Whose Money Is it Anyway? How Garnishments Are Affected by a Bankruptcy Filing
| Publication year | 2013 |
| Pages | 0010 |
A Look at the Law
by David A. Kleber
Litigators are typically trained in the art of proving their client's case in court. There are extensive motions, complex evidentiary objections and trial tactics to engage a jury. Lawyers take years to hone these crafts to obtain verdicts in favor of their clients. When the trial is over, though, sometimes the case is just beginning. When there is no insurance coverage and no deep-pocketed defendant to write a prevailing plaintiff a check, or when a prevailing defendant is entitled to a monetary judgment for attorney's fees or costs, it is often necessary to engage in post-judgment litigation to recover a judgment. There are processes and procedures under the law to enforce a judgment and compel payment, but these processes are not always as simple as they appear. Add to them the specter of bankruptcy protection, and you may face a real minefield.
Georgia law empowers a judgment creditor to enforce its judgment and collect the amount owed it by, among other methods, a strict statutory process called garnishment.[1] A garnishment is an action against a third party, the garnishee, who holds money or property belonging to the judgment debtor or owes a debt to the judgment debtor.[2] This garnishee could be, for example, a bank, a tenant, a customer, or an employer or contractor. Through the garnishment, the creditor may obtain the debtor's property, including cash funds, to satisfy the debtor's obligation under the judgment. The question addressed here is what happens when a judgment debtor files bankruptcy during the pendency of a garnishment case.
The garnishment action begins by the issuance of a summons of garnishment. The summons of garnishment is similar to a civil suit summons. For example, a regular civil summons requires a defendant to file an answer to the allegations within 30 days or risk entry of a default judgment against it. Similarly, the garnishment summons requires the garnishee to file an answer to the allegations within 45 days or risk entry of a default judgment against it.[3] Unlike a regular civil summons, though, the garnishment summons also requires the garnishee to turn over the judgment debtor's property it holds, or pay the money it owes to the debtor to the creditor instead, in order to pay the debtor's debt.[4] The creditor essentially steps into the shoes of the debtor, with respect to the garnishee, and obtains the rights to the debtor's property or the right to obtain wages or the proceeds of a contract. Rather than the garnishee paying the money or property directly to the creditor, though, Georgia garnishment procedure requires the garnishee to turn over the property or funds to the court along with its answer, and serve a copy of the answer on the creditor.[5] The court holds the money until it is disbursed to the proper party as discussed below. In this way, the court can oversee the process and ensure due process to the debtor.
Garnishment is considered a quasi in rem proceeding,[6] as it is an action against the garnishee and the debtor's property and not the debtor personally. In fact, the judgment debtor is not actually a party to the garnishment action.[7]There is one statutory mechanism by which the debtor may become a party to the garnishment action. She may file a traverse of the creditor's affidavit of garnishment.[8] A traverse is a claim by which the judgment debtor may challenge the existence of the judgment or the amount claimed due thereon, or she may plead any other matter in bar of the judgment except the validity of the judgment. The debtor may become a party in this way "at any time before judgment is entered on the garnishee's answer or before any money or other property subject to garnishment is distributed."[9] In this way, the debtor's due process rights are protected. She has the right to object and challenge the creditor's rights to the property or funds before the court turns over the property or funds to the creditor.
If the debtor files a traverse, then a hearing must be scheduled within 10 days, and "no further summons of garnishment may issue nor may any money or other property delivered to the court as subject to garnishment be disbursed" until the hearing is held.[10] In other words, if a debtor files a proper challenge to the garnishment, then the case is stayed, at least so far as the creditor's rights, until the challenge is resolved. The court determines which party has the superior legal claim to the property and disburses it accordingly. If no traverse is filed[11] within 15 days of the garnishee's answer, then the clerk of court must disburse any money it has received with the garnishee's answer to the creditor on his application.[12] The garnishee is then relieved of any liability and the case is closed.
A judgment creditor may also seek to obtain a portion of the debtor's wages an employer owes to her. Such a right to collect future wages is a chose in action. Choses in action are not subject to levy or attachment, and may only be obtained by the filing of a garnishment. In the case of regular wages, Georgia law provides a process of continuing garnishment against the debtor's employer.[13] As opposed to a single answer due within 45 days of service, the continuing garnishment affects the debtor's wages for 179 days from service,[14] and requires continuing answers from the garnishee.[15] In all other respects, the procedures are basically the same as regular garnishments as discussed above.
The process of continuing garnishment typically runs smoothly, according to the strictly defined statutory rules, until a debtor files bankruptcy. Federal bankruptcy law supersedes state garnishment law, and puts additional obligations and restrictions on the process. First, the filing of the bankruptcy petition invokes an automatic stay of all proceedings[16] except under some specific exceptions.[17] The effect of the automatic stay is to hold the debtor's property, and the rights and liabilities of parties in conflict with the debtor, in place. At the moment of filing the petition, everything in relation to legal actions against the debtor and/or her property is frozen in time.[18]Everyone, including the garnishee and garnishment court, is prohibited from transferring or affecting any property of the bankruptcy estate without approval from the bankruptcy court.[19] Accordingly, any garnishment filed after the filing of a bankruptcy petition is void and must be dismissed.[20] If a garnishment is pending prior to the bankruptcy filing, then it does not need to be dismissed. Any wages earned by the debtor after filing bankruptcy, however, are protected, and may not be affected by the continuation of the garnishment. So, the stay requires the creditor who has issued a pre-petition garnishment action to take affirmative efforts to ensure the garnishee makes no deductions from the debtor's post-petition wages.[21] This obligation does not extend, however, to dismissal of the garnishment case, or even to releasing the garnishment,[22] so long as the garnishee is notified to stop deductions under the case. The question remains, however, what about property and money in the garnishment "pipeline"? What is the legal status of such property or wages which have been identified by the garnishee as subject to the garnishment, and what if that property has been deposited in the registry of the court, or already paid to the creditor?
Because the stay applies only to actions against "property of the [debtor's] estate," the first relevant question is whether pre-petition wages, which have been deducted from the debtor's pay prior to bankruptcy, are "property of the estate." The bankruptcy courts in Georgia are divided on this question. The Bankruptcy Court for the Middle District of Georgia has repeatedly taken the position that if funds were deducted from the debtor's pre-petition wages, then the funds are not property of the estate.[23] These decisions reasoned that the debtor is not a party to the garnishment case, and if the wages had been deducted from the debtor's pay prior to filing, then the debtor was already deprived of the property at the moment of filing. Because it is the debtor's interest in property that comprises the bankruptcy estate, if the debtor had no interest in the funds already deducted from her pay, then those funds could not be property of the estate. The Middle District reasoned, based on state law, that the only way a debtor could assert any interest in the funds was by filing a traverse. So, if no traverse was pending when the bankruptcy was filed, then the debtor could not assert any interest in the funds.[24]
The Bankruptcy Court for the Northern District of Georgia has reached a different conclusion. This court expressly rejected the Middle District's holding in In re: Antley,[25] reasoning that because a debtor could file a traverse at any time prior to disbursement of the funds, the debtor had some interest in the undisbursed funds at the time of filing...
To continue reading
Request your trial