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Thursday, January 19, 2017

Bank Account Seizures and Wage Garnishments Before Bankruptcy, part 2

© 2017 Steven G. Klesner, All Rights Reserved

This article is intended as general information, and not as advice applicable to any person’s particular situation. As such, you should not rely upon this information, but upon the advice of your attorney after fully disclosing the facts. It is also applicable only to bankruptcy cases filed in the State of Iowa.

Wage garnishment is the main way judgment creditors collect from debtors. In this case, the county sheriff tells your employer to begin withholding from your paycheck, and to pay those amounts to the sheriff. Here’s what you need to know:

There are limits on the amounts of the garnishments (these do not apply to state or federal taxes). One limitation is on the amount that can be taken from each paycheck. Typically, this is 25% of the debtor’s income after taxes are withheld. So, if a debtor’s gross pay for two weeks is $2,500, and taxes are $500, then the employer will withhold 25% of $2,000, or $500.

The second limitation is the amount that can be taken in a calendar year. If a debtor’s annual income is under $16,000, that amount is $400. For under 24,000, it is $800. For under $35,000, $1,500 can be garnished. $2,000 can be taken from those earning between $35,000 and $49,999.99, and 10% can be taken from those earning over $50,000. When these limits are reached, the garnishment must stop until the next year.

For some people, the 25% taken from several paychecks is a real hardship. But, if they are considering a payment arrangement with a creditor, or if they are thinking of a Chapter 13 bankruptcy and are considering the affordability of the payment, then they should consider what the annual limitation on garnishment is before deciding on these other alternatives. Garnishment may cost more, or it may cost less, than those other options. Just remember that these limits are per creditor, so if there are other judgments, those may start garnishing when another reaches its annual limit.

Debtors may also petition the state court to allow less to be taken. The court will consider evidence of living expenses (be prepared to show all expenses with billing statements or other documents), and may decide to allow less than 25%.

A bankruptcy will interrupt a wage garnishment, and in many cases, debtors will be able to recover some, or all, of the amounts already taken. Many debtors may be unable to raise money to file the case while they’re being garnished. Talk to your attorney about whether the money recovered can be used to pay for the bankruptcy. Some may agree (we often do, but you must act quickly, before the garnishment is complete).

11:12 am cst 

Bank Account Seizures and Wage Garnishments Before Bankruptcy

© 2017 Steven G. Klesner, All Rights Reserved

This article is intended as general information, and not as advice applicable to any person’s particular situation. As such, you should not rely upon this information, but upon the advice of your attorney after fully disclosing the facts. It is also applicable only to bankruptcy cases filed in the State of Iowa.

Many people do not file for bankruptcy relief until they’ve been garnished at least once. Sometimes, bank accounts are frozen. Wage garnishments are also common. Frequently, debtors have failed to understand their rights and have lost money they did not need to lose.

This is particularly true of bank garnishments. When a creditor has a court judgment – meaning they have filed a suit and have won that suit – it has the right to go after property, and bank accounts are a common target. The creditor files documents with the court and directs the county sheriff to direct the debtor’s bank to freeze all accounts in the name of the debtor. The money in these accounts is then paid over to the sheriff, who sends it to the clerk of court, and eventually it is paid to the creditor.

Here are some things people don’t understand about this process:

  1. The moment a bankruptcy is filed, this process stops. The account will be un-frozen. Any funds in the account will be made available to the debtor. If any amounts were already transferred to the sheriff, or the clerk, then those amounts can be recovered during a bankruptcy, assuming the amounts fit within the exemption limits.
  2. Before a bankruptcy, or if there will be no bankruptcy, the debtor still has rights. First, the debtor has a clear right to exempt $1,000 under the “wildcard” exemption of Iowa Code sec. 627.6(14). All debtors should, as soon as they learn of any account seizure, immediately file a request with the court to be allowed this exemption. Any kind of written request, such as a “Dear Judge” letter, will trigger a hearing, and the judge should honor that request. The debtor should also immediately stop putting any funds in the frozen account. These amounts will also be frozen.
  3. Second, many people are joint owners of bank accounts that really belong to someone else, like a spouse, an elderly parent, or a minor child. Sometimes, they should really only be authorized signers, or custodians, but the account has been set up as a joint account. All of the funds in joint accounts will be frozen (or at least enough to fully pay the debt), unless the debtor objects. If the debtor objects, then Iowa law says the debtor is presumed to own one-half of it (if there are two names on the account). So, with no further evidence, the debtor can get half of the money released. When the funds in the account came completely from the other owner – like when a spouse who puts her paycheck money in the account and the debtor has his income put into another account – then going to court with bank statements that show the spouse’s income being the only source, then then entire amount should be released, since Iowa law says a debtor can rebut the presumption of the debtor’s partial ownership by showing the sources of the money and the intentions of the owners. I once had a case where a debtor was on her elderly mom’s account to manage her finances, and it had a lot of money in it. It got garnished. We objected, and went to court and showed the account had only mom’s income in it. The court released the entire amount.

What about wage garnishments? That’s a whole other matter, which I’ll take up in the next article.

10:43 am cst 

Tax Refunds in Chapter 7 Cases in Iowa

© 2017 Steven G. Klesner, All Rights Reserved


This article is intended as general information, and not as advice applicable to any person’s particular situation. As such, you should not rely upon this information, but upon the advice of your attorney after fully disclosing the facts. It is also applicable only to bankruptcy cases filed in the State of Iowa.

When a person files a chapter 7 bankruptcy case, she must disclose all property and property rights that exist at that time. One type of property right is the right to receive income tax refunds from the state and federal governments. People might be owed for past years, but the most common situation is an upcoming refund for an on-time filing.

Federal tax returns are usually due on April 15, and the Iowa return on April 30. The bankruptcy courts consider your income tax refund as already “accrued” – meaning you have a right to the refund – before the year ends. In fact, you are accruing it all during the year as you have income withheld from your wages for payment of the taxes due the following April 15. At the end of the year, the entire amount is accrued.

For several months of the year, usually fall through early spring, future tax refunds are a potential issue. You are allowed to keep, or exempt, a certain amount, but if you exceed that amount, then you may lose some of your refund to the bankruptcy trustee, who will use it to pay some of your debt and administrative costs.

This can be a very complex subject, and it is one area where your lawyer earns his fee. Your lawyer can save you hundreds or thousands of dollars with good advice, or lose you a lot with bad advice. It takes experience and effort to save clients money.

An example will help to understand the issue. Andrew and Abby are meeting with their attorney on January 31 to file a joint case. Andrew made $40,000 last year, and Abby made $60,000. Both were employees, and their employers withheld taxes from their income. They had no other source of taxable income. They’ve received their W-2’s, and have had their joint federal and state returns prepared.

The returns show they will receive $4,000 from the feds and $1,000 from Iowa. Of this amount, $1,000 is shown on the federal return line for Additional Child Tax Credit (or “ACTC”). The balance of the federal refund ($3,000) is due to over-withholding. All of the Iowa refund is due to over-withholding.

The first thing to understand is that there usually are three kinds of property, accrued tax refunds, bank balances, and accrued wages, that share overlapping exemptions. There are also three kinds of exemptions that can apply (the amounts are for each person filing for bankruptcy, so these amounts are doubled in the case of Andrew and Abby):

   1.      $1,000 “wildcard,” which can be applied to bank balances and many other kinds of property;  

   2.      $1,000 accrued wages and tax refunds; and

   3.      75% of earned wages, which is a limitation on garnishment.

Attorneys ought to apply these allowances to make maximum use of the 75% allowance, since there is no cap on the allowance, and then apply the accrued wages/tax refunds allowance, and hold the wildcard in reserve because it can be used for other things.

Let’s assume Andrew and Abby have joint bank accounts, and expect to have about $1,000 in those accounts on the day they file their case. The only source of deposits for the past few months has been their paychecks, and their bank statements show those wage deposits. When they file their bankruptcy, they also expect that Andrew will be owed about $800 in wages by his employer (due to the usual delay in being paid for employment), and Abby will be owed about $1,200.

The 75% limitation can be applied to the earned wages and, probably, the bank accounts (lawyers and trustees sometimes disagree on whether it applies to bank accounts, but if the amount is not large, then it doesn’t get challenged). So, we see that we can protect all but 25% of the bank balance and accrued wages this way.

That means $250 of money in the bank, and $200 for Andrew and $300 for Abby of wages, or $750 total, needs to be exempted under either the wildcard or accrued wages/tax refunds allowances. Andrew is allowed $1,000 wildcard and $1,000 accrued wages/tax refunds, and so is Abby. Between them, then, there is $4,000 available to cover the $750. No problem so far.

That leaves $3,250 ($4,000 minus $750) of wildcard and accrued wages/tax refunds to apply to the income tax refunds. The $1,000 of the federal refund that is due to the ACTC has its own exemption (as a public assistance benefit under Iowa Code sec. 627.6(8)(a)). The remaining $4,000 of state and federal refunds exceed the $3,250 available, by $750.

It’s a little more complicated, however. The tax refunds are not considered by the courts to be equally owned by Andrew and Abby. Andrew’s share of the refunds is equal to his share of their income for the year. He earned 40% of their income, and so his share of the $4,000 at issue is $1,600. Abby’s 60% is $2,400.

Andrew’s $2,000 in available wildcard and wages/tax refunds is enough to cover his half of the $250 (or $125) bank funds and his $200 in wages, and still cover his $1,600 share of the tax refunds. But Abby’s share of the bank funds and her wages eats up $425 ($125 plus $300) of her $2,000 allowance, which leaves her only $1,575 to cover her $2,400 share of the refunds. She’s over by $825, and, even if Andrew has left-over allowances, he cannot apply them to Abby’s share of the refunds. Andrew and Abby don’t have a $750 problem; they have an $825 problem.

Sound complicated? It is. Because this is a simple scenario. Imagine several bank accounts, with funds from different sources, other assets in need of the wildcard exemption, and a more lopsided income difference between spouses, which would be common.

In Andrew and Abby’s case, the $825 that is at risk may not be enough to tempt a bankruptcy trustee to demand that it be paid over to him (some trustees choose to not pursue anything under $1,000). But there is risk, and the trustee may not agree that the 75% exemption can be used on bank accounts, putting $750 more in dispute, and leading to a court fight.

The solution in this case (other than choosing to take a chance and be willing to turn over the excess amount) is to wait until after the refunds have been received and spent. This should be done in close consultation with an attorney, to make sure the use of the refunds is appropriate.

Waiting isn’t always an option, however. Maybe a court case, a garnishment, or some other collection action or other reason exists to file quickly. Perhaps you are considering filing late in the year, and so you don’t know what your refunds will be. In that case, your trustee may hold your case open until you file your returns, to see how big those refunds are. The refunds are then prorated based on the date of the filing (if you file on December 1, for example, then you’ve accrued about 11/12th of the refund).

Sometimes, too, people owe student loans or other government debt, and their refunds get seized. This is something to talk to a lawyer about. It may call for filing a bankruptcy right away to try to avoid a tax refund seizure, or it may avoid the whole issue if the agency seizes the refund.

The take-away is this is complicated stuff, and you need an attorney who can make maximum use of the exemptions and save you money. Timing the case filing, and using the exemptions well, are the main tools.

Remember this is all based on Iowa law, which applies to Iowa bankruptcy cases. Do not use this as a guide for what happens in other states.

10:10 am cst 

Thursday, February 17, 2011

Old blog posts:


July 1, 2009

Modifying Mortgage Loans?

Months ago, there was hope that Washington would provide a change in bankruptcy law to allow the modification of some mortgages in bankruptcy to make mortgages more affordable.  That didn't happen.  But is it possible to ever modify a mortgage loan?

For many clients, I recommend visiting the website for up-to-date information about negotiating with mortgage lenders.  But if they can't help, then sometimes it is possible to modify a mortgage in a Chapter 13 bankruptcy.  Chapter 13 is a bankruptcy in which the debtor makes payments through a bankruptcy trustee for three to five years.  If you owe more on your mortgages than your house is worth, you may be able to reduce the total mortgage debt down to the amount of the current value of your home.  Each case is different, so talk to your bankruptcy lawyer to see if this is possible for you.

May 25, 2008

How Attorneys Decide What to Charge

Attorneys make assumptions about what potential clients want. Some attorneys assume that clients are mostly motivated by price. While that certainly is an important issue for people already having financial troubles, what clients most want, and need, is good representation. That means personal attention from the lawyer and the lawyer's experienced, helpful staff.

Attorneys who engage in discount pricing are usually doing no favor for their clients or themselves. They assume that all potential clients will decide who to hire based on price alone. Because of this belief, these attorneys decide to do one of two things: either make bankruptcy a small (and less profitable) part of their larger practices, or build a volume bankruptcy practice. No client should want to hire an attorney who does few bankruptcies and who sees that aspect of the practice as less profitable. Volume practices, meanwhile, are only viable in large metropolitan areas, and it is a fact that a low fee necessarily means a brief amount of "face time" with the attorney.

Higher priced attorneys, on the other hand, should not be assumed to be better. Someone considering hiring an attorney should, if possible, choose a lawyer based on reputation. Family, friends, and trusted attorneys are good sources of information. And there is nothing wrong with meeting with more than one attorney for free consultations. Meeting more than one attorney will allow the client to pick an attorney who they trust to give the best representation possible.

I think bankruptcy representation is very reasonably priced compared to other services. Divorce and other family law matters, criminal representation, and other common services usually cost considerably more than a bankruptcy, and with much less predictable results.

May 25, 2008

Zombie Debt

Zombie debt is debt that is discharged in bankruptcy, or otherwise unenforceable, but refuses to die. This has become an increasingly common problem. The constant buying and selling of debts on a volume basis means that debt buyers (debt collectors) don't check or don't care that the debt isn't enforceable. Several years ago I had someone visit me with a problem. There was a credit card he last paid on about fifteen years before. Now he was being called by a collector from Florida. I called the collector, explained that Iowa has a 10 year statute of limitations on contractual debts, and he told me "surely, counselor, you're not telling me that just because your client isn't legally responsible to pay this debt, that he isn't morally responsible to pay it." I laughed. People don't come to lawyers for lessons on morals, and debt collectors are in no position to lecture on personal ethics.

Sometimes, zombie debt can be truly and permanently killed by a simple call or letter from a lawyer. Sometimes, however, it takes lawsuits or repeated disputes to the major credit bureaus to protect your credit. This is a sad fact of life -- illegal conduct by creditors and debt collectors is common, and there is no easy way to combat it.


May 25, 2008

Real Estate Title Problem After Bankruptcy

Here's one of the more annoying problems for people who successfully completed their bankruptcy cases and the lawyers who represented them. Here's how it usually starts for me. "Hi, I'm Bob Smith, and you probably don't remember me but you did a bankruptcy case for me about 4 years ago, and I'm being told that there was something not done in the bankruptcy and now I can't sell/refinance my home." I look up Bob's information, and tell him what someone should have told him instead of saying I didn't do a good job. The issue is complicated, however, and takes time to explain.

When someone files for bankruptcy, he or she is discharging his or her personal obligation to pay the debt. There is no effect on liens, like mortgages and auto loan security interests. Sometimes, people have been sued and had court judgments entered against them before the bankruptcy is filed. In that case, under Iowa law there is a judgment lien against any real estate the debtor owns or has any partial interest in (such as being the spouse of someone who owns real estate) in the county where the judgment is filed. Bankruptcy doesn't get rid of a judgment lien unless a motion to avoid the judgment lien is filed in the bankruptcy case.

If there are judgment liens, then we routinely file motions to avoid those liens. The problem arises when the debtor did not own any real estate when the bankruptcy was filed, but later buys real estate or gets married to someone who owns real estate. During the bankruptcy, we can't file a motion because there is no lien to avoid since there is no real estate. The first time the debtor or the spouse tries to sell or refinance, the title examiner discovers there is a court judgment, and it appears to be a lien against the real estate. The title examiner does not know there was a bankruptcy case which discharged the debt. Iowa law clearly states that the judgment is not a lien against property acquired after the judgment debt was discharged in bankruptcy.

This is inconvenient for clients, since the issue usually is first raised at a real estate closing or immediately before. It is embarrassing, and I can understand how someone feels when this arises, such as when a new spouse is told the client's bankruptcy is messing up the spouse's real estate transaction. Unfortunately, there appears to be no way around this problem, other than for me to write to various persons explaining the issue and citing the law.  We just have to deal with it when it arises. This may be a problem only in Iowa, since Iowa is the only state which actually requires real title examinations to make sure that there are no title problems with real estate. But that is another issue I don't intend to get into.

April 20, 2008

Negotiating with Mortgage Lenders

Consumer bankruptcy attorneys have known for some time that negotiating with mortgage lenders, their servicing agents, and their attorneys is hard and has been getting harder. Getting payoff balances, cure balances, or any kind of numbers is frustrating, to say the least.  For a discussion of the problems in negotiating with mortgage lenders, go here:

This should be a wake-up call for anyone hoping that they can work it out on their own with their lender. Certainly, homeowners should be burning up the phones until they get what they want, but frequently, I see people who put all their hopes in getting a deal on the phone, and wait too long and let the mortgage foreclosure go too far to recover in bankruptcy.

10:42 am cst 

2017.01.01 | 2011.02.01

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