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Oregon Bankruptcy Blog

Chapter 7 & Chapter 13 Bankruptcy Information

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A wage garnishment is often the last straw that forces people to consider filing bankruptcy.  In Oregon, judgment creditors can garnish up to 25% of net (or take-home) wages.  Once a garnishment starts, it continues to run for 90 days unless satisfied (or paid).  After 90 days, the garnishment can continue if renewed every 90 days until it is satisfied.  Filing a Chapter 7 or Chapter 13 bankruptcy case will not only stop the garnishment from continuing and prevent other judgment creditors from stepping in and garnishing wages, it may also give the debtor who files the bankruptcy case the opportunity to recover the money already seized by the creditor.  

Payments to creditors through wage garnishment are considered recoverable preference payments under section 547 of the Bankruptcy Code if the amount garnished exceeds $600 and the funds were seized within the 90 days prior to the filing of the bankruptcy case.   If the federal exemptions are properly applied by the debtor, payments to creditors under the garnishment can be exempted under sections 522(g) - (h) of the Bankruptcy Code.  The asset must be disclosed on Schedule B of the petition and claimed as exempt on Schedule C of the petition.  Under 9th Circuit case law, payments made to collection agents or agencies may be recovered directly from such agents or agencies.

When I meet a client whose wages are being garnished, I try to file the client's case as quickly as possible.  In these situations, I do not typically require that the full attorney fee be paid prior to filing the bankruptcy case.   This allows my clients to file cases and start the garnishment recovery process more quickly.  Because wage garnishment recovery is not covered under my Chapter 7 or Chapter 13 attorney fee agreements, I offer a contingency fee arrangement to recover the funds from the creditor.  This means that if I am unable to recover the garnished funds, I do not collect a fee from my client. 

Before Oregon allowed debtors in bankruptcy to apply federal bankruptcy exemption laws, bankruptcy attorneys typically suggested that debtors file tax returns and receive tax refunds before filing bankruptcy.  This was because there was no way to protect non-EIC (Earned Income Credit) tax refunds over $400 ($800 in joint cases) from liquidation by bankruptcy trustees.  Now that debtors have the option of selecting federal bankruptcy exemptions, debtors in bankruptcy have other options available.

If my clients choose to receive and spend tax refunds prior to filing a bankruptcy case, it is very important that they remember to track how refunds are spent.  The trustees in Eugene, Oregon often request documentation that shows how the refunds were spent at the 341 hearing.  If debtors can provide an explanation regarding how they spent refunds and receipts for these expenditures, the 341 hearing typically goes very smoothly. However, not every client can wait to file bankruptcy until they receive and spend income tax refunds.

If my client has enough "wildcard" exemption available, I often advise that it is possible file the tax return, receive the refund, and deposit the refund in a bank account so that the funds can be used for expenses that arise after the bankruptcy.  Making this decision involves "exemption planning" and should be discussed with an attorney.

If my client decides to file a bankruptcy case before filing a tax return and receiving the tax refund, I advised my client to wait to deposit refund checks and use the funds until the trustee assigned to the case authorizes the debtor to do so.  Trustees in different districts employ different approaches when it comes to debtors using exempt property during a bankruptcy case.  In Eugene, Oregon, where I practice, when clients choose this option, I contact the trustee and ask the trustee to abandon the exempted tax refund so that my clients can use the funds. 

It is very helpful to debtors to have so many options available.  Because many people do not have money available to file bankruptcy until they receive income tax refunds, they need to use at least a portion of their tax refunds to pay attorney fees and court fees.  With the choice of Oregon and federal exemption laws, debtors are no longer forced to spend all of this precious resource more quickly than they otherwise might.