Bankruptcy is a legal proceeding in federal court that allows a person to be placed under an administrator to manage the payment of some or all debts. As employers, agencies must comply with federal requirements when bankruptcy involves an employee.
Chapter 13 of the Bankruptcy Code generally authorizes the restructuring of a person’s debts so the person is able to use future earnings to pay all or a substantial portion of those debts without being burdened by creditors’ collections actions.
State employees who declare bankruptcy under Chapter 13 must file a debt adjustment plan with the bankruptcy court. The plan must detail when and how the employee will pay his or her debts. A “bankruptcy trustee” is assigned to the debtor. The trustee is responsible for ensuring compliance with the plan.
A state agency may receive a bankruptcy court order from the trustee. The order requires the agency to turn over all or part of the debtor’s income to the trustee. Once the agency receives an order, the agency must stop withholding on any other garnishments except for child support withholding orders. Bankruptcy orders take priority over any other claim against an employee’s wages, including federal or state tax levies in place before the bankruptcy order.
The deduction will begin the pay period following the receipt of the order and continues until the agency is notified by the trustee to stop the deduction.
11 United States Code Annotated, Sections 1302(b)(5), 1321, 1322(a)(1), 1325(a), (c); Collier On Bankruptcy, Sections 1300.01 – 1300.02, 1300.46 (15th ed. rev. 1999); Texas Government Code, Section 659.002(d) (Vernon 2004).