What you need to know about wage garnishments.

Filing for bankruptcy is an excellent way to stop wage garnishments.  The automatic stay immediately stops all collection actions, and the discharge wipes out the judgment debt.
However, as any quality bankruptcy attorney will tell you, filing for bankruptcy requires some time and work.  If you want you case done properly and without errors, you should expect that the process will take a couple of weeks, minimum.  In other cases, people need to deliberately wait to file their case for any number of reasons.
But you’re facing a wage garnishment NOW.  What can you do to avoid wage garnishment until your bankruptcy case is ready to be filed?
Let’s start out with some basic facts that you should know about wage garnishment.  Note: everything in this post is specific to Wisconsin law.  If you have been sued in another state, consult with an attorney who practices in that state.
  • The maximum amount that can be garnished is 20% if your “disposable earnings” (your gross wages, minus amounts taken out for federal tax, state tax, and social security taxes, but does not include other deductions such as insurance or union dues).  If you have child support deducted from your paycheck, then the combined amount of child support deductions and the wage garnishment can be no greater than 25% of your disposable earnings.
  • Garnishments typically last for 13 weeks.  They can end sooner if the underlying debt is fully paid.  They can be extended for a longer period either by stipulation, or by a new application that takes effect after the first 13 week period is up.  Also, public employees can be garnished until the debt is paid off.
  • You can only be garnished by one general creditor at a time (does not include tax levies, federal student loan levies, and child support).
  • You cannot be fired solely because of a wage garnishment (though most employment in the United States is “at-will” employment, which means an employer can fire you for any reason or no reason at all, so long as it is not solely for a discriminatory reason).  There is also an exception to this rule if you have a collective bargaining agreement that permits termination under such circumstances.
  • You may dispute a wage garnishment.  To do so, click here for the form.  Send a copy to the Clerk of Courts, the creditor and/or the creditor’s attorney, and your employer.  Your employer must not garnish you if you file one of these responses, unless and until the court overrules your application and directs the employer to proceed with the garnishment.  Your employer must wait at least 5 days after your pay date before sending garnished funds to the creditor, to allow time for you to file a dispute.
  • Most creditors cannot touch certain types of income (such as social security).  However, if you owe debt to the government, social security and other types of income can become fair game.

You may be exempt from wage garnishment.  If you are, make sure that you file a response with the court and copy your employer.  Your employer is not required to investigate on his own to determine whether or not you are garnishment-proof.  All exceptions (except proof of bankruptcy filing or discharge) require a judicial determination.
You may be garnishment-proof if:
  • You have filed bankruptcy and the automatic stay is still pending.  (In pending Chapter 13s, only until property of the estate revests back to you.)
  • You have received a bankruptcy discharge, and the debt was incurred before your bankruptcy case was filed.
  • Your household income is below the federal poverty guidelines.
  • If your household income is above the federal poverty guidelines, but the garnishment would bring you below the guidelines, you can only be garnished to the extent that it brings you down to the poverty guidelines.
  • Currently, or in the past six months, you have received – or determined to be eligible for – public assistance (food stamps, W2, SSI, etc.).

Divorce and Bankruptcy

Divorce and bankruptcy tend to go hand in hand.  Either the financial stresses that led to bankruptcy also break down the marriage, or ex-spouses use bankruptcy as a way to clean-up and get a fresh start after divorce.
However, the issue of divorce can weak havoc on bankruptcy, and vice-versa.  So it’s good to revisit some of these themes.  Particularly when you’re trying to decide which to do first: file for divorce or file for bankruptcy, and whether to file joint or individual.  Many of these themes have circular reasoning, so there really was no linear way to present these, other than randomly…
  • Filing a joint bankruptcy before a divorce is finalized is almost always the preferred route.  It’s cheaper to file one joint petition rather than two separate individual petitions.  Both debtors benefit equally from the discharge, neither one has to rely on the “phantom discharge”, and it renders most “hold harmless” clauses in divorce papers moot.
  • On the other hand, some debtors don’t want to file joint because of impact on credit scores, because bankruptcy causes the revelation of certain financial information that could give one of the spouses leverage in divorce proceedings, or because the income potential of one debtor disqualifies both debtors – as a married couple – from Chapter 7.
  • For reasons beyond my comprehension, creditors are not required to abide by the terms of divorce orders.  Which means that a bankruptcy filed after divorce may not be as effective as a bankruptcy filed before divorce.  Divorce orders usually contain “hold harmless” clauses.  Which means if one spouse gets a debt discharged in bankruptcy that was assigned to him or her in the divorce, and the creditor then pursues the other spouse for payment, the second spouse can go into family court and get a non-dischargeable support order from the first spouse for damages resulting from their failure to pay the debt assigned to them in divorce.  So, if you do file divorce before bankruptcy, make sure that your attorney knows of your intent to file for bankruptcy and that your divorce papers do not include “hold harmless” clauses.  (DO NOT FILE FOR DIVORCE WITHOUT AN ATTORNEY!  Most divorcees who have done so will tell you that it was a mistake.)
  • Get rid of the mentality that you and your spouse split everything 50-50, or that credit cards in one spouse’s name are not the responsibility of the other spouse.  Wisconsin is a community property state, which means that married spouses are deemed a single legal entity, and each spouse is presumed to own a whole and undivided interest in all assets (and share a whole and undivided liability in all debts).
  • Consequently, a bankruptcy petition must disclose the assets of both spouses (if the divorce is not yet finalized), even if one spouse is filing without the other spouse.  Assets of the non-filing spouse that are not disclosed (even if it is due to the non-filing spouse’s lack of cooperation) cannot be taken as exempt, which means the trustee can seize and liquidate unreported and non-exempt assets of the non-filing spouse.  While the filing spouse might not care, this adverse impact on the non-filing spouse could hurt the filing spouse when it comes time to settle the divorce.
  • Additionally, in a non-filing spouse scenario, only the filing spouse can claim exemptions (which are generally half of the exemptions available to joint filers), often creating non-exempt assets where there would be none of both spouses filed.
  • Bankruptcy filed after divorce also must contend with a potential fraudulent conveyance issue.  Were the assets in divorce split roughly 50-50?  If not, why?  If the non-filing spouse got the house, both cars, and all the jewelry, and the filing spouse got stuck with nothing, there could be a fraud issue.  It is not unheard of for a married couple to get divorced just to protect assets from unsecured creditors (in fact, I had a client once myself who tried to pull this stunt, and I fired her as a client).
  • In the event that a single filer has enough exemptions on his own to cover the assets of both spouses, then the question becomes whether the filing spouse can exempt the non-filing spouse’s interest.  If that seems strange to you in light of what I said earlier about community property, you’re not alone.  It seems that this is where the “whole and undivided interest” standard breaks down into a 50-50 theory, again for reasons beyond my comprehension.  At any rate, the court then looks at the non-exempt asset.  Is it readily divisible – like a bank account?  If yes, the debtor can only exempt their half share.  If it is not readily divisible (like a house or single vehicle), then the debtor can exempt both spouse’s share in the asset, provided enough exemptions exist to cover the asset.
  • Once a divorce is final, former spouses can no longer file a joint petition.  A joint bankruptcy petition must be filed before the divorce is finalized.
  • As you may have gathered, it is quite simple for one spouse to adversely impact the spouse by filing for bankruptcy.  Some people would say this is unfair.  I agree.  But it is also part of the cost of marriage that too few people understand and appreciate before they get married.
  • I get a number of clients who cannot provide me with the information of their non-filing spouse because they have been estranged for so long.  They may not be on speaking terms, or they may not even know how to contact the spouse anymore.  Does that mean the filing spouse is off the hook for disclosing the information of the non-filing spouse?  Unfortunately, no.  As stated earlier, unreported assets could potentially be liquidated by the trustee, and even if the filing spouse doesn’t care, it would impact the divorce proceedings when they come.  The solution – if you are unable or unwilling to work with your spouse in a joint filing is to file for divorce first.  Newspaper publication resolves any problems with being unable to locate/contact the other spouse.  Just remember that in filing divorce before filing bankruptcy, to be on the lookout for “hold harmless” clauses that can affect your discharge.

How does my spouse factor into bankruptcy?

Wisconsin is a community property state – one of nine, along with Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Generally-speaking, spouses in a community property state have an equal undivided interest in property and an equal undivided liability for debt. (The simplest way to understand this concept is to think of the married couple as a single unit instead of two individual people.) Many people are unaware of this and erroneously believe that because a bill comes in the name of one spouse only, that only that spouse is liable for the debt.
The existence of community property in bankruptcy lends itself to a phenomenon in bankruptcy that we call a phantom discharge, or a community discharge. This means that one spouse can file without the other spouse, and the non-filing spouse’s community property is protected against collection from community debts. In other words, the non-filing spouse benefits from the filing spouse’s discharge.
In my experience, debtors’ attorneys have mixed feelings about the value and reliability of a phantom discharge. My position is that I have little faith in them. There are exceptions to community property. There are several ways that spouses in a community property state can create non-community assets and debts, and frankly, some of the analyses to determine community status are incredibly subjective. I find it prudent and far less risky to have both spouses file joint, so that each named debtor receives a genuine discharge.
The two most common scenarios I encounter where I find it to be okay to have a non-filing spouse are (a) when the couple is recently married and has not incurred any post-marital, community debt, and the non-filing spouse has little or no pre-marital debt, and (b) when the non-filing spouse filed an individual bankruptcy very recently – again, usually in cases where the couple is recently married – and so there is a very small window between discharges where debts could have been incurred that the debtors need to worry about. More often, I see one spouse want to file without the other spouse out of guilt and a desire to save the other spouse the embarrassment of bankruptcy. I don’t recommend allowing pride and shame guide your decision-making. If you’ve reached the point where you think you need to file for bankruptcy, you need to focus on your finances and doing what needs to be done so you don’t find yourself back in the same position.
Even if you decide that relying on the phantom discharge is a risk worth taking, there are other practical reasons to have both spouses file a joint petition. As I stated earlier, community property means that each spouse owns the property of the other spouse. But for the exceptions to community property, you must list and take exempt the assets of both spouses. Generally, a married couple will have more assets than a non-married person. For this reason, many of the exemptions that we use to protect your assets from liquidation from the Trustee can be doubled for a married couple, but only if they file a joint petition. I have found that often times where you have a non-filing spouse, you also have un-exempt property that could have been exempt if the other spouse had filed jointly.
On that same vein – regardless of whether you file joint or have a non-filing spouse, you must list the income and assets of both spouses. As another practical matter, having both spouses joint makes the entire process run smoother.
Another instance where I see a lot of non-filing spouses are when the couple is in the process of divorce. Many debtors ask me whether they are better off filing joint before their divorce is final or filing alone after it is final. Generally, I recommend filing joint before, because we get a discharge for both debtors and because divorce decrees can limit dischargeability (which I will discuss momentarily). But the answer is rarely that simple. Part of it depends on how far along the couple is in the divorce process. Many confuse the act of filing for divorce with being divorced. But there is actually a several-month period in this state between when the divorce is filed and when it is finalized. Spouses who wish to file joint must file their bankruptcy before their divorce is finalized. Conversely, if one spouse files bankruptcy alone and the divorce is not yet final, then the non-filing spouse’s income and assets must be disclosed. So, another factor is whether the spouses are still on speaking terms. In other words, is obtaining the other spouse’s income and asset information going to be an issue? Finally, if the other spouse intends to file their own individual bankruptcy, then I am more inclined to allow the other spouse to file individual. Of course, it is far cheaper for both parties to file joint.
Let’s talk about divorce decrees. If you’ve been divorced, you might remember that part of the paperwork addressed the division and assignment of marital debts amongst both spouses. These debts might not be dischargeable if the divorce decree contains a “shall hold harmless” clause. Let’s take an example: John Doe and Jane Doe file for divorce. They only have two credit cards, one through Chase Bank and the other through Associated Bank. Both credit cards have a balance of roughly $10,000 each, and so the judge assigns the Chase debt to John and the Associated debt to Jane. If Jane files for bankruptcy and receives a discharge on her debt to Associated, and Associated attempts to collect the debt from John, then John can take Jane to court on the grounds that Jane was to hold John harmless for the Associated debt. If all of this happens, a non-dischargeable obligation could be created from Jane to John. Admittedly, this result does not seem to occur too often, but it does happen.
Finally, I want to discuss families and households. Determining the size of a household and who constitutes the household will impact your bankruptcy in several ways. Most notably, it will determine the median income level you are subject to on the Means Test and it will determine whose income is to be considered in the budget and on the Means Test. I’m not going to discuss any absolute truths for the simple reason that family structures can be complex, resulting in countless arrangements. It’s pretty simple when you have one person, or a husband and wife, or perhaps a couple of kids. But suppose you have extended family (grandparents, uncles, aunts, cousins, nephews, nieces, etc.) living with you. Or perhaps other adult dependents – college-aged kids still living at home. Suppose you’re in the process of divorce, or are engaged, or are domestic partners rather than spouses. Suppose you have joint custody with a former spouse over a child. The combinations are practically limitless, and these are all circumstances that you should discuss with your bankruptcy attorney (and possibly a tax attorney) to determine how these household arrangements will impact your bankruptcy, if at all.