Can Bankruptcy Stop a Garnishment on Bank Account?

Debts leading to bank garnishment are a primary reason some people choose to file for bankruptcy. All forms of bankruptcy stop garnishment, including Chapter 7 bankruptcy, which eliminates unsecured debt in just months. Chapter 13 bankruptcy reorganizes credit obligations over a period of three to five years.

Considerations

An automatic stay is a court order in bankruptcy requiring debt collectors to end all collection efforts, including bank garnishment. Federal law prohibits banks and debt collectors from continuing with garnishment after a judge issues the order. It is possible for a debtor to file for bankruptcy and end garnishment in as little as one business day.

Disadvantages

Bankruptcy ends garnishment but presents other problems. Federal law requires a debtor to list all debts in a bankruptcy petition. That makes it impossible for a debtor to file for bankruptcy simply to end a single bank garnishment. That could create problems for some people who have the rest of their fiances relatively under control but are suffering financially because of one garnishment. Bank garnishment allows debt collectors to freeze a debtors bank account. That limits the debtors access to the account except to make deposits. The bank restricts the debtors debit card to deposits only and will return checks written against the checking account because of insufficient funds.

Effects

The debtors credit rating suffers as well. Major credit reporting agencies such as TransUnion, Equifax and Experian monitor court records and will list the bankruptcy on credit reports for 10 years. The Federal Trade Commission reports that it is impossible to remove the information sooner, despite claims by some credit repair agencies. Bankruptcy makes it difficult to qualify for new credit at low interest rates for several years. Some people filing for bankruptcy may find it hard to qualify for any major credit loans for two or three years. For example, mortgage companies may require down payments of around 20 percent.

Alternatives

Bank garnishments are sometimes negotiable, although debt collectors can refuse to accept alternative payment arrangements. Garnishment gives debt collectors exceptional leverage, and most are unlikely to surrender the advantage without significant incentive. That could include offering the debt collector a one-time fee for ending the garnishment and accepting monthly installment payments. For example, a debt collector garnishing a bank account for $5,000 may agree to end the garnishment for an up-front payment of $1,000 and 12 monthly installments totaling $5,000 -- with the first three payments due in advance. Debtors who cannot negotiate payment arrangements can stop using the garnished bank account. That means moving direct deposits, such as paychecks, to another bank or a prepaid debit card. However, the debt collector has the right to garnish the new bank account if it can obtain the banking information. Bankrate reports that some debt collectors with garnishment orders call around to different banks in a debtors city to find account information.