ROBERT H. JACOBVITZ, United States Bankruptcy Judge.
Debtors claimed an exemption under New Mexico's wage garnishment statute, N.M.S.A. 1978 § 35-12-7, in certain funds deposited pre-petition into their checking account at Wells Fargo Bank. The Chapter 7 Trustee and Xerox Corporation objected, asserting that the New Mexico garnishment statute is inapplicable for use by a debtor in bankruptcy to claim an exemption in otherwise non-exempt assets.
Debtors filed a voluntary petition under Chapter 7 of the Bankruptcy Code on December 29, 2017. See Docket No. 1. Debtors elected to claim exemptions under New Mexico law.
Debtors amended their claim of exemption under N.M.S.A. 1978 § 35-12-7 to reduce the amount of the claimed exemption in the funds on deposit in their checking account at Wells Fargo Bank to $1,893.00. See Docket No. 35.
The Court held a status conference on August 16, 2018 because there was no evidence before the Court that the source of the funds in the Wells Fargo Bank checking account in which the Debtors claim an exemption under N.M.S.A. 1978 § 35-12-7 are the proceeds of the Debtors' wages. Following the status conference, the parties filed Stipulated Facts Regarding Objection to Debtors['] Claim of Exemption ("Stipulation"). See Docket No. 44. The Stipulation establishes that the total amount of the funds on deposit in the Wells Fargo Bank checking account on the petition date was $2,601.98. Id. Of that amount, $1,819.02 was attributable to wages, and $782.96 was attributable to non-wages. Id.
The objections raise the issue of whether the New Mexico garnishment statute
Courts examining the question of whether a state law garnishment statute affords debtors in bankruptcy an exemption in wages have come to opposite conclusions. Compare, e.g., In re Urban, 262 B.R. 865 (Bankr. D. Kan. 2001) (debtors could claim an exemption in bankruptcy under Kansas's wage garnishment statute), In re Robinson, 241 B.R. 447 (9th Cir. BAP 1999) (Oregon garnishment statute provides debtors in bankruptcy with an exemption in wages), and In re Haraughty, 403 B.R. 607 (Bankr. S.D. Ind. 2009) (Indiana wage garnishment statute afforded debtors a bankruptcy exemption in a portion of wages), with, e.g., In re Doughman, 263 B.R. 905 (Bankr. D. Kan. 1999)
To determine whether the wage garnishment exemption contained in the New Mexico garnishment statute applies to proceeds of wages on deposit in a bank account, the Court will first examine the garnishment process in New Mexico. A creditor may garnish the following: 1) a debt owed to a defendant that is not exempt from garnishment; or 2) personal property belonging to the defendant. N.M.S.A. 1978 § 35-12-1. Wages are a form of debt owed to a defendant.
To initiate a garnishment, a creditor serves a writ of garnishment on a third-party garnishee whom the creditor believes either 1) is indebted to the defendant; or 2) is in possession of property that belongs to the defendant. See N.M.S.A. 1978 § 35-12-2 (service on garnishee); NMRA, Rule 1-065.2(B) (service of writ of garnishment). Service of the writ of garnishment after entry of a judgment "has the effect of attaching all personal property, money, wages or salary in excess of the amount exempt under Section 35-12-7 1978... in the garnishee's possession ..."
To garnish wages, a judgment creditor serves a writ of garnishment on the judgment debtor's employer, who becomes the garnishee. The garnishment exemption statute caps the amount of disposable earnings for any pay period that can be garnished. N.M.S.A. 1978 § 35-7-12.
Because a writ of garnishment never attaches to wages and salary exempt from garnishment, a judgment debtor is not required to do anything to claim an exemption in wages under New Mexico's wage garnishment statute.
A garnishee who employs the judgment debtor continues to pay the judgment creditor the non-exempt portion of the debtor's wages until 1) the judgment is paid in full, or 2) the garnishee no longer employs the judgment debtor. See N.M.S.A. 1978 § 35-12-4(D) (if the garnishee employs the debtor, the judgment orders the garnishee to pay the creditor the non-exempt portion of the judgment debtor's wages until the judgment is satisfied, or the employment relationship is terminated, and the garnishee notifies the judgment creditor in writing that it no longer employs the judgment debtor). If the judgment debtor files a voluntary petition under the Bankruptcy Code, the automatic stay imposed by 11 U.S.C. § 362 stops the garnishment. See 11 U.S.C. § 362 (with exceptions, the automatic stay imposed upon the filing of a bankruptcy petition stays enforcement of a pre-petition judgment against the debtor and stays any act to collect a pre-petition claim against the debtor).
The New Mexico general exemption statute is set forth in N.M.S.A. 1978 §§ 42-10-1 to 42-10-13. That statute grants exemptions against certain real and personal property. Unlike the wage garnishment exemption, which is self-executing, any person desiring to claim an exemption under the general exemption statute must file a claim of exemption in the appropriate court. See N.M.S.A. 1978 § 42-10-13 ("Any person desiring to claim that property is exempt ... shall file his claim of exemption... in the appropriate court ..."). For writs of execution and writs of attachment issued by a state district court, the New Mexico Rules of Civil Procedure set forth a procedure for claiming the exemptions of personal property under N.M.S.A. 1978 §§ 42-10-1 to 42-10-7. See NMRA, Rule 1-065(J) and Rule 1-065.1(C). For writs of garnishment other than wage garnishments, NMRA, Rule 1-065.2(G) and (H) set forth a procedure whereby the judgment debtor must file a claim of exemption with the court and serve the claim of exemption on the judgment creditor and garnishee to preserve a claim of exemption. Failure to timely file and serve a claim of an exemption in personal property available under N.M.S.A. 1978 §§ 42-10-1 to 42-10-7 results in waiver of the exemption. See NMRA, Rule 1-065.2(I) ("If the judgment debtor fails to [timely] file a claim of exemption ... the judgment debtor shall be deemed to have waived the right to claim a statutory exemption other than wages.").
As with all questions of statutory construction under New Mexico law, interpretation of the wage exemption provisions of the New Mexico wage garnishment statute depends on the meaning of the language used and the intended purpose of the statute. See Youth & Families Dep't v. Maurice H. (In re Grace H.), 2014-NMSC-034, ¶ 34, 335 P.3d 746, 752) ("`Our principal goal in interpreting statutes is to give effect to the Legislature's intent.' To glean the Legislature's intent, the Court `first turn[s] to the plain meaning of the words at issue.'") (quoting Griego v. Oliver, 2014-NMSC-003, ¶ 20, 316 P.3d 865). To discern the meaning of a statute, the Court first looks to the language of the statute itself; if the meaning is clear, the inquiry ordinarily is complete.
A careful examination of the New Mexico garnishment statute leads to the conclusion that the wage garnishment exemption contained in the statute applies only to wages or salary due from the employer to the judgment debtor and does not apply to wages or salary once paid to the judgment debtor. Section 35-12-8 requires
The self-executing nature of the wage garnishment exemption also supports the conclusion that the exemption does not apply to the proceeds of wages on deposit in a bank account. Unlike exemptions claimed under the New Mexico general exemption statute, there is no mechanism in the garnishment statute for a garnishee who is not the debtor's employer to withhold any exempt proceeds of wages from the judgment creditor. The judgment debtor does not serve a wage garnishment claim of exemption on the judgment creditor or garnishee and does not file a claim of a garnishment exemption with a court.
The statutory form of writ of garnishment, contained in N.M.S.A. 1978 § 35-12-18, further reinforces the conclusion that the garnishment exemption applies only to wages due from the employer to the judgment debtor. Section 35-12-18 provides that writs of garnishment must be in substantially the form set out in that section. As it relates to wages, the statutory writ of garnishment form states that, if the writ was issued in aid of execution of judgment, it "attaches wages or salary due from you to the defendant" in excess of the amount exempt from garnishment under N.M.S.A. 1978 § 35-12-7(A). N.M.S.A. 1978 § 35-12-18 (emphasis added). The statutory form also prohibits the garnishee from paying the nonexempt amount to the judgment debtor. Id. As it relates to wages, the required statutory form of writ of garnishment is designed only for garnishing wages due from the employer to the judgment debtor and makes no sense if it were applied to garnish the proceeds of wages on deposit in a bank account.
Once wages or salary are paid and deposited into a debtor's bank account, a debtor must rely on the exemptions available under New Mexico's general exemption statutes to protect such funds. See, e.g., N.M.S.A. 1978 § 42-10-1 (providing an exemption in personal property); N.M.S.A. 1978 § 42-10-10 (exemption in lieu of homestead). To claim an exemption under
If a writ of garnishment is served on a bank that is not the judgment debtor's employer, the bank does not owe any wages or salary to the judgment debtor. In that instance, neither the judgment creditor nor the bank must ascertain whether or to what extent funds on deposit in the judgment debtor's bank account are proceeds of wages or salary paid to the debtor. This is so because the New Mexico garnishment statute only requires a garnishee that is the judgment debtor's employer to withhold the nonexempt portion of the judgment debtor's wages as determined under N.M.S.A. 1978 § 35-12-7. See N.M.S.A. 1978 § 35-12-4(D).
Here, $1,918.02 of the funds in the Debtors' Wells Fargo bank account that the parties stipulate to be proceeds of wages are not subject to the wage garnishment exemption. The New Mexico garnishment statute is inapplicable to those funds because they are no longer wages the employer owes to the Debtors.
This approach is consistent with several other decisions which conclude that a state wage garnishment statute does apply in bankruptcy to protect wages once paid to the debtor and deposited into the debtor's bank account. See, e.g., In re Adcock, 264 B.R. 708, 711 (D. Kan. 2000) (concluding that wage garnishment restrictions apply only to wages before they are paid to the debtor, and that the debtor could not claim an exemption in funds on deposit in debtor's checking account as of the petition date); Thum, 329 B.R. at 855 (observing that "[o]nce he deposits the wages into a bank account ... the funds become fair game for creditors."); In re Resler, 282 B.R. 246, 248-49 (Bankr. D. Kan. 2002) (holding that pre-petition earnings deposited in the debtor's bank account prior to bankruptcy are not exempt under Kansas wage garnishment statute, reasoning that such funds on deposit in a debtor's account are subject to garnishment); Doughman, 263 B.R. at 908 (stating that the restrictions in the Kansas garnishment statute "apply only to wages before they are paid to the debtor.").
Section 35-12-7(A) of the New Mexico garnishment statute is likewise inapplicable to the remaining $782.96 in the Wells Fargo Bank checking account, which the parties stipulate are not attributable to wages. Debtors may only rely on the personal property exemption under N.M.S.A. 1978 § 42-10-1 to claim an exemption in funds on deposit in their bank account on the petition date.
Construction of the New Mexico garnishment exemption in this manner is consistent with the New Mexico Supreme Court's policy of construing exemption statutes liberally "to promote the humane policy [of preventing] families from becoming destitute as the result of misfortune through common debts which generally are unforeseen." Portal, 2002-NMSC-011,
However, wages deposited into a judgment debtor's bank account lose their character as wages for purposes of the New Mexico garnishment statute. As funds on deposit, they are only subject to the general property exemptions under New Mexico law.
Many judgment debtors whose wages are being garnished will not likely forfeit the remaining seventy-five percent of the exempt wages deposited into a bank account because a judgment creditor who wishes to garnish a debtor's bank account must serve a separate writ of garnishment on the bank. Unlike wage garnishments, garnishment of a judgment debtor's bank account is not continuing. See N.M.S.A. 1978 § 35-12-3 (the effect of garnishment on the garnishee is to attach personal property of the judgment debtor that is in possession of the garnishee as of the time the writ is served, or that comes into the garnishee's possession or control between the time of service and the time the garnishee files its answer to the writ). As a practical matter, wages paid to a judgment debtor will be unavailable to satisfy a judgment if the debtor spends the wages deposited into his or her bank account before a judgment creditor serves a writ of garnishment on the judgment debtor's bank, or if the wages are deposited in the account after the garnishee files its answer to the writ of garnishment.
If a debtor in bankruptcy could rely on the New Mexico wage garnishment exemption to exempt proceeds of wages deposited into a bank account, it is possible that a debtor could exempt wages in an amount much greater than the New Mexico wage garnishment exemption statute is intended to protect: a debtor could use a bank account to accumulate funds over time, and then shelter the funds from creditors by claiming exempt 75% of the total amount on deposit, regardless of amount, provided the debtor could trace the proceeds of the funds on deposit in the bank account to wages. As noted by the Bankruptcy Court for the Central District of Illinois:
Thum, 329 B.R. at 855.
Based on the foregoing, the Court will sustain the Trustee's objection to the Debtor's claimed exemption and disallow the Debtor's exemption claimed under N.M.S.A. 1978 § 35-12-7. The Court will enter a separate order consistent with this Memorandum Opinion.
