This column was originally published in the Grand Rapids Business Journal on September 25, 2015.
On October 1, 2015, thanks to recent changes in the law, there will be several big changes to Michigan’s periodic garnishment process. Some changes will benefit creditors who are owed money, some will benefit debtors, and some will benefit employers who receive garnishments related to the debts of their employees.
Garnishments are one way a business can obtain payment from customers who do not pay their bills. If you file and win a lawsuit to collect an account, and the customer still does not voluntarily pay the bill, you may file garnishments against your customer’s employer and try to obtain payment from that employer.
These types of garnishments are called “periodic garnishments,” and can be sent to employers or anyone else who makes regular – or “periodic” – payments to your customer after a judgment is obtained. The changes in the garnishment laws do not affect “non-periodic” garnishments which, for example, include garnishments sent to banks.
Under the new law, periodic garnishments sent to a customer’s employer will remain in effect until the judgment is paid in full. Previously, periodic garnishments expired in six months.
Garnishments will continue to be paid in the order in which they are received by the judgment debtor’s employer. In other words, first come, first served. Thus, if an employer receives a garnishment from two creditors, the first garnishment will continue to be paid until it is paid in full, after which the second garnishment will be honored if appropriate.
Because periodic garnishments continue until they are paid in full, creditors will no longer have to refile their garnishments every six months. This should make it easier to collect judgments. However, under the changes, creditors will have to provide to the judgment debtor’s employer and the judgment debtor a statement every six months explaining the balance remaining on the judgment, including interest and costs.
The new law also requires creditors to file a release of the garnishment within 21 days after the judgment has been paid in full.
Changes for Employers
The fee paid to garnishees as reimbursement for the cost of responding to periodic garnishments has been increased from $6 to $35. This is helpful to employers who receive garnishments for their employees, but means that creditors may have to be more selective in the garnishments they file, because the $35 fee is not refundable if the judgment debtor does not work for the employer.
The changes in the law also include many more protections for businesses which receive garnishments for their employees. In the past, businesses that received garnishments for their employees could face a judgment being entered against them if they did not handle a garnishment properly. Even minor and unintentional mistakes by the employer could result in the employer being held responsible for the entire amount of the judgment previously entered against an employee. The changes to the garnishment laws help protect businesses from those disastrous results.
Additionally in the past, an employer who did not file a garnishment disclosure within 14 days after it received a garnishment could automatically have a judgment entered against it for the full amount owed by the debtor employee without any advance notice. With the changes in the law, an employer who does not file a disclosure within 14 days after receiving the garnishment must subsequently be sent a notice from the creditor informing the employer of its failure to respond to the garnishment. The employer then has 28 days to respond to the notice and begin withholding from the employee’s wages if the employee still works for the business.
If the business still does not respond to the garnishment or the notice sent by the creditor, then the creditor may request that a default be entered against the employer. The default must be sent by certified mail to the business’s principal place of business or registered agent.
If the employer does not respond to the default, the creditor may then request that the court enter a default judgment against the employer. The creditor must send a copy of the request for a default judgment by certified mail, return receipt requested, to the employer’s principal place of business or resident agent.
However, the court may not enter the default judgment if the employer – at any time before the default judgment is actually entered by the court – sends a disclosure certifying that the employer will begin withholding payments under the garnishment for the employee.
Even if a default judgment is entered against an employer, the employer may still file a motion within 21 days after the judgment is entered explaining – if appropriate – that its failure to comply with the garnishment was inadvertent or was the result of some other good-faith mistake, and informing the creditor and the court that the employer will begin withholding from the employee’s wages immediately.
If the employer files this motion, then the court must reduce the default judgment to not more than the amount that should have been withheld if the garnishment had been in effect for 56 days. In other words, if the court had entered a judgment against the employer for the full amount of the judgment owed by the employee, which is typical, the employer may reduce the judgment from that amount to the amount that the employer should have withheld under the garnishment.
Courts will also be required to set aside default judgments against employers if they did not owe their employees any payments or wages after the employer was served with the garnishment.
Finally, if a judgment is entered against an employer for not properly handling an employee garnishment, the new laws allow the employer to recover from the employee’s future wages any amount that the employer was required to pay to the creditor.
All of the new changes apply to writs of garnishment issued after September 30, 2015.