Section 547 of the United States Bankruptcy Code permits the bankruptcy trustee to submit a ""adversary complaint"" against the creditor in order to """"avoid"""" the preferential transfer and recover the funds for the benefit of the debtor's bankruptcy estate. In many jurisdictions, interest at the utmost legal rate from the date of the transfer can also be recovered.
At least twice or three times per month, I encounter a case in which a debtor's wages or bank account were garnished within 90 days prior to filing for bankruptcy. Sometimes the debtor's wages are garnished for several months before they decide to file bankruptcy or can afford to do so.
In my experience, the majority of chapter 7 trustees do not file a complaint to avoid and recover a preferential transfer against a garnishing creditor when the transfer amount is less than a few thousand dollars. Some trustees might. If the debtor has adequate exemptions to exempt the garnished funds and claims the funds as exempt in their bankruptcy schedules, the trustee will not pursue the transfers.
Section 522(h) of the Bankruptcy Code allows the debtor to evade a preferential transfer or setoff if the trustee does not. However, unlike the trustee, the debtor cannot evade a """"voluntary"""" preferential transfer -- only a """"involuntary"""" transfer resulting from wage or bank garnishment, etc.
I've filed a large number of complaints to avoid and recover preferential transfers from garnishing creditors in chapter 7 cases, and to date, every creditor has settled without even filing a response to the complaint. During the 90-day preference period, each """"settlement"""" resulted in the creditor returning 100 percent of the garnished funds. Not a single creditor fought back or even filed a response to the complaint. Although debtors do not have to pay a filing fee or incur any service of process fees to file an adversary complaint, the majority believed they were receiving a bargain because they did not have to pay interest or court fees. Before sending the check, the attorney for one creditor commended me for educating her on preferential transfers.
I'm astonished that there are not more bankruptcy attorneys filing complaints against garnishing creditors for preferential transfer. Simply claim the garnished funds as exempt, submit a standard preferential transfer complaint through the CM/ECF, and mail a copy of the summons and complaint to the garnishing creditor. Wait a week, receive payment, and file for dismissal.
Attorneys can modify their existing retainer agreement, include an addendum, or have a separate retainer agreement that grants them up to a 40% contingency fee on a preferential transfer recovery (or potentially more, depending on state bar or other rules in their jurisdiction). The average amount recovered per case has been between $1,800 and $2,200. It's simple to collect $700 to $1,000 in additional fees for little effort. The debtors are glad to pay it, as this is money they would have lost anyway.
In contrast to certain business cases, garnishing creditors in consumer cases have no defense to a preferential transfer claim -- at least, none that I can think of (and presumably none that they have thought of so far). Money is available for the taking. File a complaint and receive compensation.
In addition, bankruptcy case law states that preferential transfers to state agencies, such as the IRS, SBA, etc., are recoverable, though you should verify the case law in your jurisdiction.
Contact me at greg@lawdocs-us.com if you'd like an editable copy of the preferential transfer complaint I use, and I'll transmit it to you. It can be used in any jurisdiction, although minor modifications may be required to conform to your local rules of practice and procedure.""
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