The best way to obtain payment of a debt is to be paid voluntarily. If voluntary payment is not made on a debt, it may be necessary to file a lawsuit and obtain a judgment against the person or entity that owes the money. Obtaining the judgment may be the easiest part of the collection process. Collection on the judgment is often difficult.
In this article, the "judgment creditor" is that party holding the judgment. The "debtor" is the party owing the debt.
The difficulty in collecting a judgment usually results from the desire of the debtor to avoid payment of his or her debts, or an inability of the debtor to fully pay the judgment. If the judgment is not voluntarily paid, the judgment creditor will need to use the court's powers to find and collect against property of the debtor to satisfy the judgment.
One collection technique involves garnishment. The purpose of garnishment is to preserve money or property that is being held by a third party (called the "garnishee"), so that it may be used to satisfy the judgment. Usually, garnishment is used to seek recovery out of bank accounts and wages. Once the garnishment writ discussed below is properly served, the garnishee becomes liable for any money or property owed by the garnishee to the debtor.
This article assumes that a judgment has been obtained, the judgment has not been voluntarily paid within twenty-one (21) days after it was entered, and the debtor has not requested that the court grant him or her relief from the judgment.
The first step in the garnishment process is seeking a writ of garnishment. The form of the writ is supplied by the court, but must be completed with information about the existence of the judgment, the unpaid balance, and a statement under oath that the judgment creditor knows or has good reason to believe that the garnishee either has money or property that belongs to the debtor or may in the future be obligated to make periodic payments to the debtor (such as wages). The writ must contain sufficient information to allow the garnishee to identify the debtor. That information may include the debtor's address, social security number, employee identification number, or account number. The court-approved form, or one that substantially conforms to it, must be used.
The writ must be served on the garnishee within ninety-one (91) days after it was issued. After being served with the writ, the garnishee must serve a copy of the writ on the debtor within seven (7) days after the garnishee was served. The garnishee is also required to file a verified disclosure of the garnishee's liability to the debtor with the clerk of the court within fourteen (14) days after the garnishee was served. The disclosure must also be mailed or delivered to the judgment creditor and also to the debtor.
A garnishee receiving a writ of garnishment must take the writ seriously and promptly file and serve the required response to the garnishment. If the garnishee fails to make a timely disclosure, the judgment creditor will likely obtain a judgment against the garnishee for the full amount of the original judgment against the debtor. This is a harsh remedy, but is subject to limitations. Ultimately, a garnishee failing to disclose may be liable only for the amount that the garnishee would otherwise be responsible to pay under the garnishment. Further, there are certain remedies allowed by the court rules to set aside the judgment.
The garnishee may have a number of responses to the writ of garnishment. These would include the following:
Not enough information has been given to identify the debtor. If written notice of the defect is given to the court, the writ of garnishment is not effective.
The debtor is not employed by the garnishee, no funds are owed by the garnishee to the debtor, or the garnishee holds no property for the debtor.
The fee due to the garnishee was not paid when the writ was served. The fee is $6 if the writ seeks to garnish periodic payments or income tax refunds or credits. Otherwise, the fee is $1. If the fee is not paid, the garnishment is likely not valid.
The garnishee may claim the right of setoff. In other words, if the debtor is also indebted to the garnishee, the garnishee may elect to apply funds in its hands to the debts of the debtor to the garnishee.
If the garnishee is the debtor's employer, federal law limits garnishments to twenty-five percent (25%) of disposal earnings each week unless the debtor earns minimum wage or near minimum wage.
The garnishee holds an interest that is not subject to the garnishment, such as a real estate interest. Real estate interests are subject to other collection procedures.
The garnishee is holding money in escrow, or as trustee under a trust agreement that does not permit creditors of the debtor to garnish the trust property.
The garnishee holds the funds or property as security for the debt owed by the debtor to the garnishee.
The garnishee has some other defense to payment of the funds or property to the debtor.
If the judgment creditor is not satisfied with the garnishee disclosure, he or she may proceed in court to contest the disclosure. In effect, as the judgment creditor you may have a trial over whether the garnishee holds funds or property for the debtor, which can be garnished. If the garnishee is found by the court to be holding funds or property for the debtor, the court may order those funds or property delivered to satisfy the judgment. The debtor may participate in those proceedings.
If the garnishee discloses holding funds of the debtor, the writ of garnishment is to direct where the funds are to be paid. Typically, the writ directs the funds to be paid directly to the person holding the judgment. The court may, however, direct the funds to be deposited with the court.
If the writ discloses that the garnishee holds property other than money, the person holding the judgment has fifty-six (56) days to file a motion to seek an appropriate court order regarding application of the property to the satisfaction of the judgment.
If the garnishee is the debtor's employer, and if the debtor's wages exceed twenty-five percent (25%) of the debtor's disposable income, the garnishee must withhold and pay over the excess wages for a period of three months. This was a new procedure added to Michigan law in 1991. The procedure avoids the requirement to prepare and serve a writ of garnishee for each pay period, and further avoids the difficulty of properly timing a writ of garnishment served on the employer. Periodic payments subject to garnishment include wages, salary, commissions, bonuses, and other income paid to the debtor during the period the writ is effective. However, periodic payments also include nonemployment-related payments, such as land contract payments, rent, and other periodic debtor contract payments.
The garnishee is protected against paying twice. In any action by the debtor against the garnishee, the garnishee may introduce the garnishment into evidence to bar the debtor's claim.
Keep in mind that the debtor is also a party to the garnishment. Therefore, the debtor has a right to object to the garnishment. Objections might be based on one or more of the following:
- The garnishment proceedings are defective.
- The funds or property held by the garnishee are exempt from garnishment by law.
- The debtor has filed bankruptcy.
- The debtor has obtained a court order allowing payment of the judgment in installments.
- Garnishment is not available because the maximum amount permitted by law is being withheld pursuant to a writ of garnishment having a higher priority.
- The underlying judgment has been paid. Note that the debtor may not contest the validity of the judgment in a garnishment proceeding.
If you hold a judgment, be creative. Garnishments are the easiest and least expensive method of proceeding to collect on a judgment. Garnishment of banks and employers are the typical sources for obtaining payment. However, the debtor might also be providing services as an independent contractor, and may be owed for those services. The attorney for the debtor could be holding money, the debtor may have a claim against an insurance company, or the debtor may have a judgment against others. The debtor might also hold a land contract or lease, under which payments are due.
If you are a garnishee, be careful to make a timely disclosure. When in doubt, allow the court to determine whether the money or property in your hands is subject to garnishment.
If you are the debtor, look into the possibility of obtaining a court order allowing the judgment to be paid in installments. This avoids having to inconvenience your employer or others with whom you are dealing. As a last resort, look into bankruptcy. This will stop the garnishments.
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Tim Hillegonds is a partner with Warner Norcross & Judd LLP and specializes in bankruptcy and creditors' rights. Tim may be reached at 616.752.2132 in the Grand Rapids office. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.