Michigan Bankruptcy Blog

Did You Know? | Creditors have affirmative duty to release garnishments following bankruptcy filing.

In the "Did You Know?" section of the Michigan Bankruptcy Blog, we feature opinions that are not newly issued but that may be helpful for Michigan bankruptcy practitioners. 

When a person files bankruptcy, most collection actions are automatically stayed.  Subject to certain exceptions, Section 362 of the Bankruptcy Code prohibits the commencement or continuation of an action to recover a pre-petition claim, the enforcement of a pre-petition judgment, and any act to collect a pre-petition claim against the debtor, among other things. 

But if a creditor undertakes collection actions before the bankruptcy filing – such as by filing a garnishment against a debtor's right to receive an income tax refund – is the creditor required to take any affirmative steps to withdraw those actions after the debtor files bankruptcy?

The Bankruptcy Court for the Eastern District of Michigan has held that creditors do have an affirmative duty to halt their pre-petition collection activities.  In In re McCall-Pruitt, 281 B.R. 910 (Bankr. E.D. Mich. 2002), a creditor received a Chapter 7 debtor's post-petition state income tax refund based on a pre-petition garnishment, and the debtor brought a motion for sanctions, arguing that the creditor violated the automatic stay.

The Bankruptcy Court held that the creditor violated the automatic stay by accepting the tax refund.  The court reasoned that the creditor "had a duty to halt all collection proceedings when the debtor filed for bankruptcy protection.  Their failure to do so and their acceptance of the funds from the State of Michigan violated the automatic stay, even though they took no further action to enforce the garnishment."  Id. at 912, emphasis in original.

The McCall-Pruitt court also relied upon In re Banks, 253 B.R. 25 (Bankr. E.D. Mich. 2000), which recognized that "courts widely agree that a creditor has an affirmative duty to dismiss a prepetition garnishment upon learning of the bankruptcy filing."  Id. at 30.

In light of this case law, creditors and their counsel should be sure to release pre-petition garnishments when they learn of a bankruptcy filing.  Simply refraining from additional collection actions is not enough to avoid violating the automatic stay.

Categories: Chapter 7, Did you Know?, Eastern District of Michigan