Funds Garnished Prior to Filing Bankruptcy May be Recoverable
Get Garnished Funds Back if Filing Within 90 Days of Filing
Funds garnished by creditors from your paycheck, bank account, or State of Michigan tax refund must generally be returned to you if you file within 90 days of the garnishment, so long as certain circumstances are met.
When Can I Get Garnished Funds Back After Filing Chapter 7 or Chapter 13 Bankruptcy?
Funds garnished prior to a bankruptcy filing must be returned to you if they meet the definition of what is called an “avoidable preference” under the US Bankruptcy Code. A preference is a “windfall” payment to a creditor (whether you made it voluntarily or involuntarily) which results in that creditor receiving more than they would have received in a Chapter 7 asset liquidation, if there were to have been one (most Chapter 7 bankruptcies do not result in any asset being liquidated).
A creditor may not be “preferred” above other similarly types of creditors (unsecured, secured, and so forth). If any “unsecured” (no collateral attached to the debt: credit cards, medical debts, personal loans, etc.) is to receive anything from a bankruptcy case, all unsecured creditors must get the same amount.
This is why you should not repay personal loans to your grandmother or brother-in-law before filing: the Chapter 7 Trustee will sue them to get the funds back in order to redistribute them to your other creditors.
What Is a Preference?
A garnishment preference must be returned to you (as opposed to a Chapter 7 Trustee) if it meets these conditions:
- $600 or more (total) taken
- within the 90 days prior to filing
- and you were able to and did list and exempt the garnished funds in your bankruptcy petition schedules
- and the Chapter 7 Trustee does not attempt to avoid (undo) the transfer his- or herself
Thus, if only $599 in total was taken from your paycheck or bank account, you will not be able to get the funds back. If the funds were taken 100 days prior to filing, you will not be able to get them back.
You can only retrieve from a garnishing creditor the amount of money garnished within the 90 day “preference period,” furthermore, so, if even more money was garnished prior to the 90-day period, you will not get that portion back.
Generally, creditors will return the funds upon demand by your attorney, but, if not, a motion for contempt or adversary proceeding (lawsuit) may be required to force them to comply with the law. If such a step is required, you will certainly be glad that you hired an experienced bankruptcy attorney for your bankruptcy rather than attempting to save a few bucks by going it alone without legal representation.
Get Garnished Funds Back: State of Michigan Tax Refund Garnishment
When the funds garnished were taken from your State of Michigan tax refund, a further note is required. Some creditors’ law firms in southeast Michigan sometimes take the position that, if they obtained their writ of garnishment and placed their “lien” on your state tax refund prior to 90 days before your bankruptcy filing, they do not need to return the funds, even if the funds were taken from your refund within the 90 day preference period.
There is case-law from the Bankruptcy Court of the Eastern District of Michigan, which includes Detroit, Ann Arbor, Flint, Saginaw, and other cities in eastern Michigan, which supports this position, although the individual argument is specific to your particular facts.
The bottom-line with regard to State of Michigan tax refund garnishment, which is an extremely common form of garnishment, is that, if you receive a notice of garnishment and are considering filing for bankruptcy to deal with it, you will want to work hard to get your case filed before you are further out than 91 days from the date the garnishment notice was sent to you if you want to make sure not to A) lose your money to begin with and B) get it back if it is.
Filing Bankruptcy to Get Garnished Funds Back: The Bottom Line
The bottom line is that filing a bankruptcy will stop a garnishment from continuing or from ever occurring. But, if you actually want to get garnished funds back after they have already been taken, time is of the essence and hiring an experienced bankruptcy lawyer is crucial!
Do not wait or think too long about it before scheduling an initial consultation to explore your options. Do not drag your feet gathering the large amount of required documentation for your lawyer once you do hire one.
Think fast, file fast, and you can stop the bleeding.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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