How to Protect Property from Garnishment

Almost anyone who has ever been sued in court and had a judgment entered against them has heard of garnishment. A garnishment is an order by a court to withhold and surrender a portion of a person’s pay to another entity that has been awarded a judgment against the debtor. Even if you have never personally had your wages garnished, you are probably aware of others who have or have had to deal with the threat of a garnishment. You may be less familiar with the process of bank account levy, wherein a bank is instructed to withdraw funds from an account without the account holder’s permission so that the funds may be used to pay back a creditor.  It is important to learn about how garnishments and bank levies work and how to protect your property if you believe you may be at risk of having your income or benefits garnished or your bank account levied by a creditor.

Why Do You Have a Garnishment or Levy?

Whether you are at risk of garnishment or levy or you have already had a judgment entered against you, there are things you can do to protect your property from garnishment. If you’re unfamiliar with how garnishments and levies work, the process is relatively straightforward. With very few exceptions, for things like unpaid federal taxes, federal student loans, and past due child support obligations, every garnishment and levy action begins with a lawsuit. This is important because a debt collector cannot garnish your wages without first taking you to court. 

Once you are sued, you must respond to the lawsuit filed against you to defend yourself. If you fail to respond, or you lose the lawsuit after presenting your defense, a judgment will be entered against you. Once a judgment has been entered against you, future court documents will refer to you as the judgment debtor and your creditor as the judgment creditor. A judgment allows your creditor, now known as a judgment creditor, to request a garnishment or a bank account levy against you. However, you will be given a period of time to simply pay the judgment or work out payment arrangements with the judgment creditor to satisfy it before you’re subjected to garnishment or levy. If you fail to pay the judgment within that period of time, the garnishment or levy order will be enforced. 

There are two types of garnishment actions. Periodic garnishments, also known as wage garnishments, and non-periodic garnishments also known as attachments or bank account levies. Wage garnishments are exactly what the name implies. A wage garnishment is an order from the court to withhold pay from your paycheck or benefits distribution and surrender it to the court or your judgment creditor. Federal law and most jurisdictions limit the amount of any garnishment to a maximum of twenty-five percent of your disposable income. Most jurisdictions only allow one garnishment to be in effect at a time. Non-periodic garnishments, or attachments, are usually directed at your bank account. A bank levy or attachment orders the bank to seize the funds in your bank account, up to the amount of the judgment, and surrender them to the court or your judgment creditor.

Whether you are dealing with a wage garnishment or attachment, it is important to remember that before the funds from either source are surrendered to your judgment creditor, you will receive notice that your employer or bank has been served the judgment order and you’ll be given a period of time to object to the judgment. To object to the garnishment or levy, a claim of exemption form must be filed with the same court that issued the garnishment or attachment order. While the exemption claim is pending, the funds withheld or seized will be held by your employer, or bank, until the court rules on your claim of exemption.

Because you only have a short period of time to file a claim of exemption to a garnishment, it is important to know what a garnishment order looks like if you receive one in the mail. Typically, a garnishment order will contain the name of the court that issued the order, the name of the individuals involved in the case, the case number assigned to the case by the court, the amount of the judgment entered against you, the amount of funds to be withheld from your pay and who the funds are to be surrendered to. It will also usually be accompanied by a separate document known as a garnishment disclosure, informing you how you can file a claim of exemption, how long you have to file it, and where you must file it. Even if the income being garnished is not exempt, you may be able to decrease the amount being garnished by claiming something known as a ‘necessaries of life’ exemption. A ‘necessaries of life’ exemption requires proof you need the money being garnished to pay for such things as food, clothing, and shelter for you and your family. To complete a ‘necessaries of life’ exemption, you must provide the court with some general information regarding your income and expenses and how much you have left over every month. If you are unsure if the income being garnished is exempt or if you qualify for a ‘necessaries of life’ exemption, seek legal advice from an attorney.

What Is Exempt from Garnishment or Levy Outside of a Bankruptcy?

Regardless of whether you choose to file a claim of exemption to a wage garnishment or not, certain types of property are exempt from garnishment and levy under the law. Exemptions exclude certain property or funds from being taken by way of garnishment or levy. Exemptions do not protect property or funds from garnishment as a matter of course. Instead, it means that if funds or property are garnished or levied, and you can show that the funds or property are exempt from garnishment, the garnishment or levy order will either be halted or your funds/property will be returned if they have already been taken from you. You will likely need a court hearing to get your property back if it has already been garnished or levied. 

The broadest types of income that are exempt from garnishment are public benefits. Public benefits include Social Security income, Social Security disability income, public assistance, veteran’s benefits, supplemental security income, and unemployment compensation. Other types of exempt income in most states include railroad retirement benefits, workers’ compensation, life insurance benefits, child support, spousal support/alimony, and retirement benefits. Most states also have a personal property exemption that will be honored for certain kinds of personal property. Regardless of what type of exemption your funds fall under, because you bear the burden of proving that any funds subject to a garnishment or levy order are exempt, you should avoid commingling these funds with non-exempt funds. For example, if you are paid federal benefits by direct deposit, always direct these funds to a separate, dedicated bank account.

Keeping potentially exempt funds in a dedicated account is especially important if you are served with a bank levy. Because bank levies can seize funds up to the entire amount of the judgment owed, your entire bank account could be emptied for several weeks at a minimum until you have an opportunity to file a claim of exemption and appear to make your case in court.

How Do Exemptions Work in a Bankruptcy?

Bankruptcy is designed to provide relief to individuals who can no longer afford to pay their bills. Chapter 7 bankruptcy legally eliminates debts you can no longer afford to pay and prohibits your creditors from attempting to collect them again. When a bankruptcy is filed, something known as an “automatic stay” is entered by the Bankruptcy Court. This stops wage garnishment and prohibits any further collection activity from being taken against you while your bankruptcy case remains active. It also suspends any collection activity currently in effect, including pending lawsuits, and unexecuted bank levies or attachments.

Depending on whether you file a Chapter 7 or Chapter 13 bankruptcy, some of the particularly valuable personal property or assets that you own may be sold to pay your creditors. However, just like with garnishments, in a Chapter 7 bankruptcy, you are entitled to exemptions to protect some or all of your property from being sold or surrendered as part of the bankruptcy process. 

Bankruptcy exemptions may only exempt a portion of the value of your property like the equity in your home. However, other exemptions apply to all, or virtually all, of the property or assets within a specific category. Benefits like Social Security benefits, retirement benefits, IRA, 401(k), child support, alimony, and veteran’s benefits are typically one hundred percent exempt. Other benefits, like workers’ compensation awards, are usually one hundred percent exempt to the extent they are necessary to care for you and your dependents. Most life insurance proceeds are also exempt in bankruptcy under specific conditions.

Just as you are required to file a claim of exemption to stop a pending garnishment or recover exempt funds that have already been garnished, you must claim any exemption you are entitled to when you file a Chapter 7 bankruptcy. In order to claim your exemption, you will have to indicate the property or funds that you believe are exempt, the amount or value of the property that is exempt, whether you are claiming the exemption based on state law or federal law where allowed, and you must reference the specific provision of the law that grants the exemption.

Conclusion

No one wants to be sued. And no one wants to have their wages garnished or bank accounts levied to pay a debt they couldn’t afford to pay prior to being sued. Thankfully, knowing how to protect exempt property from garnishment outside of bankruptcy may lessen the blow of both being sued and being garnished. Additionally, knowing that bankruptcy can stop a lawsuit, as well as garnishment dead in its tracks, may make it possible for you to get the fresh start you deserve.