quitclaimed the fee simple interest he possessed in his homestead to his longtime live-in girlfriend via a quitclaim deed. At the time of the transfer, the house was worth $300k and the balance on the only mortgage was $140k. He was quite frank with me that the reason he transferred the property out of his name was because he was planning on filing a Chapter 7 bankruptcy in the near future, and did not want to lose his house to the bankruptcy court and his creditors.

It then became my unenviable job of telling him that what he’d done would not prevent the court from seizing the house as an asset in a Chapter 7 liquidation bankruptcy. The issues here are one of equity and one of transfer. In Illinois where I practice, an individual can protect up to $15k of equity in their homestead. (PLEASE NOTE: The homestead exemption varies state-to-state .) Even after a cost of sale analysis to account for broker fees, etc., my prospective client had over $130k of equity in his house. After deducting the $15k homestead exemption, this would leave roughly $115k of exposed equity in the house were he to file a Chapter 7 bankruptcy. In this case, a bankruptcy trustee would seize and liquidate the house and use the monies to repay this person’s creditors. Any surplus of sale would be returned to the client after all qualifying debts had been paid.

The fact that he’d transferred the house before the filing of bankruptcy will not stop the court from pursuing the equity in this situation. All transfers of assets within a two-year window prior to filing must be disclosed on a Chapter 7 or Chapter 13 bankruptcy petition in the Statement of Financial Affairs. A bankruptcy trustee by statute possesses the power to offset any transfers within a four-year window prior to filing if he deems the transfer to be fraudulent and if there’s a sufficient asset to make a meaningful distribution to the filer’s creditor’s.

In this case, had I filed a Chapter 7 Bankruptcy for this person, his assigned bankruptcy trustee would have “set aside” the fraudulent transfer and sold the property out from under the client so he could repay the $60k of credit card debt the client had incurred with the proceeds of sale from the house.

To make matters worse for this person, I also unfortunately could not put him into a Chapter 13 repayment plan because he no longer possessed the requisite household income to repay his debts and maintain his necessities, i.e. mortgage payment, food, clothing, transportation, utilities, etc.

Thus, I had to break the bad news that the only options he has now are either to sell his house and use the money he receives from the sale to repay his debt; somehow legitimately increase his income so he can support a Chapter 13 repayment plan; or wait the four year period until February, 2011 to file a Chapter 7 Bankruptcy so a trustee can not set aside the transfer at issue.

The lesson to be learned here is simple. If you are contemplating materially changing any aspect of your financial situation before filing bankruptcy, make sure to consult with an experienced attorney who can advise you if your intended actions would be potentially damaging to your future case.

Less Individuals File Bankruptcy in 2006

On Tuesday, The American Bankruptcy Institute released filing statistics for the 2006 calendar year. The total number of bankruptcy filings in 2006 was down 71 percent, to 618,000 bankruptcy filings, from a record high in of 2.1 million filings in 2005. Bankruptcy filings were the lowest since 1980. States showing significant declines in bankruptcy filings include Louisiana , West Virginia , and Oklahoma .

This dramatic decrease comes as no surprise and is largely due to the sudden surge in filings seen leading up to the enactment of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BACPA) and the rush to file before BACPA was enacted.

There is always a percentage of the population that needs a bankruptcy and are effectively insolvent, but don’t actually file for bankruptcy protection until a triggering even leaves them with no other viable options. Typically, filing bankruptcy is triggered by some form of collection activity, such as harassing phone calls, foreclosure, repossession, garnishment, or law suits. However, the bankruptcy law change in 2005 acted as a trigger for the thousands of people who were on-the-fence and were motivated to file bankruptcy before the uncertainty of the new bankruptcy laws. This explains a large part of why 2006 filings were down so dramatically, and I’d expect them to gradually rise as the amount of people who need a bankruptcy increases. The recent increase in foreclosures and the rising use of consumer credit are expected to further contribute to an increase in bankruptcy filings for 2007.

Bankruptcy Filings for 2006 were at their highest in the fourth quarter and are increased each quarter, with a further increase expected for first quarter 2007.

New Century Financial Files Bankruptcy

On Monday, New Century Financial filed for Chapter 11 bankruptcy protection in Delaware. New Century, once the nation’s second largest subprime mortgage lender, also announced plans to fire 3,200 employees, about 54 percent of its work force. As part of the restructuring plan, New Century will sell its loan servicing business to Carrington Capital Management for $139 million.

New Century is the latest subprime lender to fall casualty to the dramatic increase in defaults and foreclosures nationwide. Many homeowners have seen their monthly mortgage payments increase as interest rates have risen. Due to the recent popularity of Adjustable Rate Mortgages and interest only loans, many homeowners are facing steep increases in mortgage payments as interest rates rise and fixed introductory payment periods end. Chapter 13 bankruptcy can stop a foreclosure, but you must have sufficient income to continue with the regular mortgage payments in addition to a court ordered payment to catch up on the mortgage arrears and pay off a percentage of any other debts.

The credit industry is responding to the recent collapse of the subprime market with a tightening of qualifications and some have stopped subprime loans altogether. Although it is still relatively easy to obtain a mortgage after a bankruptcy, consumers should expect to find fewer loans available immediately following a bankruptcy discharge.

Risky, or irresponsible, lending extends too many other areas of the credit industry, including pay-day loans, financing offers, credit cards, and auto loans. These industries have not received as much attention as the subprime mortgage industry, but there is clearly an over-extension of credit to consumers that simply cannot afford to carry the amount of credit given to them. These debts typically have high interest rates and unreasonable payment terms that often lead to default. The lender is harmed by the high amount of defaults, and the consumer is often forced to consider bankruptcy or other debt relief options.

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