Will a Colorado Bankruptcy Stop a Wage Garnishment?

May 24, 2011

By: David M. Serafin

In my Denver, Colorado based bankruptcy and tax law practice, I continue to face more and more questions about whether and how bankruptcy stops a wage garnishment, particularly as unsecured and judgment creditors –especially collection agencies for credit cards, medical bills or those creditors recovering on a deficiency for a prior foreclosure or repossession – become more aggressive.

First, bankruptcy will not typically stop a garnishment put into effect before the date of filing (unless the garnishment, from its onset, was illegal). The garnished funds will either be retained by the creditor or, if the funds are significant, subject to the bankruptcy trustee’s preference powers and brought back into the bankruptcy estate.

But, both chapter 7 or chapter 13 will either stop an existing wage garnishment or prevent an impending wage garnishment from going into effect. I highly recommend that the bankruptcy be filed before a garnishment ever takes effect particularly because of the financial hardship of losing up to 25% of your net wages for each pay check.

Once a bankruptcy has been filed, we immediately provide the case number and a Notice of Automatic Stay to both the creditor and the payroll/human resources department for your employer. And, if there is a pending County Court collection action in your Colorado county of residence, we can also file a Motion to Quash Writ of Garnishment (requesting that the garnishment be stopped and returning any frozen garnished funds held in escrow before remittance to the creditor) and provide the local court notice of the bankruptcy filing.

For other bankruptcy filers, the decision to file immediately because of a wage garnishment is not as clear cut if expecting a tax refund. For instance, if you lose $300 per bi-monthly pay period from a wage garnishment but are expecting to receive a $3,000 tax refund, it may make sense to absorb the garnishment(s), receive and spend down the tax refund, and then file bankruptcy (because a chapter 7 or chapter 13 trustee can compel turnover of the entire tax refund if bankruptcy is filed before receipt of the tax refund).