Tuesday, January 21, 2014

Wage Assignments in Kentucky

A simple general definition of a wage assignment is the voluntary transfer of a debtor's future wage payments, usually as security for a specific debt.

A Kentucky statute, KRS  §337.060 makes it illegal for an employer to withhold any part of an employee's wages unless,
  1. The withholding is specifically authorized by local, state or federal law, or;
  2. The employee expressly authorizes the wage deduction in writing.
A  voluntary written wage assignment may commonly be used when an employee obtains a loan from his or her employer and  repays the loan by a payroll deduction. An employer who makes such a loan cannot take it out of the employee's pay without a proper written assignment from the employee. In this type of wage assignment, standard principles of contract law are sufficient to legitimize the transaction. The employer is the lender, the employee is the borrower and both are parties to the agreement.

Some states, such as Illinois, have enacted statutes for third-party wage assignments in a consumer lending context. See, 740 ILCS 170 for the Illinois Wage Assignment Act. Kentucky has nothing similar to this Illinois statutory third-party wage assignment mechanism. On the contrary, KRS  §190.100(c) specifically prohibits wage assignments in retail installment sales contracts:
"No provisions for confession of judgment, power of attorney therefor, or wage assignment contained in any retail installment contract shall be valid or enforceable."
There are many other contexts apart from retail installment sales contracts in which a voluntary wage assignment would be a valid contract provision under Kentucky law. But, if the debtor's employer is not a party to the agreement, standard principles of contract law would not obligate the employer to honor the wage assignment. Without statutory law provision imposing such an obligation on the debtor's employer, a voluntary wage assignment could be legal but impossible to enforce and therefore worthless to the creditor by itself.

An example of a Kentucky statutory wage assignment provision with teeth can be found in KRS 405.465(4), regarding child support wage assignments.
"The [child support wage assignment] order shall be binding upon the employer or any subsequent employer upon the service by certified mail of a copy of the order upon the employer and until further order of the court."
KRS § 286.4-570, — Wage purchases -- Assignment of compensation, offers us a somewhat puzzling level of ambiguity. A "wage purchase" is commonly known as a payday loan, and KRS § 286.4-570 validates payday loan wage assignments, while limiting them. If the employee expressly authorizes a payday loan wage assignment in writing, KRS  §337.060, supra, would not make it illegal for an employer to honor the wage assignment, but there is no Kentucky statutory provision which requires an employer to honor a payday loan wage assignment. 

Sunday, January 19, 2014

The Laws of Unintended and Unforeseen Consequences

I have previously mentioned that the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), also known as "Welfare Reform", has spawned a vast government based system for collecting child support payments that has expanded far beyond the law's original purpose. See: Child Support - Garnishment or Payroll Deduction?  PRWORA was a cornerstone of the Republican Contract with America  and it was signed into law by President Bill Clinton on August 22, 1996, fulfilling his 1992 campaign promise to "end welfare as we have come to know it".

One of the major components of PRWORA was an emphasis on enhancing the enforcement of child support collections, to put financial responsibility on absent fathers for their children with welfare recipient mothers. Thus, State agencies tasked with administratively assessing, imposing and collecting child support for dependent children who were receiving public assistance were born. During the years since PRWORA, those State agencies have expanded their child support collection activities to include virtually any child support obligation, imposed for any reason. These would include child support obligations resulting from a judicial divorce proceeding or a paternity suit, whether the dependent child is a participant in public welfare or not.

Another part of this enhanced efforts to collect child support in PRORA was a mandate that each State implement a quarterly matching of delinquent non-custodial parents to the accounts maintained at financial institutions.For this purpose, the U.S. Department of Health and Human Services, Office of Child Support Enforcement has developed a comprehensive Financial Data Match Specifications Handbook. The idea is that bank accounts of delinquent non-custodial parents can thus be more easily located and garnished to satisfy their child support obligations.

This, too, has expanded over the years into areas other than that intended or foreseen by the Congress and the President of 1996.

The Kentucky Department of Revenue has been tasked with assessing and collecting a wide variety of taxes to benefit the Commonwealth. That job also clearly requires levy, attachment or garnishment to collect delinquent taxes owed by uncooperative taxpayers. The Department's levy procedures are outlined in Kentucky Administrative Rules 103 KAR 1:150. Electronic data match and levy procedures.

The Kentucky Department of Revenue has also adopted a mechanism for matching of delinquent taxpayers to the accounts maintained at financial institutions. Indeed, 103 KAR 1:150 mandates use of the very same Financial Data Match Specifications Handbook created by the Federal Office of Child Support Enforcement.

The irony of this development is almost poetic. 

Practice and Procedure - The Part That Makes Me Crazy

Regarding the issuance and service of a Kentucky judicial garnishment.

KRS 425.501(3) states,
"The order of garnishment shall be served on the persons named as garnishees, and in addition a copy thereof shall be delivered by the garnishee to the judgment debtor or mailed to him at his last known address . . . . " [emphasis added]
The Kentucky Circuit Court Clerk's Manual procedure for garnishments states,
"6. To Issue a Wage Garnishment (AOC Form 150):
"a.  * * *
"b. Creditor or attorney will mail Notice of Rights (top page of AOC Form 150) to judgment debtor." [emphasis added]
There is no similar provision in the Clerk's Manual for the creditor, rather than the garnishee, to notify the judgment debtor for a non-wage garnishment order. Maybe there are instructions to the garnishee printed on the AOC Form 150.1. I have not seen that form yet. It's not available online.

So, does the garnishee notify the judgment debtor of the garnishment, does the judgment creditor notify the judgment debtor of the garnishment or do they both provide notice? Is the rule the same or is it different for wage garnishments and non-wage garnishments?

It's not a big deal if the judgment debtor actually receives timely written notice of the garnishment, regardless of who delivers the notice. But, if the judgment debtor does not receive written notice of the garnishment, or receives it late in the game, it could cause unnecessary problems.

I believe that the garnishee is more likely to be in the best position to have current accurate contact information for the judgment debtor. But, that's just me. I also believe that garnishees may not reliably follow instructions, like lawyers do.

Kentucky Judicial Garnishment Procedure - By the Book

Sometimes I get lucky . . . .

Written and Edited by:
Office of Legal Services
Administrative Office of the Courts
1001 Vandalay Drive
Frankfort, KY 40601
December 31, 2013

The Kentucky Circuit Court Clerks Manual (Clerks Manual) is published by the Administrative Office of the Courts (AOC) and written by the AOC Office of Legal Services. The Clerks Manual constitutes rules of the Kentucky Supreme Court pursuant to CR 1(2), RCr 1.02(2) and SCR 1.050(1) and is published for the purpose of establishing procedures for the daily operations in the Office of Kentucky Circuit Court Clerk.


* * * *

pp 293 - 296

KRS 425.501 TO 425.526
CR 69.02
(Circuit or District Court)
1. Garnishment is a special kind of execution by which property of the judgment debtor in the hands of a third party may be reached, including (but not limited to) wages in the hands of his/her employer. Garnishment before judgment is an attachment, and the procedures for issuing a writ of attachment must be observed. Proceed to attachment and writ of possession sections for procedures.
When to Issue
2. Follow the direction of the court‟s order specifying when a garnishment may be issued. In the absence of a court order and upon the filing of a proper affidavit by the judgment creditor, issue the garnishment ten days after judgment has been entered. KRS 426.030.
Exceptions to Issuance
a. If a motion attacking the judgment is filed as provided in CR 62.01, do not issue the garnishment until ten (10) days after entry of judgment on the motion. City of Louisville v. Verst, 308 Ky. 46, 213 S.W. 2d 517 (1948).
(1) Motion for new trial;
(2) Motion to amend or vacate the judgment;
(3) Motion for judgment notwithstanding the verdict;
(4) Motion for amending the findings.
b. Do not issue the garnishment if supersedeas bond has been given pending appeal. CR 73.04.
Affidavit for Garnishment
3. The judgment creditor's affidavit for garnishment must show the date of judgment, the amount due on the judgment, that the named persons hold property belonging to the judgment debtor, or are indebted to him/her. KRS 425.501(1). The affidavit is the last page of AOC Form 150 for Wage Garnishment. AOC Form 145 is the affidavit for Non-Wage Garnishment. Apply the "FILED" stamp to the affidavit; add the date and your initials. File by completing a document screen.
4. Bond is not required of the judgment creditor. KRS 425.501(2).
5. If satisfied with the affidavit, collect the bond filing fee as set forth in the Fees and Costs section of this manual and give a receipt.
Issuance of Wage Garnishment
6. To Issue a Wage Garnishment (AOC Form 150):
a. Have the judgment creditor or attorney complete AOC Form 150, Order of Wage Garnishment.
b. Creditor or attorney will mail Notice of Rights (top page of AOC Form 150) to judgment debtor.
c. Creditor or attorney will select method of service of Order (pages 2,3,4,5, of AOC Form 150).
(1) If creditor or attorney requests service through clerk‟s office, collect postage fees as set forth in the Fees and Costs section of this manual and give a receipt.
(2) If creditor or attorney chooses another method of service, give completed AOC Forms 150 and 150.4 to creditor or attorney.
Issuance of Non-Wage Garnishment
7. To Issue a Non-Wage Garnishment (AOC Forms 145 and 150.1):
a. Have judgment creditor or attorney complete AOC Form 145, Affidavit for Writ of Non-Wage Garnishment and 150.1, Order of Garnishment (Non-Wage).
b. Creditor or attorney will select method of service of order (AOC Form 150.1).
(1) If creditor or attorney requests service through clerk‟s office, collect postage fees as set forth in the Fees and Costs section of this manual.
(2) If creditor or attorney chooses another method of service, give completed AOC Forms 150 and 150.4 to creditor or attorney.

8. Make a docket notation of the issuance of the garnishment by completing a document screen. Use the date of issuance as the filing date.
NOTE: If AOC Forms 150 and 150.4 are returned to the creditor or attorney for service, note this fact in the memo field of the document screen.
If proceeds from a non-wage garnishment are returned to the clerk, hold the funds for 15 days from the date of return of the proceeds unless otherwise ordered by the court.
Return on Garnishment

9. If a return on the garnishment is received, apply the "FILED" stamp; add the date and your initials. Enter the file stamp date and the return of service information in the memo field of the document screen where the garnishment was issued. Answer of Garnishee

10. When the Answer of Garnishee is received, apply the "FILED" stamp; add the date and your initials and file by completing a document screen.

Funds Held by Clerk

11.a. Wage Garnishment If the creditor in a wage garnishment is not represented by an attorney, the garnishee will forward the funds to the clerk. Hold the funds for 15 days from the date of the employer's check. CR 69.02.

11.b. Non-Wage Garnishment If proceeds from a non-wage garnishment are returned to the clerk, hold the funds for 15 days from the date of return of the proceeds unless otherwise ordered by the court.
Affidavit to Challenge
12. If the debtor believes the garnished funds/ property are exempt from garnishment, the debtor can challenge the garnishment by filing an AOC Form 150.2, Affidavit to Challenge Garnishment (Wage or Non-Wage).
a. Wage Garnishment: AOC Form 150.2 must be completed within 13 days of the date on the payroll check from which funds were withheld.
b. Non-Wage Garnishment: AOC Form 150.2 must be completed within 10 days of the garnishee's date of receipt of the garnishment.
c. Set a hearing using the lower half of AOC Form 150.2 and note on court calendar by completing a scheduled events screen. File the original of AOC Form 150.2 by applying the "FILED" stamp; add date and your initials and complete a document screen. Give one copy to debtor and mail a copy to creditor's attorney.
d. When AOC Form 150.3, Garnishment Challenge Order is received:

(1) Apply "ENTERED" stamp to the order, add the date and your initials. Do not use the "FILED" stamp.
(2) Enter the order on a document screen including a brief description. This constitutes entry of the order; the order does not become effective until this is done. RCr 11.04.
(3) After the order is entered serve notice of entry on every party who is not in default or who has not filed a waiver of notice by making a copy of the order that has been stamped entered and mail or hand deliver it to the party or attorney. CR 77.04(1), RCr 12.06(1)(3).
(4) Make an entry on the document screen showing the manner and date of service of notice of entry of the order. RCr 12.06.
Supplemental Garnishment
13. When a creditor or creditor's attorney files AOC Form 150.5, Affidavit and Supplemental Order of Wage Garnishment, for the unpaid balance and accrued interest:
a. Creditor or attorney completes the affidavit (top portion of AOC Form 150.5), retains one copy and mails one copy to the debtor. Apply the "FILED" stamp; add the date and your initials and file by completing a document screen.
b. Collect a fee for the issuance of the supplemental garnishment as set forth in the Fees and Costs section of this manual and give a receipt.
c. Issue the supplemental garnishment (bottom portion of AOC Form 150.5). Make a notation of the issuance of the supplemental garnishment by completing a document screen, using the date of issuance as the filing date. Creditor or attorney will select method of service of the garnishment.
d. If a return of service on the garnishment is received, apply the "FILED" stamp; add the date and your initials. Enter the file stamp date and the return of service information in the memo field of the document screen where the garnishment was issued.

Saturday, January 18, 2014

When the Execptions Ate the Rule: Making sense of KRS 427.050

427.050 Out-of-state law applicable when wages earned and payable out-of-state - Exceptions, part (1), provides:
"(1) The law of the state wherein wages are earned and payable relating to exemptions shall apply to all garnishments served in the State of Kentucky, except that Kentucky law shall exclusively apply:
"(a) Where the defendant was personally served with process in the State of Kentucky; or
"(b) Where the defendant was a bona fide resident of the State of Kentucky when the subject debt arose; or
"(c) Where the defendant was a bona fide resident of the State of Kentucky when the cause of action arose".
When I read that statute like I'm reading a newspaper, it's, "Sure. It all makes perfect sense." But, when I try to imagine a hypothetical situation where this statute might make a difference, it is a little bit more difficult. Best I can figure it, KRS 427.050 actually says that the Kentucky rules of wage garnishment apply to any wage garnishment proceeding brought within the Commonwealth of Kentucky unless the debt, the cause of action, service on the defendant, the defendant's work and payment of wages for the defendant's work all happen outside of Kentucky.

One realistic example I can devise when this statute could apply is as follows:
  • Defendant is an out-of-state resident who negligently caused an automobile accident and personal injury while driving in Kentucky. (Forget about insurance.)
  • Defendant is sued in a Kentucky court and a damage judgment is entered for the plaintiff.
  • Defendant not only lives outside Kentucky, but the defendant also works and is paid outside Kentucky.
  • However, the defendant's out-of-state employer also does business in Kentucky, sufficient to render it subject to Kentucky jurisdiction.
  • The plaintiff in the Kentucky personal injury action files the necessary paperwork in the Kentucky court to have a wage garnishment issued to collect the judgment.
  • Voilá! Kentucky's statutory wage garnishment limits do not apply.
Although there is nothing extra special about Kentucky's statutory wage garnishment limits, some other states, like Texas, prohibit wage garnishment altogether. If the negligent driver in the above scenario were a resident of Texas merely driving through Kentucky when the accident happened, he or she would still be entitled to the benefits of Texas law's limits on wage garnishments.in a Kentucky court.

In the reverse situation, wherein a Kentucky resident negligently caused damage in Kentucky, is sued and is served in Kentucky, but subsequently moves to Texas, the Texas prohibition on wage garnishment would not be available in a Kentucky-based garnishment.

It is not so clear if a Texas court would apply Texas wage garnishment law or Kentucky wage garnishment law in this last circumstance. It is clear that a Texas court should give full faith and credit to the Kentucky judgment, but should it also give full faith and credit to Kentucky's exemption laws when the Kentucky judgment is exported to Texas?   

Part (2) of KRS 427.050 is a bigger mystery. That part provides:
"Where the law of a state other than Kentucky applies to a particular garnishment, the garnishee may plead such exemption law."
In a wage garnishment, the "garnishee" is the employer. Generally, it is the judgment debtor (the employee)  who must claim an exemption in garnishment, and not the garnishee employer.

KRS 425.501(4) specifically provides:
"The judgment debtor may appear and claim the exemption of any property or debt that is exempt from execution, and on proof of exemption the garnishment shall be discharged as to the exempt property or debt."
If it ever happens, reconciling these two code sections is  a job for the Kentucky Court of Appeals. The easy solution is that in the very limited circumstances in which KRS 427.050 applies, both the garnishee employer and the judgment debtor employee may raise the out-of-state exemption. Why not?

Friday, January 17, 2014

Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970

I have a genuine knack for allowing myself to be sucked into the most obscure and generally useless backwaters of the legal word, by accident. But since it was so damn difficult for me to even begin to get a grip on the issue, I have to share what I found.

The Home Affordable Foreclosure Alternatives (HAFA) is a U.S. Treasury program which arose from the recent (2007 - 2009) global economic and real estate bad dream. Part of the program provides Federal subsidies to mortgage lenders to encourage short sales for borrowers in financial distress. As part of the HAFA program, residents of the properties which are subject of the short sales (whether owner occupant or rental tenants) are required to vacate the premises when the short sale closes.

Since there are Federal subsidies involved, the mortgage lenders must be in compliance with the requirements of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (42 USC § 4601, et seq.), in general, and specifically, the provisions for resident relocation assistance, found at 42 USC § 4621, et seq.

If you are looking to understand relocation assistance under HAFA, these Code sections and any relevant Treasury Department regulations are the place to look.

I hope that helps.

Thursday, January 16, 2014

Child Support - Garnishment or Payroll Deduction?

In 2009, about two-third of all child support collected for the year nationwide came from employers deducting those support payments from employee's or individual independent contractor's income payments. Some of these deductions came about by court order,  some by administrative order and some by voluntary agreement.

The last, voluntary agreement, lacks an essential characteristic of a typical garnishment, which is involuntarily imposed by law. However, many of the non-voluntary child support withholding orders lack another common characteristic of garnishment. It is not necessary that the non-custodial parent with the child support obligation be in default before the withholding order is imposed. Being in arrears or in non-compliance with a child support order is not always a precondition to a wage or payment withholding order. 

Over the last thirty years, or so, child support has changed from a purely personal and family court judicial matter into a highly legislated, regulated and automated interstate child support enforcement system. The changes have been all for the good, no doubt, but it has left many of the traditional precepts of garnishment in the dust. I can only conclude that calling the child support collection process a garnishment, a withholding or a paycheck deduction is not important. It is what it is. 

But, standard garnishment laws and procedures cannot be, and are not, wholly divorced from the modern child support collection apparatus. Many of the older limits and priorities still apply.

More importantly, there is a certain social stigma attached to the idea of wage garnishment in general, and to a child support wage garnishment in particular. The common mistaken perception of child support collection by payroll deduction sometimes throws out the pejorative,  "deadbeat dad," when the facts of the situation simply do not support any suspicion that a non-custodial parent is in any way personally remiss in meeting child support obligations.  It's just the way the system works. An individual may be wholly faithful and diligent in meeting child support payment obligations and yet be subject to a involuntary order requiring wage withholding.

In Kentucky, upon request, the Commonwealth's Cabinet for Health and Family Services, will assume the support collection and disbursement responsibilities for any dependent child, regardless how the support obligation originated. The support obligation could result from administrative action because the child's custodian is receiving public assistance; it could come from a judicial order in a divorce or paternity cause of action; or it could result from a voluntary agreement. It does not matter.

In fact, the Cabinet for Health and Family Services (CHFS) can, upon request, also enforce and collect spousal support where:
  1. There is an existing spousal support order;
  2. The spouse or ex-spouse is living with the dependent child, and;
  3. CHFS is already collecting support for the child.
The Family Support Act of 1988 revised the old Aid to Families with Dependent Children (AFDC) program requiring the wages of a non-custodial parent to be subject to wage withholding, "regardless of whether support payments by such parent are in arrears."

The Uniform Interstate Family Support Act, drafted by the National Conference of Commissioners on Uniform State Laws in 1992 and subsequently adopted by every state, allows child support orders to be enforced across state lines.

The Personal Responsibility and Work Opportunity Reconciliation Act 0f 1996 established the framework for each state to create a central child support collection unit, the creation of standardized child support wage withholding orders, and imposed a requirement that all businesses of a certain size timely report newly hired employees to a statewide central registry to facilitate tracking non-custodial parents to new places of employment.

These days, imposing and enforcing child support obligations is part of a very big and interlinked nearly-automated machine. It is similar to wage garnishment in many ways, but in many other ways it is quite different.

IRS Tax Levy Garnishment Exemptions

IRS tax levy garnishment exemptions are refreshingly simple. 26 U.S.C. § 6334 - Property Exempt From Levy, provides in part,

"(a) Enumeration
"There shall be exempt from levy —
"(1) . . .
"(2) . . .
"(3) . . .
"(4) Unemployment benefits . . .
"(5) . . .
"(6) Certain annuity and pension payments . . . payments under the Railroad Retirement Act, . . . the Railroad Unemployment Insurance Act, special pension payments received by a person . . .[on the military] Medal of Honor roll . . ., and annuities . . . [for retired military].
"(7) Workmen’s compensation Any amount payable to an individual as workmen’s compensation . . .
"(8) Judgments for support of minor children .
"If the taxpayer is required by judgment of a court of competent jurisdiction, entered prior to the date of levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.
"(9) [See note below]
"(10) Certain service-connected disability payments . . .
"(11) Certain public assistance payments
"Any amount payable to an individual as a recipient of public assistance under—
"(A) [SSI for the aged, blind, and disabled], or
"(B) State . . . public welfare programs for which eligibility is determined by a needs or income test.
("12) Assistance under Job Training Partnership Act . . . . "

Note:  26 U.S.C. § 6334(a)(9) must be read in conjunction with 26 U.S.C. § 6334(d) the amount exempt from an I.R.S. wage garnishment is the sum of one standard deduction plus each allowed personal exemption, with that annualized amount being pro-rated to the applicable wage pay period. Also,  26 U.S.C. § 6334(d)(2)(B) provides that a verified written statement must be submitted to establish the number of personal exemptions. Otherwise, in the absence of such a verified written statement, the exemption "shall be applied as if the taxpayer were a married individual filing a separate return with only 1 personal exemption."

26 U.S.C. §§ 6334(a)(8) & (9) are the only parts of this section that would apply to a debtor's wages. The payments set out as exempt in paragraphs (4), (6), (7), (10), (11) and (12) clearly cannot be garnished by the I.R.S. directly, but the funds may become vulnerable to a bank garnishment once the benefits have been deposited into an account.

Matthews v. Lewis, Ky., 617 S.W.2d 43 (1981) may provide some traction for a debtor arguing the statutory exemption follows the funds, at least to the extent that they can be traced and identified.  In Matthews workers’ compensation benefits deposited into a checking account had been garnisheed. The Kentucky Supreme Court was asked to decide whether a Kentucky exemption statute (KRS 342.180) precluded the garnishment. The Court ruled that statutory language specifically identifying worker's compensation payments as exempt from execution was intended to preclude garnishment. The opinion observed that:
"Our society's contemporary social programs exhibit a philosophy of relief for the distressed, the impoverished, and the victims of personal and financial catastrophes among us. The Workers' Compensation Act is simply one aspect of those social programs. Kentucky's exemption statutes are simply another necessary instrument in the overall scheme of social welfare programs. They are the teeth in the protection given certain deserving victims from their creditors . . . We hold that unless they provide clearly to the contrary, Kentucky's exemption statutes, including but not limited to KRS 342.180, extend protection to deposits in bank checking accounts so long as those deposits can be identified as or traced to payments of exempt funds."

Wednesday, January 15, 2014

Student Loan Wage Garnishment Hardship Exemption

Both 34 CFR §34.24 - §34.25 and 11 KAR 3:100 provide for a financial hardship exemption in administrative wage garnishments of, respectively, (1) defaulted student loans made directly by the U.S. Department of Education and, (2) defaulted student loans guaranteed by the Kentucky loan insurance program, the Kentucky Higher Education Assistance Authority.

Ordinary consumer student loans subject to judicial wage garnishments under Kentucky law do not have any similar hardship exemption expressly authorized by statute or judicial precedent, that I have found.

I have previously suggested (see: Inventing a Kentucky Wage Garnishment Hardship Exemption) that such an equitable hardship exemption might be implicit in Kentucky's judicial wage garnishment statute, KRS § 427.010(2).

All the world needs now is for some brave soul to put it to the test.

34 CFR § 34.24 - Claim of financial hardship by debtor subject to garnishment, provides in relevant part:
"(a) You [the student loan debtor] may object to a proposed garnishment on the ground that withholding the amount or at the rate stated in the notice of garnishment would cause financial hardship to you and your dependents. (See § 34.7)
"(b) . . .
"(c) . . .
"(1) You bear the burden of proving a claim of financial hardship by a preponderance of the credible evidence.
"(2) You must prove by credible documentation —
"(i) The amount of the costs incurred by you, your spouse, and any dependents, for basic living expenses; and
"(ii) The income available from any source to meet those expenses.
"(1) We consider your claim of financial hardship by comparing —
"(i) The amounts that you prove are being incurred for basic living expenses; against
"(ii) The amounts spent for basic living expenses by families of the same size and similar income to yours.
"(2) We regard the standards published by the Internal Revenue Service under 26 U.S.C. 7122(c)(2) (the ‘‘National Standards’’) as establishing the average amounts spent for basic living expenses for families of the same size as, and with family incomes comparable to, your family.
"(3) We accept as reasonable the amount that you prove you incur for a type of basic living expense to the extent that the amount does not exceed the amount spent for that expense by families of the same size and similar income according to the National Standards.
"(4) If you claim for any basic living expense an amount that exceeds the amount in the National Standards, you must prove that the amount you claim is reasonable and necessary. "
The corresponding part of the Kentucky Administrative Regulation, 11 KAR 3:100(6), starts off simple and shifts from the general to the specific, and then . . .
"(a) If the debtor asserts as a defense a claim that withholding of his disposable pay would constitute an extreme financial hardship, the debtor shall submit documentation of all available resources and actual expenses and shall have the burden of demonstrating the necessity of actual expenses.
" (b) The hearing officer shall compare the debtor's available resources and the necessary expenses and current debt obligations of the debtor and debtor's dependents. The hearing officer shall determine that extreme financial hardship exists if the debtor currently is not able to provide at least minimal subsistence for the debtor and debtor's dependents that could be claimed on a federal income tax return. The hearing officer shall consider as available resources of the debtor income of the debtor, the debtor's spouse, and debtor's dependents from all sources, including nontaxable income and government benefits, expenses paid on behalf of the debtor by another person, and the cash value of any current liquid assets, such as bank accounts and investments. The hearing officer shall consider the claim of extreme financial hardship in accordance with the presumptions established in this paragraph.
"1. Withholding of an amount of disposable pay shall constitute an extreme financial hardship if:
"a. The debtor resides in the District of Columbia or a state other than Alaska or Hawaii and the debtor's available resources do not exceed the applicable poverty guideline, multiplied by 125 percent, based on the debtor's family size:"
 . . . . and, then it gets way too complex to easily summarize or excerpt You'll just have to read it for yourself. This much of it indicates that one living below 125% of the poverty level cannot have his or her wages garnished by a state administrative proceeding to satisfy a student loan debt, upon proper application and proof.

Pursuing Equity In the Age of Legal Positivism

Question: Do modern courts of law have the inherent discretionary power to fashion novel equitable remedies neither strictly authorized by statute nor part of the common law?

Answer: Of course they do. Who is there to stop them?

It's a joke.

Student Loan Wage Garnishments

There are three general categories of student loans.
  1. Direct loans from the U. S. Department of Education;
  2. Loans guaranteed by a state loan insurance program, and;
  3. Ordinary consumer loans.
Each of these three types of student loans may ultimately be collected by garnishment upon default. However, the legal authority and the procedures applicable in the event a garnishment is pursued depends upon the source and the type of the loan.

Administrative wage garnishments to collect direct student loans from the Federal government are authorized by the  Debt Collection Improvement Act of 1996 and they are subject to the procedures contained within 34 Code of Federal Regulations (CFR) Part 34.

Administrative wage garnishments to collect student loans guaranteed by a state loan insurance program are authorized by the Higher Education Act and corresponding State statutes and regulations. The administrative wage garnishment procedures used by the Kentucky Higher Education Assistance Authority are contained in 11 Kentucky Administrative Regulation (KAR) 3:100.

Wage and non-wage garnishments to collect ordinary consumer student loans are subject the the same statutory law, procedural rules and appellate opinions as are all other judicial garnishments.

It is important to know which type of student loan it is.

Tuesday, January 14, 2014

Grit In My Grits: A Tuesday Complaint About Kentucky Practice

In Kentucky civil procedure there is a general distinction between a default judgment on a claim for liquidated damages and on a claim for indefinite damages.

Kentucky Rules of Civil Procedure, CR 8.04 - Effect of Failure to Deny - provides, in part:

" . . . . Averments in a pleading to which a responsive pleading is required are admitted when not denied  . . . except that the following allegations must be proved:
(a) . . .
(b) . . .
(c) Those concerning value or amount of damages which are not for a sum certain or for a sum which may by computation be made certain." [emphasis added]
K. R. C. P., CR 8.01 - Claims For Relief
"(1) A pleading which sets forth a claim for relief . . . shall contain . . . a demand for judgment for the relief to which he deems himself entitled. . .
(2) In any action for unliquidated damages the prayer for damages in any pleading shall not recite any sum as alleged damages . . . . " [emphasis added]
With a complaint on a credit card debt, for example, simple logic would indicate the amount of damages claimed by the plaintiff is for, "a sum certain or for a sum which may by computation be made certain." which must be specified in the complaint. Yes?

When a defendant is in default for failure to appear and defend in such an action, the allegations in the plaintiff's complaint are not denied and the dollar amount claimed in the complaint is deemed admitted by CR 8.04.

Thus, in an action on a consumer loan transaction, it seems obvious no hearing to determine the amount of damages is required. It's just a simple "computation". But, was life and consumer lending ever really all that simple?

CR 55.01 - Judgment
". . . . If, in order to enable the court to enter [default] judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court, without a jury, shall conduct such hearings or order such references as it deems necessary and proper . . . . " [emphasis added]
With the assignment of consumer loans to junk debt collectors, possibly unwarranted claims for exorbitant prejudgment interest rates and a wide variety of added-on fees and charges, simple computations may turn out to be mind boggling complex.   Clearly a trial judge would be authorized by CR 55.01 to conduct a hearing to establish damages in a consumer loan debt collection action in default for defendant's failure to appear and defend, should he or she feel the urge. However, it is likely unreasonable to require it.

The simplest solution to this problem is probably the best solution. For a consumer debtor being sued who takes the position, "Yep, I owe them something, but not as much as they are asking," the thing to do is to appear and defend the action, and to not allow a default judgment to be entered.

OK. Now I feel better. Thanks for listening.

Sunday, January 12, 2014

Kentucky Default Judgments: A Different Breed of Cat

In Cloverleaf Dairy v. Michels, 636 S.W.2d 894 (Ky. App. 1982), the chronology was as follows:
  1. On May 26, the trial court entered a final judgment;
  2. Within ten days Appellee filed a motion for relief from the judgment;
  3. On June 16 the trial court denied this motion;
  4. Appellee thereafter filed another motion for relief from the judgment;
  5. The trial court granted this second motion, reversed its order of June 16 and modified its May 26 judgment, and;
  6. This ruling was appealed.
The Kentucky Court of Appeals reversed the trial court, stating, "We . . . find no authority in the Civil Rules for a party to make more than one motion for reconsideration of a judgment."

In Mingey v. Cline Leasing Service, Inc., 707 S.W.2d 794, 796 (Ky. App.1986), the chronology was as follows:
  1. On January 11, the trial court entered a final judgment;
  2. Within ten days Appellant filed a motion for relief from the judgment;
  3. On February 15, the trial court denied this motion;
  4. Appellant thereafter filed another motion for relief from the judgment;
  5. The trial court granted this second motion, reversed its order of February 15 and set aside its January 11 judgment;
  6. On March 27 Appellee moved to have the January 11 judgment reinstated;
  7. Thereafter, on April 18, the trial court granted Appllee's motion and reinstated the prior judgment based upon the holding in Cloverleaf Dairy v. Michels, supra, and;
  8. This ruling was appealed.
The Kentucky Court of Appeals reversed the trial court, stating, "Cloverleaf Dairy v. Michels . . . is clearly distinguishable from the instant case . . . . "

The primary difference between  Cloverleaf Dairy and Mingey is simply this: The final judgment in Mingey was a default judgment and in Cloverleaf Dairy, it was not. Different rules apply to Kentucky default judgments, in several respects.

For example, it is a general rule that for a trial error to be subject to appellate review, the alleged error must first be presented at the trial court level and preserved in the record. One exception to this general rule is the direct appeal of a default judgment. As the Court of Appeals stated in Statewide Environmental Services Inc v. Fifth Third Bank, 352 S.W.3d 927 (Ky. App. 2011):
"Of course, an inherent characteristic of a direct appeal from a default judgment is that the appellant has failed to preserve his claim of error. Ordinarily, we review unpreserved claims under the manifest injustice standard established in CR 61.02, the "substantial error" rule. However, the standard of review we apply now became a part of our common law in Rouse v. Craig Realty Co., 203 Ky. 697, 262 S.W. 1083 (1924), before adoption of our current rules of civil procedure. Subsequent to the adoption of the current civil rules, the issue arose again in Mingey v. Cline Leasing Service, Inc., 707 S.W.2d 794 (Ky.App.1986), and we elected to apply the more specific Rouse standard of review despite the availability of CR 61.02. Jeffrey followed Mingey; therefore, we now follow Jeffrey . . .Under Jeffrey v. Jeffrey, [153 S.W.3d 849, 851 (Ky. App. 2004)] , the default judgment itself may be appealed directly without preservation of the error . . . ." [footnotes 6 - 7]
'However, the issue in such an appeal [is] limited to determining whether the pleadings were sufficient to uphold the judgment, or whether the appellant was actually in default.'  Mingey v. Cline Leasing Service, Inc., Ky.App., 707 S.W.2d 794, 796 (1986) citing Rouse v. Craig Realty Co., 203 Ky. 697, 262 S.W. 1083 (1924)", as quoted in Jeffrey.

Friday, January 10, 2014

Debtor Grounds for a Hearing In an Administrative Wage Garnishment

The federal Debt Collection Improvement Act of 1996 provides administrative wage garnishments for the collection of wide array of debts owed to the federal government. Debtors are entitled to request and obtain a hearing to contest such a wage garnishment. The grounds a debtor may assert are as follows.

(1) Existence, validity, past-due status or amount of the debt: Objection on grounds that –
  • The debt was previously paid or settled in full
  • The debtor is in compliance with a valid repayment agreement
  • The amount owed on the debt is incorrectly stated because not all payments had been credited
  • The debtor has a legal defense as to liability for the debt under Federal or State law
(2) Enforceability of the debt through  Administrative Wage Garnishment (AWG):
  • The debt was discharged or is currently in active bankruptcy
  • The debt is unenforceable by AWG due to involuntarily separation from previous employment and debtor currently employed for less than 12 months
(3) Financial hardship: Garnishment of fifteen  percent (15%) of the debtor’s disposable pay will create a financial hardship on the debtor and his or her dependents .

Note to Myself: Can a Garnishee Defendant Object to Venue?

I want to write this down so that I don't forget it, but it is not a question that I wish to answer. Can a garnishee defendant object to venue?

Kentucky law has elaborate statutory venue provisions which control the permitted location for civil action of various types. See: William H. Fortune, Venue of Civil Actions in Kentucky, 60 Ky. L.J. 497 (1972).

KRS 425.501 – Proceedings for obtaining order of garnishment, provides:
 "(1) Any person in whose favor a final judgment in personam has been entered in any court of record of this state may, upon the filing of an affidavit by him or his agent or attorney in the office of the clerk of the court in which the judgment was entered, and in the same cause in which said judgment was obtained showing the date of the judgment and the amount due thereon, and that one (1) or more named persons hold property belonging to, or are indebted to, the judgment debtor, obtain an order of garnishment to be served in accordance with the Rules of Civil Procedure." [emphasis added]
Garnishment was not known in the common law. Rather it is a statutory invention.See, generally, Rood, John R., A Treatise on the Law of Garnishment, West Publishing Co. (1896).
"Garnishment is a special auxiliary remedy for the more effectual recovery of debts. It is always ancillary to the main action under which it is prosecuted, and therefore necessarily goes down with it. It is not a new suit, and necessarily before the same court as the main action . . . it is essentially and in effect a suit or action against the garnishee by the defendant, in the name and for the benefit of the plaintiff. "  Ibid p. 3 - 4 [footnotes omitted]
 In effect, KRS 425.501 makes service of a garnishment order upon a garnishee defendant the commencement of a civil action against the garnishee, which is subject to the same defenses the garnishee could assert against the judgment debtor if the suit had been brought directly. [citations omitted]

In theory, if not in actual practice, Kentucky's garnishment statute places no obvious limits upon the nature of the garnishee's indebtedness to the judgment debtor that is subject to a garnishment proceeding. Thus, in theory, a judgment creditor could garnish a judgment debtor's cause of action in rem or for personal injury, against a third party garnishee defendant. It would be similar to a subrogation by operation of law. [research omitted]

Clearly, a garnishee defendant may waive any objection to venue in such a case, but also it could be asserted. What a court might do in this instance is anyone's guess. KRS 425.501 makes it clear that the garnishment must be brought in the original action, but doing so might work a substantial unfairness upon the garnishee defendant.

The whole issue fails my basic test for practicality, but there it is nonetheless.

Thursday, January 9, 2014

A Kentucky Debtor’s Guide to Garnishment Withholding: Preface & Introduction

A Kentucky Debtor’s Guide to Garnishment Withholding


Lawyers tend to go where the money is and debtors in serious financial difficulty can’t afford to pay for expert guidance in their time of greatest need. Self-help law is always an option, but proceeding as your own lawyer is difficult and it is often dangerous.  Acting as your own lawyer is for the very brave, the very foolish or the very desperate.  Except for the fact that I do it myself all the time, I don’t recommend jumping into the shark pool alone. The possibilities are sink, swim or be eaten alive.

With that warning in mind, I know that the brave, foolish or desperate will go it alone anyway. I have to admit that proceeding without a lawyer is often a much safer and better option than is doing nothing.  Although our legal system is vast, confusing and complex, most personal legal problems are not all that difficult. With enough information, clearly explained, I firmly believe that anyone with average intelligence or above can fairly quickly understand his or her available legal options, and decide how to pursue a useful course of action.

Please remember the legal outcome is never guaranteed, there is always the possibility that you will make your situation worse and there are ways to get professional legal advice for free.


Garnishment is a generic legal term for a debt collection method for confiscating a debtor’s money or property from a third party. Different states may use different words to name the same basic procedure. There are two general categories of garnishment: wage garnishment and non-wage garnishment.

Wage garnishment happens when a creditor forces a debtor’s employer to withhold a portion of one or more paychecks to satisfy a debt.

Non-wage garnishment happens when a creditor forces any third party to turn over any money or personal property in the third party’s possession that belongs to or is owed to the debtor, to satisfy a debt. Typically, a debtor’s bank accounts may be garnished, but non-wage garnishments are not limited to bank accounts.

There are two general legal mechanisms by which a creditor may force a garnishment: judicial and administrative.

Judicial garnishments arise from credit card debts, consumer loan debts, personal injury damage awards, breach of contract damages, divorce property settlement debts, debts or damages in landlord-tenant disputes or any other of the many ways a person can be in debt because of having been sued in a court of law.

Administrative garnishments can result from tax debts, student loan debts, child support debts, or from nearly any debt owed to the federal government.  Administrative garnishments generally do not involve the court system at all.

Each of these different type of garnishments involve different rules and procedures, so it is of critical importance that a debtor know the type of debt involved in the garnishment debt collection process.  Since each state has different garnishment collection laws, it is important not to be confused by using the wrong set of state rules.

Unfortunately, there is another type of garnishment, which I call the scam garnishment. This type of garnishment may appear when an unscrupulous creditor deceptively tries to use an administrative garnishment process for a consumer debt collection that ought to proceed as a judicial garnishment, for example. Tricksters may even attempt to collect a debt that does not exist or which has expired.

More often, I suspect, honest mistakes happen. The wrong amount is claimed, a payment is overlooked or the wrong interest rate is applied to a legitimate outstanding debt. In any event, a debtor who is subject to a garnishment proceeding will be well served by a careful examination of the debt that is claimed and by an understanding of the proper legal procedures which control the collection process.

Finally, in every state there are provisions for limits and exceptions to the type and amount of property or cash that creditors can seize in the garnishment debt collection process. A few of these limits are fairly automatic from a debtor’s point of view, but there are many others that a debtor must act upon in order to claim and preserve.  Knowing what the exemptions are and how to claim them is important. It is also time-critical. A debtor’s diligence and prompt action can make a big difference.



Tuesday, January 7, 2014

The Complexity of Kentucky Garnishment Procedure In a Nutshell

Kentucky's garnishment procedures, principally contained in KRS §425.501, et seq.,  KRCP Rule 69.02 and various local rules of court, attempt to accommodate a wide variety of factual circumstances, most of which never present in actual practice.
  • There are different rules for wage and non-wage garnishments;
  • There are different rules for wage garnishments of support payments, taxes, student loans and other types of debt;
  • The same rules apply to garnishment of debts owed to the judgment debtor and personal property owned by the judgment debtor currently in the possession of a third party;
  • Debts owed to the judgment debtor might or might not be for a specified fixed amount. For example, there are types of bank accounts that are tied to various markets that may fluctuate from day to day;
  • Debts owed to the judgment debtor might or might not be due on demand. A third party may owe money to a judgment debtor, but it is not due and payable right now;
  • Third parties may have superior claims to to property sought to be garnished;
  • A vast array of federal or state non-bankruptcy exemptions may apply to the property potentially subject to garnishment. Some of these exemption require the judgment debtor to affirmatively claim the exemption and some do not;
  • A garnishee defendant may be uncooperative and not respond to a garnishment order or may not serve notice of the garnishment order upon the judgment debtor, as required;
  • Garnishment orders may be one-shot deals or they may be continuing;
  • Multiple garnishments from different judgment creditors may descend at virtually the same time;
  • Enforcement of foreign judgments may present unique problems;
  • Seeking to garnish against an out-of-state garnishee defendant via Kentucky's long-arm statutes can be fun; 
  • With costs, post judgment interest and the costs of the garnishment added in, it may be difficult to know when the judgment creditor's judgment is satisfied and the garnishment lien is released; 
  • The garnishment may be barred by the time limit on judgments imposed by KRS 413.090;
  • The property sought to be garnished may be jointly owned, and;
  • . . . .more that I haven't considered yet.

Time Allowed to Claim a Kentucky Garnishment Exemption

How much time does Kentucky civil procedure allow a judgment debtor to object to a garnishment or to claim an exemption? It is a question without an easy answer.

Typically, it seems, many Kentucky garnishments proceed quite summarily, and without ever landing upon any judge's desk. A judgment creditor files a form AOC-145 (Affidavit for Writ of Non-Wage Garnishment), the court clerk issues a form AOC-150.1 (Order of Non-wage Garnishment), the garnishee defendant is served, the judgment debtor is notified and nothing happens until the garnishee delivers the money to the creditor's attorney. End of story.

I have read that form AOC-150.1 (Order of Non-wage Garnishment) expressly states the judgment debtor has ten days within which to present objections or exemptions, but there is nothing in KRS 425.501(4) or the Kentucky Rules of Civil Procedure, CR 69.02, to give that ten day limit an authoritative foundation. In an unpublished opinion, MGM Collection Agency, Inc. v. Barger , 1999-CA-001848-DG, the Kentucky Court of Appeals stated that there was no time limit for claiming an exemption in a garnishment action. I believe this to be a bit of judicial hyperbolic dicta. There has to be some limit, even if that limit is ambiguous or unspecified.

The decisive factors in MGM Collection Agency, Inc. v. Barger seem to have been that; (1) A non-party joint account owner promptly presented a meritorious objection to the bank garnishment (i.e. it wasn't the judgment debtor's money) before any sum was delivered by the bank to the judgment creditor, and; (2) Although we know when the bank itself was served with the garnishment order, there is nothing in the Appellate Court's opinion showing when the judgment debtor first received notice of the garnishment.

In short, the judgment creditor's whole appeal hinged upon the thinnest technicality.

The fog surrounding this issue is so dense, it is difficult to clearly and succinctly describe its contours. With the written law being so indefinite,  it should be sufficient to assume the timeliness of a judgment debtor's objection to a garnishment or a claim of exemption is a matter within the trial court's discretion, based upon a multiplicity of relevant factors, including any claim of excusable neglect.

But, that's just me talking.

Saturday, January 4, 2014

Rage Against Junk Debt Collectors

I awoke this morning in a feisty mood with the intent to guzzle coffee and to conceive a monkey wrench. Here is the outline for my monkey wrench: Throw with caution.
  1. Credit card companies avoid state usury laws by operating as National Banks or other federally chartered institutions.
  2. Federal law preempts state law for National Banks, etc. Thus, state usury laws do not apply to most credit card transactions.
  3. Upon a credit card debtor's default, these debts are frequently sold to junk debt collectors for a fraction of the amount owed.
  4. Upon the assignment of the debt from a National Bank, etc., to a junk debt collector that is not a National Bank, state usury laws become applicable to the debt in the hands of the junk debt collector.
  5. In the event a junk debt collector attempts to claim prejudgment interest at the prior credit card interest rate, which sometimes happens, the mere attempt may result in the forfeiture of all interest on the debt, and other civil penalties.
  6. KRS § 360.020 provides, in part, "The taking, receiving, reserving, or charging a rate of interest greater than is allowed by KRS 360.010, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of debt carries with it . . . . "
It's something to think about on a cold Saturday morning.

Friday, January 3, 2014

Inventing a Kentucky Wage Garnishment Hardship Exemption

I have found at least one state that provides for a discretionary exemption in a wage garnishment based upon the debtor's claim of economic hardship. I have located nothing in Kentucky law that is expressly similar.

Oklahoma Statutes §31-1.1.provides, in part:
"Earnings from personal services - Exemption from process - Order.
"A. Following the issuance of [a] . . . garnishment . . . the debtor may file with the court an application requesting a hearing to exempt from such process by reason of undue hardship that portion of any earnings from personal services necessary for the maintenance of a family or other dependents supported wholly or partially by the labor of the debtor. A debtor with no family or other dependents may not claim an exemption under this section. . .
"B. In determining the existence of an undue hardship, the court should consider the income and expenses of the family and other dependents, and the standard of living created by the income and expenses. The court should also consider the standard of living in relationship to the minimal subsistence needs of the debtor’s family and other dependents, with comparison to the minimal subsistence standards in the community, in regard to basic shelter, food, clothing, personal necessities and transportation. The court should then determine if the lack of the funds sought to be exempt would be an undue hardship by creating less than a minimal level of subsistence. If deprivation of these earnings would create an undue hardship on the debtor and the family or other dependents the debtor supports, the court may:
"1. Order all or a portion of the personal earnings exempt . . . . 
[emphasis added]
Kentucky's exemption statutes do embody the concept of reasonably necessary support as being an essential factor for claiming particular types of exemptions. For example:

KRS § 427.150(1);
"To the extent reasonably necessary for the support of an individual and his dependents . . .  rights to receive money or property for alimony, support, or separate maintenance." [emphasis added]  
KRS § 427.150(2)(b);
"A payment on account of the wrongful death . . .  to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;"  [emphasis added]
KRS § 427.150(2)(d);
"A payment in compensation of loss of future earnings . . .  to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;"  [emphasis added]  
The Kentucky statutory limit on wage garnishment in KRS § 427.010(2), which is not a true "exemption" according to the Kentucky Court of Appeals in Brown v. Commonwealth, 40 S.W.3d 873 (1999), provides, in relevant part:
". . . . the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed the lesser of . . . . " [emphasis added]
The language of KRS § 427.010(2) suggests the determination of an individual debtor's wages subject to garnishment is not a mechanical calculation, and there is a space from within which the debtor can reasonably argue the financial circumstances of his or her specific case justify the court to limit a wage garnishment to less than the maximum allowed by statute, down to and including zero, within the court's sound exercise of discretion.

Thursday, January 2, 2014

Claiming a Kentucky Exemption: Bank Accounts

Question: Why do creditors garnish bank accounts?

Answer: Sutton's Law. Because that's where the money is.

An assortment of State and Federal statutes provide a variety of debtor exemptions for retirement benefits, worker's compensation benefits, alimony payments and more. Generally, this means that creditors cannot go directly after the source of these funds and garnish them before they are paid. However, once these benefits are paid to the debtor and the funds are deposited in the debtor's bank account, it is a different issue. Are these exempt benefits subject to a bank garnishment?

In Matthews v. Lewis, 617 S. W. 2nd 43 (1981), the Kentucky Supreme Court addressed the following issue:
"The question presented by this case is whether assets received from a statutorily exempted source and placed by the recipient into his or her bank checking account lose their exempt status."
 After a detailed discussion of Kentucky precedent and cases from several other jurisdictions, the Kentucky Supreme Court held:
" . . . . unless they provide clearly to the contrary, Kentucky's exemption statutes, including but not limited to KRS 342.180, extend protection to deposits in bank checking accounts so long as those deposits can be identified as or traced to payments of exempt funds."
 So, basically . . . no. Subject to the debtor's burden of proving the bank account funds originate from an exempt source, they may not be garnished to satisfy an ordinary debt. Debts for taxes and child support are a different story.

The court stated, "The right to a subsistence way of life is considered fundamental," and quoted from Kruger v. Wells Fargo Bank, 11 Cal.3d 352, 113 Cal.Rptr. 449, 521 P.2d 441 (1974).
"The legislative objective in providing unemployment compensation and disability benefits — to furnish the unemployed worker and his family with a stream of income to defray the cost of their subsistence — would probably fail if creditors could seize that income and apply it to past debts. Consequently the Legislature provided that unemployment and disability benefits cannot be subjected to attachment or execution."
The court continued with,
"Our society's contemporary social programs exhibit a philosophy of relief for the distressed, the impoverished, and the victims of personal and financial catastrophes among us. The Workers' Compensation Act is simply one aspect of those social programs. Kentucky's exemption statutes are simply another necessary instrument in the overall scheme of social welfare programs. They are the teeth in the prosecution given certain deserving victims from their creditors."
The laws applicable in Kentucky provide many protections for debtors in distress, but debtors must be aware of these legal rights and they must also take effective action to assert these rights when they are threatened.

Wednesday, January 1, 2014

Claiming a Kentucky Exemption: Disability Indurance

I believe I once read through a disability insurance policy some forty years ago, but it was not a memorable experience. Nor is it an experience that I yearn to repeat anytime soon. I'm not that type of glutton for punishment.

So, everything I have to say about privately purchased disability insurance policies is rank speculation and conjecture. I do not know what any standard private disability insurance policy says. Caveat emptor.

In MPM Financial Group, Inc. v. Morton, 289 S.W.3d 193 (2009), the Kentucky Supreme Court granted discretionary review of an unpublished Kentucky Court of Appeals opinion which construed K.R.S. 427.170 to provide a general expansion of property exempt from execution for all purposes, and not just for Bankruptcy purposes, and reversed the Court of Appeals. The most interesting part of the case and the appeal was the part not decided.

The case arose when MPM Financial Group sought to garnish private disability insurance benefits being paid to Morton. In addition to claiming that these disability insurance benefits were exempt from execution under KRS §427.170, which didn't work out for Morton on appeal, he also claimed the exemption provided by KRS §427.150(2)(d):
"A payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor;"
Yeah, disability insurance benefits being compensation for loss of future earnings makes a certain amount of sense, but the trial court ruled that Morton's disability payments were not exempt under KRS §427.150(2)(d). The trial court agreed with Morton that the disability insurance benefits were exempt under KRS §427.170. MPM Financial appealed the trial court's application of KRS §427.170 to all debtors, and the applicability of KRS §427.150(2)(d) was procedurally neglected by those involved in the appeal.
"We note that, in Morton's brief, he argues that the trial court erred when it held that KRS 427.150(2)(d) did not apply to his disability benefits. KRS 427.150(2)(d) contains an exemption for debtors who receive compensation for the loss of future earnings. Morton argues that his disability benefits constitute compensation for the loss of future earnings. While Morton's argument is interesting, he failed to file a cross-appeal regarding the issue; therefore, we cannot address its merits since it is not before us."
Likewise, before the Kentucky Supreme Court, "Morton did not file a cross-petition for discretionary review with respect to the availability of an exemption under KRS 427.150." Both the unpublished Court of Appeals opinion and the Kentucky Supreme Court opinion in MPM Financial Group, Inc. v. Morton are silent on the question: Does KRS §427.150(2)(d) provide a non-bankruptcy exemption for benefits paid under a private disability insurance policy?

There are two critical components to KRS §427.150(2)(d):
  1. The payments are compensation for loss of future earnings, and;
  2. The payments are reasonably necessary for support.
Each of these factors would be the focus of considerable proof and evidence at the trial level. The logic of equating "disability insurance" with "loss of future earnings" is not sufficiently compelling. It may be true in whole or in part, as an issue of fact, but it is not necessarily true as a matter of law. Disability insurance benefits might conceivably be wholly unrelated to future earnings, if the insurance policy is a mere casino betting game. Or, the terms of the policy may connect policy premiums and benefits with present earnings as a predictor of future earnings. However, payout benefits may include compensation for expenses associated with a disability that are unrelated to the insured's loss of future earnings resulting from the disability.

Also, KRS §427.150(2)(d) provides an exemption only "to the extent reasonably necessary for the support of the debtor and any dependent of the debtor."

As with so many things in the law, winning on the facts is a better bet than trying to win with an abstract appeal to logic. With proper proof of the terms of the disability insurance policy, the nature of the disability and how insurance benefits relate to the insured's loss of future earnings, coupled with evidence the disability insurance benefits are reasonably necessary for support, a good case can be made.