Pretending to be a Lawyer by the Light of a Full Moon

There's a full moon today in a few hours, and if you doubt that a full moon has psychological effects, hold that thought and try to follow this logic.

1. Credit card lenders commonly charge interest in excess of 30% per year.
2. Kentucky law, KRS §286.3-740, authorizes banks to charge no more than 21% interest per year (1.75% per month x 12) on revolving credit plans.
3. Most National Banks are organized in states without interest rate limits (Nevada, Delaware, etc.).
4. Federal law preempts state law and federal law allows National Banks to operate nationally under the rules of the bank's home state.
5. Therefore, National Banks doing business in Kentucky are not limited by Kentucky laws limiting the amount of interest that can be charged for credit card debt.
6. When a credit card debtor defaults, the unpaid balance is accelerated and the debt is sold to a third party, it stops being a revolving credit plan, by definition, and it stops being a debt owned by a National Bank enjoying the supremacy of federal law.
7. In the hands of a junk debt collector, the debt is just an ordinary unsecured debt.
8. In Kentucky, ordinary unsecured debts which are not owned by banks or National banks are subject to Kentucky's general usury statute, KRS §360.010, which limits interest to 8% per year.
9. If the junk debt collector attempts "taking, receiving, reserving, or charging a rate of interest greater than is allowed by KRS 360.010," (8%) for any period after assignment of the debt from the National Bank, the debt collector runs afoul KRS §360.020 and the civil forfeiture provisions therein.

I've gone down this road before, See: Washington Mutual (WaMu) credit cards

  

Debtor's lament - accounts frozen by garnishment

When an ordinary creditor garnishes a debtor's bank account, the bank responds by freezing the debtor's access to the funds until the garnishment process is complete. I suppose the bank will continue to accept deposits into the account, but withdrawals and automatic bill payments stop. The debtor's outstanding checks begin to bounce as they are presented to the bank for payment. This happens even if all of the debtor's cash in a deposit account are exempt from execution by law and are immune from seizure. Twentieth Century garnishment procedures require the debtor to affirmatively act to claim and prove the exemption and persuade a judge to release the garnishment, restraint, freeze or whatever they call it in your local jurisdiction. The process can easily take 30 days or more. From a debtor's point of view, it's like adding injury to insult. It is an very iffy proposition that every debtor has the wits and resources to take the steps necessary to protect his or her legal rights.

In the last few years the U.S. Treasury Department has developed regulations to mitigate this debtor problem, at least with respect to federal benefit payments that are immune from seizure by ordinary creditors.  Veteran benefit payments and Social Security benefits are prime examples. These federal benefits, among others, are practically impervious to the claims of ordinary creditors. The U.S. Congress and the U.S. Supreme Court have said so, repeatedly. But, prior to the age of digital banking, who knew where money came from? 

With most federal benefit payments being made by direct deposit these days, the source of the deposits are digitally encoded and the financial institution 'knows' if funds in an account are exempt. The recently finalized Treasury regulations ( 31 C. F. R. 212) require banks and other financial institutions to make two months of exempt payments available to the debtor during the garnishment process while freezing any surplus funds.

This does not change the scope of the debtor's exemption. If the debtor has more than two months worth of exempt benefit payment on deposit, the debtor must still follow ordinary garnishment procedures to claim the full exemption. In the meantime, the debtor is not frozen out of exempt cash needed for day-to-day living expenses.

Will this new system work to perfection and without error? Probably not.

But, a word of caution to debtors. It is best to leave exempt federal benefit direct deposits in the same account into which they were originally deposited. If any direct deposited benefit funds are transferred by the debtor to a different account, as for example from a checking account to a savings account, the bank's ability to easily identify the exempt funds may be forfeited. Again, this does not change the availability of the exemption, but it may result in more of the debtor's funds being frozen as application is made to the court and the debtor proves the exemption.

Garnishment Exemptions Available to Kentucky Residents

Certain property is exempt from seizure by general creditors. There are several categories of exemptions available to Kentucky debtors. Different exemptions apply to non-bankruptcy debtors and debtors in the process of seeking bankruptcy protection. Certain exemptions are provided by Kentucky law and others are provided by federal law. Different exemptions apply to tax debts and non-tax debts. Most Kentucky non-bankruptcy non-tax debt exemptions otherwise available do not provide protection for claims of child support obligations.  Many federal exemptions do not apply to debts to the federal government.

The following is a rough outline of available exemptions under Kentucky and federal law. As with all things legal, the devil is in the details and the opportunity for serious complications is nearly endless.

Kentucky Non-Bankruptcy Exemptions

This is a fairly comprehensive list of Kentucky statutory non-bankruptcy exemptions. A few, like exemptions for state bonuses paid to World War I veterans, have been omitted. Additional specific federal exemptions are listed below.

• Alimony support or separate maintenance
• An award under a crime victim's reparation law;
• Payment received for wrongful death of an individual the debtor was a dependent to the extent reasonably necessary for support of debtor and debtor's dependents;
• Up to $7,500 paid for personal injury, with qualifications;
• Compensation for loss of future earnings to the extent reasonably necessary for support and maintenance;
• Payments received from an exempt pension;
• Individual retirement accounts, and other types of retirement plans, with some exceptions;
• Household furnishings, jewelry and personal clothing not to exceed $3,000 in value;
• Tools, equipment and livestock of a person engaged in farming, not exceeding $3,000;
• One motor vehicle and its necessary accessories, not exceeding in the aggregate $2,500;
• Professionally prescribed health aids for the debtor, or a dependent of the debtor;
• The tools, not exceeding $300 in value, of any individual debtor necessary in his trade;
• The professional library and office equipment of a minister, attorney, physician, surgeon, chiropractor, veterinarian, or dentist, necessary in the practice of such profession, and not exceeding $1,000 in value;
• Homestead or burial plot not to exceed $5,000 in value, total;
• Certain life insurance benefits;
• Certain police or firefighter’s pension fund benefits;
• Worker’s compensation benefits;
• Certain retirement annuity benefits for public school and university teachers and employees;
• Participation in Kentucky Educational Savings Plan Trust;
• Wages of work-release prisoners, with exceptions;

KRS 427.045 - Exemptions not applicable to claims for child support, provides:

“The exemptions provided in KRS 342.180 and KRS 427.010 to 427.040 shall not apply for executions, attachments, or garnishments, issued for the collection of maintenance of minor children.”

Federal Non-Bankruptcy Exemptions

Most of the following exemptions are not available as against child support or tax collections. Many are nevertheless subject to administrative offset for the collection of non-tax debts to the United States.

• Social Security Benefits - Old Age, Survivors and Disability Benefits
• Supplemental Security Income (SSI) Benefits
• Veterans’ Benefits
• Civil Service and Federal Retirement and Disability Benefits
• CIA Retirement benefits
• Crop insurance
• Military Annuities and Survivors’ Benefits
• Student Assistance - Federal Work Study program benefits
• Railroad Retirement Benefits
• Merchant Seamen Wages
• Longshoremen’s and Harbor Workers’ Death and Disability Benefits
• Foreign Service Retirement and Disability Benefits

Exempt Funds after Deposit into Bank Account

Question: Can a general creditor successfully garnish exempt payments once the money has been deposited into a debtor’s bank account?

Answer: Maybe yes and maybe no. It depends.

In Matthews v. Lewis, Ky., 617 S.W.2d 43 (1981), the Kentucky Supreme Court answered the question for one type of exempt payment, A bank account containing worker’s compensation payments continue to be exempt from execution, attachment and garnishment. The court wrote:

“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.”

Although the Matthews case should provide debtors considerable encouragement with similar statutory exemptions, each statutory exemption is subject to the proviso the statute may, “clearly provide to the contrary.”

For example, Kentucky’s Transitional Assistance Program (KTAP) provides in KRS 205.220(3):

"Public assistance shall not be assignable and shall be exempt from levy or execution. Furthermore, no assignment, pledge or encumbrance of any right to benefits due or payable under this chapter shall be valid. Public assistance benefits, as long as they are not mingled with other funds of the recipient, shall be exempt from any remedy for the collection of all debts, liens and encumbrances. No waiver of any exemption provided for in this subsection shall be valid.” [emphasis added]

Matthews v. Lewis, did not impose the no-mingling of funds requirement generally. This specific statute added the requirement.

Additionally, there is a potential for complications depending upon the type of account into which the exempt funds are deposited. There is a distinction between money that is immediately available to the debtor for current living expenses and money that has been transformed into an ‘investment.’ There are many different types of accounts offered by banks and financial institutions that are clearly long term investment accounts. The continued exempt status of funds in these accounts would be disqualified. This, as lawyers like to say, is an “interesting question.”

Wage Exemptions Are Not Exemptions

The federal Consumer Credit Protection Act (CCPA) limits the amount of a debtor’s wages that can be garnished. Kentucky has enacted statutory law virtually identical to the CCPA wage garnishment limits in KRS 427.010(2). Although this has been lumped in KRS Chapter 427 with other genuine exemption provisions, for codification purposes, this accident of proximity does not really mean much.

This statutory limit on wage garnishments is not an exemption and it does not protect wages after they have been paid to the employee. If the wages actually paid to an employee are deposited into a bank account, they are subject to a bank garnishment, in Kentucky. See: Brown v. Commonwealth of Kentucky, 40 S.W.3d 873  (Ky. App. 1999)

See also: Notes on Kentucky's exemption laws.

Kentucky Garnishment of Jointly Owned Bank Accounts

It often happens that a creditor will garnish a debtor’s bank account, but there are more individuals named as account owners than just the one debtor. People have a multitude of reasons for jointly owned bank accounts, and they may never have thought about the possibility their individual deposits to an account might be subject to the debts of a another named account co-owner.

KRS 391.310(1) provides in part as follows:

“A joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.”

A party’s “net contribution” to the account is defined by KRS 391.300(6) as the sum of all deposits thereto made by or for him, less all withdrawals made by or for him which have not been paid to or applied to the use of any other party, plus a pro rata share of any interest or dividends included in the current balance. These statutory provisions are “relevant only to controversies between these persons and their creditors and other successors,” KRS 391.305. Each of an account’s co-owners may be authorized full access and right to withdraw all of the funds in an account, even if that is more than their respective individual contribution of fund into the account, but in Kentucky the mere right to withdraw all the funds from an account does not establish ‘ownership’ of all the funds.

For example, a joint account is established for a child’s education with the intent that the child is the owner of all the funds in the account even though many contributions into the account are made by others. If contributions to the fund are intended as gifts to the child,  “clear and convincing” documentation should be created to establish that intent to safeguard the account funds from the other’s creditors, KRS 391.310(1), supra.

Ownership of joint bank accounts is presumed by statute to depend upon who contributed the funds to the account, subject to proof of a different intention. But, with bank account judicial garnishments, Kentucky courts have held that a party to a joint account is initially presumed to own the entire joint account for procedural purposes. The debtor or other account co-owners must claim and prove their respective contributions to the account to overcome that presumption, or prove an intention that the non-contributor has a greater ownership interest than their relative contributions would indicate. See Brown v Commonwealth of Kentucky, 40 S.W.3d 873 (Ky. App. 1999)

Brown, supra, stated in passing the best procedural practice would be for the non-debtor joint owner of the account to intervene as an interested party pursuant to Civil Rule 24.01 and assert his or her ownership rights directly.

Distraint for Rent or Garnishment - Kentucky Law

This is a very long explanation of not very much.

Residential landlord and tenant law is complicated in Kentucky because the Uniform  Landlord and Tenant Act (URLTA), as enacted  by the Kentucky legislature, applies to residential renters in some parts of the Commonwealth, but not in other parts. In Kentucky, URLTA is available as a local government option, to be enacted as local governments see fit, or not. Consequently, whether the provisions apply to any particular residential tenancy depends upon the geographic location of the residence. Generally speaking, the larger urban centers in Kentucky, such as Louisville and Lexington, have locally adopted URLTA but the more rural areas have not.

The URLTA provisions do not apply to commercial and agricultural renters, wherever they may be located in the Commonwealth. URLTA applies only to residential tenancies in areas that have adopted that law locally.

Kentucky landlords have a statutory lien for unpaid rent on the tenant’s personal property, which may be recovered by attachment or by action, KRS 383.010, et seq., even if the rent debtor’s property is in the possession of a third party. KRS 383.020(1) states, “A distress warrant or attachment for rent shall bind, and may be levied upon, any personal property of the original tenant found in the county . . . .” This language indicates the subject personal property of the rent debtor does not necessarily have to be found on the leased premises. This landlord remedy is traditionally known as distraint for rent. The URLTA, on the other hand, abolishes distraint for rent, KRS 383.680, for residential tenants, in those areas where URLTA applies.

Seizing a person’s personal property in the hands of a third party to satisfy a debt for rent has the same look and feel as does a non-wage garnishment, but it has an entirely different statutory foundation.

The Complexity of Student Loans - Kentucky Edition

There are two general categories of student loans.

1. Government originated or guaranteed student loans, and;
2. Non-government originated uninsured student loans.

Both 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 depend 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 federal Debt Collection Improvement Act of 1996. Most student loans from the federal government originate from the Department of Education. These are subject to the procedures contained within 34 Code of Federal Regulations (CFR) Part 34.

The federal Department of Health and Human Services helps fund specialized loan programs for medical and nursing students. These health profession student loan funds are established and administered by medical or nursing schools which do not have the legal authority for non-judicial administrative garnishment debt collections. School administered health profession student loan debts are collected through normal judicial procedures. See: 42 CFR Part 57, Subparts C & D. Although these school based programs are regulated and partially funded with federal money, the loans are administered and collected by non-government entities.

Administrative wage garnishments to collect student loans guaranteed by a state loan insurance program are authorized by the federal Higher Education Act and corresponding state statutes and regulations. The administrative wage garnishment procedures used by the Kentucky Higher Education Assistance Authority (KHEAA) are contained in Kentucky Administrative Regulation 11 KAR 3:100. These guaranteed student loans are made and administered by private lenders. Initial collection of delinquent guaranteed loans is undertaken by the private lenders but ultimately, defaulted loans are transferred to KHEAA which pursues final collection methods, including administrative wage garnishment.

The Kentucky Higher Education Student Loan Corporation (KHESLC) was created by Kentucky Revised Statute 164A in 1978 as an independent public corporation and political subdivision of the Commonwealth. KRS 164A.240(2)A3 specifically authorizes KHESLC to establish and use administrative garnishment to collect defaulted student loans.

The KHESLC and the KHEAA share a common board of directors, executive director, staff and office space and by statute, KRS 164A.050(12). They also provide technical, clerical and administrative assistance to each other. In addition to its other functions, KHESLC makes direct insured student loans. Presumably, the direct student loans made by KHESLC are insured by KHEAA.

The complex inner workings of these two public Kentucky corporations are unimportant to a student loan debtor. For all practical purposes, it seems, KRS 164A.050(13), a direct insured student loan from KHESLC is collected the same as an insured student loan from a private lender.

There are countless non-government sources for uninsured student loans, ranging from large financial institutions to small loan funds established by local civic or non-profit organizations. These are ordinary private loans that are recovered through standard debt collection and judicial processes.

Wage and non-wage garnishments to collect ordinary uninsured student loans from private lenders are subject to 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 is being collected, who currently owns the loan and who is collecting a delinquency.  However complicated the abstract legal framework may appear, it is actually fairly simple when compared to how the student loan business is implemented in actual practice. For example, the Kentucky Higher Education Student Loan Corporation, a public corporation, may administer loans originated by independent private non-profit corporations and then subcontract collections to a private debt collector. The loan account may bounce around among different organizations depending upon the phase of loan repayment, delinquency or default.  Selling loans in the secondary market is another common practice among lenders, possibly including buy-back provisions on default, so the financial institution or organization a borrower sends his or her payments to and ownership of the debt may change during the life of the loan. The ownership, servicing and collection of student loans may be divided among different organization and all may shift over time.

It can become very confusing for a debtor. Keep good records and keep your lender updated on your mailing address so that you always receive important notices, which you faithfully collect and retain in a file.

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. 

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 . . . .

KENTUCKY CIRCUIT COURT CLERKS' MANUAL
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.

The online version of the Clerks Manual is the official version and is current as of the date you are viewing it online. BE ADVISED THAT THE CLERKS MANUAL IS SUBJECT TO REVISION AT ANY TIME AS A RESULT OF CHANGES NECESSARY PURSUANT TO STATUTE, COURT RULE, AND CASE LAW, AS WELL AS LEGAL INTERPRETATIONS MADE BY THE AOC OFFICE OF LEGAL SERVICES.

* * * *

pp 293 - 296

GARNISHMENT AFTER JUDGMENT
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).

Fee

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.

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."

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) . . .
"(d)

"(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.

"(e)

"(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.

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.

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.

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.

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.

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.

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.