Wages cannot generally be garnished in Texas for ordinary debts, but there are exceptions. One of the exceptions is for federal debts, such as loans from or guaranteed by federal agencies.

If your wages are bting garnished and you file bankruptcy, it may be possible to get the wages back that were garnished within the 90 days prior to filing bankruptcy, our Fifth Circuit Court of Appeal ruled in March 2017. Tower Credit Inc. v. Schott, (In re Jackson), 850 F.3d 816 (5th Cir. March 13, 2017). The creditor's appeal from that decision has now been denied by the U.S. Supreme Court.

In the original bankruptcy court case, the debtor's wages were being garnished before she filed bankruptcy. She filed bankruptcy which stopped the garnishment. Then she filed what is known as a "preference" or preferential transfer lawsuit in bankruptcy court, asking the bankruptcy court to return the money that was taken our of her paycheck in the 90 days before bankruptcy. This is allowed under certain circumstances, so long as the wages can be claimed as exempt. See 11 U.S.C. Sections 522(h) and 547.

The creditor argued, as several other courts have held, that the "transfer" really occurs when the garnishment court order is served on the employer, which is often more than 90 days before the bankruptcy. Therefore the wages garnished are not a preference, and the debtor should not be allowed to recover them.

But the 5th Circuit Court of Appeals held in Tower Credit that:

"The combination of Supreme Court precedent and the overwhelming weight of persuasive authority applying § 547(e)(3) make clear that a debtor’s wages cannot be transferred until they are earned. Thus, we hold that a creditor’s collection of garnished wages earned during the preference period is an avoidable transfer made during the preference period even if the garnishment was served prior to that period."

So now debtors in bankruptcy, at least in the 5th Circuit (Texas, Mississippi and Louisiana) will be able to recover exempt wages that were garnished within 90 days of filing bankruptcy. They will likely have to file an adversary proceeding or lawsuit in bankruptcy court to do so, but at least they have the right to do so. We have already used the authority of the Tower Credit case to recover wages for a lady that had been garnished by the Small Business Administration here in the Houston, Texas area. 

So you think this decision is correct? Should wages be able to be recovered as preferential payments? Or should the creditor be able to keep the money that they have garnished? Please give your questions or comments below!

J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
Be the first to comment!
Post a Comment