Bankruptcy Court Rules Indiana's Wage Garnishment Statute Affords Debtors With Limited Exemption

A U.S. Bankruptcy Court in Indianapolis recently ruled that Indiana's wage garnishment statute (Ind. Code 24-4-5-105) provides individuals filing bankruptcy in Indiana with a limited exemption applicable to wages that were earned by the debtor before the bankruptcy case was filed, but not yet paid at the time of the filing.

In reaching this conclusion, the U.S. Bankruptcy Court for the Southern District of Indiana (Judge Coachys) rejected arguments by the bankruptcy trustee that the wage garnishment statute did not afford debtors with an "exemption" because it does not protect their unpaid wages in their entirety, and from all forms of legal process, as well as the trustee's claim that the Indiana legislature did not intend for any exemption afforded by the garnishment statute to apply in federal bankruptcy proceedings.

In In re Haraughty, the debtor in a Chapter 7 bankruptcy case was paid by his employer bi-monthly, in arrears. This resulted in the debtor receiving a paycheck after the case was filed for wages he had earned before the case was commenced. The Chapter 7 trustee filed a motion to compel the debtor to turn over the wages to the trustee, who asserted that the debtor's right to receive the wages existed on the date the bankruptcy case was filed and was an "asset" that belonged to the bankruptcy estate. In response to the trustee's motion, the debtor filed an amended schedule to claim a 100% exemption for the wages based on the Indiana wage garnishment statute, which places certain percentage limitations on the amount of wages in a given pay period that may be garnished by a person's creditors.

In (partially) upholding the debtor's exemption claim, the bankruptcy court rejected the trustee's contentions that the term "exemption" should be applied only to laws that protected the property at issue against all forms of legal process available to creditors, and also shielded the property in its entirety. The bankruptcy court noted that the statutory garnishment procedure was the only form of legal process available to creditors in Indiana trying to reach unpaid wages still in the hands of the debtor's employer, so the statute's failure to refer to other legal remedies was not significant. The court further pointed out that other, well- recognized Indiana exemption statutes, such as the homestead exemption in Ind. Code 34-55-10-2, protect only part of the debtor's interests in the types of property covered by those statutes. The bankruptcy court also rejected the trustee's argument that the Indiana legislature did not intend for the wage garnishment statute to afford debtors with an exemption that they could assert in a bankruptcy proceeding. The court found nothing in the statute itself or the statute's legislative history to support that conclusion, and cited a prior Indiana Supreme Court decision that had specifically referred to the "exemption" provided by the wage garnishment statute.

However, while the bankruptcy court recognized a valid exemption was afforded by the wage garnishment statute, it refused to allow the debtor to exempt 100% of the wages. Instead, the court held that the debtor could properly exempt only that percentage portion of the wages that would be shielded from garnishment by his creditors under the formula contained in the statute.

Posted by: James M. Matthews

Categories: Bankruptcy & Banking Law