State Violated Bankruptcy Discharge by Garnishing Wages

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By Daniel Gill

The Indiana Department of Workforce Development violated a debtor’s bankruptcy discharge when it attempted to garnish wages for unemployment over payments, an Indiana bankruptcy court ruled April 24 ( In re Todd , 2017 BL 134158, Bankr. S.D. Ind., No. 14-70736-BHL-7, 4/24/17 ).

The decision by Judge Basil H. Lorch III of the U.S. Bankruptcy Court for the Southern District of Indiana serves as a reminder that even state agencies are bound by the bankruptcy laws that protect a debtor against collection of discharged, or legally extinguished, debts.

John Todd and his wife, Dianna, filed for Chapter 7 bankruptcy on June 5, 2014. In Chapter 7, a debtor’s assets are liquidated by a trustee for the benefit of the debtor’s creditors, and most of the debtor’s debts are discharged.

Before he filed bankruptcy, Todd had made some unemployment claims and received unemployment benefits from the state.

Years prior to the bankruptcy case, the workforce development agency began investigating the propriety of those unemployment benefits. But it made no formal claim.

When Todd filed his bankruptcy case, he listed the the agency among his creditors, and it received notice of the case and of the deadline for filing objections to the debtor’s discharge.

Finally, after Todd got his discharge and the bankruptcy case closed, the agency got a determination that it had overpaid his benefits. It then began garnishing his wages.

Todd reopened his bankruptcy case to file a motion that the agency violated his bankruptcy discharge.

The court granted the motion. It rejected the state’s argument that the debts were post-petition (filed after the bankruptcy case began) because it did not make a final determination until September 2014. It ordered garnished earnings be returned, and the state had to pay Todd $1,500 for attorneys’ fees, plus costs.

The court noted that “the alleged debt arose by virtue of the IDWD’s prepetition payment of unemployment benefits to the debtor, which payments were subsequently found to be improper.”

The court stressed that the state agency was given notice of the bankruptcy and the date to object to the dischargeability of its claim, but failed to act within that time.

Todd was represented by Kevin S. Kinkade, Evansville, Ind. Deputy Attorney General Megan E. Binder represented the IDWD.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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