Under Illinois law, creditors have multiple tools at their disposal to collect judgments, including garnishment, personal citations, and third-party citations. These methods can be pursued simultaneously to maximize collection efforts. Section 735 ILCS 5/2-1402 empowers creditors to discover and apply a debtor’s non-exempt assets or income toward the satisfaction of a judgment. Specifically, the statute allows judgment creditors to:
“Discover assets for the purposes of examining the judgment debtor or any other person to discover assets or income of the debtor not exempt from the enforcement of the judgment, a deduction order or garnishment, and of compelling the application of non-exempt assets or income discovered toward the payment of the amount due under the judgment.”
This statutory framework provides creditors with broad authority to pursue judgment recovery through various avenues. However, when funds derived from garnished wages are deposited into a debtor’s bank account, their exempt status becomes a contentious issue under the Illinois Wage Deduction Act (WDA).
The Illinois Wage Deduction Act and Exempt Status of Garnished Wages
The WDA, outlined in 735 ILCS 5/12-801 et seq., limits the percentage of wages that can be garnished by creditors. Generally, no more than 15% of a debtor’s gross earnings or the amount exceeding 45 times the federal minimum hourly wage may be deducted. This statutory cap is designed to protect a debtor’s income and ensure they retain enough funds to cover basic living expenses.
However, once garnished wages are deposited into a bank account, they may lose their exempt status. Judge Heneghan, in a May 31, 2023, Memorandum Opinion and Order, reviewed this issue extensively and concluded:
“A compelling argument may be made that a judgment debtor’s wages lose any protected status once deposited into either the debtor’s bank account, or, as here, the bank account of a third party.”
The essence of Judge Heneghan’s reasoning is that, to qualify as “wages” under the WDA, the funds must still be owed by an employer to the judgment debtor at the time of enforcement. Once wages are paid and deposited into a bank account, they are no longer “owed” by the employer and thus lose their protection under the WDA. This interpretation aligns with decisions such as Meier v. Katz (In re Meier) (N.D. Ill. 2016), where a creditor was allowed to access wages deposited into a Debtor in Possession account.
This legal distinction underscores the importance of understanding the limitations of wage garnishment protections once funds are deposited and highlights the vulnerabilities judgment debtors face in supplementary proceedings.
Case Law on Wages Deposited in Bank Accounts
A series of court decisions have reinforced the principle that wages lose their exempt status once paid and deposited. Key cases include:
- PrivateBank & Trust Co. v. Gatto, 2018 IL App (2d) 170396-U: In this case, the court rejected the debtor’s claim that funds in a bank account funded entirely by garnished wages retained their exempt status. The court emphasized that under the WDA, “wages” are defined as compensation owed by an employer to a judgment debtor. Once those wages are paid and deposited, they cease to qualify as exempt wages under the statute.
- PNC Bank v. Udell, 2017 U.S. Dist. LEXIS 128320 (N.D. Ill. Aug. 13, 2017): The court ruled that the WDA does not provide ongoing protection for wages once they are deposited into a bank account. It explicitly stated, “money or other property that came from wages is [not] exempt from levy regardless of when the wages were earned.” Allowing perpetual exemption for deposited wages would contradict the purpose of judgment enforcement.
- In re Jokiel, 2012 Bankr. LEXIS 109 (Bankr. N.D. Ill. Jan. 5, 2012): This case clarified that the WDA limits only the percentage of wages that an employer may garnish but does not extend that exemption to wages once deposited into a bank account. The court found no legislative intent to shield deposited wages from collection efforts.
- In re Thum, 329 B.R. 848 (Bankr. C.D. Ill. 2005): The court held that the Illinois legislature did not intend for the WDA to offer permanent protection for wages once paid. Instead, the WDA provisions merely cap the percentage that an employer may garnish. The court reasoned that, had the legislature intended to exempt deposited wages, it would have explicitly done so.
- In re Radzilowsky, 448 B.R. 767 (Bankr. N.D. Ill. 2011): The court further underscored that the WDA “does not ‘forever sequester’ the debtor’s wages, or even unpaid wages.” Once wages are deposited into an account, the statutory protections no longer apply, leaving the funds open to collection efforts by creditors.
Can Creditors Garnish Wages and Simultaneously Seek a Turnover Order?
Illinois law permits creditors to use multiple enforcement tools concurrently, meaning a creditor could garnish wages and later seek a turnover order for earned funds deposited into a bank account—even if those funds originated from garnished wages. This dual approach is legally permissible because the WDA’s protection ceases once the funds are paid to the debtor and deposited. If you are an employer dealing with a Citation to Discover Assets, we’ve also written a comprehensive blog on how to fill out the citation form from an employer’s perspective.
Why Debtors Should Work with Creditors Early
If you’re a judgment debtor, it’s essential to understand that creditors have various tools to enforce a judgment. In Illinois, these tools can include wage garnishments, bank account citations, and personal citations. While your wages may be partially protected when garnished directly from your paycheck, these protections often end once the funds hit your bank account. Under the Illinois Wage Deduction Act (WDA), wages deposited into a bank account lose their exempt status, making them vulnerable to creditor action.
Once a creditor believes you are hiding assets or not cooperating, they can escalate enforcement efforts, which may result in frozen bank accounts or simultaneous garnishments from multiple sources. This can leave you without access to the funds you need for basic living expenses, worsening your financial situation.
Why Cooperation Matters
It’s always better to address the issue with the creditor as early as possible. Open communication and a willingness to cooperate can prevent your financial situation from spiraling out of control. Most creditors prefer working with debtors who are making an effort to repay, but if they feel you are being dishonest or uncooperative, they will use every legal tool at their disposal.
Ignoring citations or garnishments doesn’t make them go away. In fact, it can lead to default actions, which make it even harder to recover financially. When creditors believe they’re being misled, they may:
- Freeze your bank accounts, preventing you from paying bills.
- Pursue multiple enforcement actions, like simultaneous wage garnishments and bank citations.
- Use aggressive legal tactics that could complicate your ability to maintain a steady income.
Avoiding Common Pitfalls
- Don’t Ignore Citations or Garnishments: Responding to legal notices is crucial. Ignoring them will only escalate the situation.
- Keep Detailed Records: Document all interactions with creditors. This can help protect you in case issues arise down the line.
- Stay Honest: Misleading creditors or attempting to hide assets will only lead to harsher enforcement actions.
A Balanced Approach
For creditors, being overly aggressive can backfire, pushing a debtor to stop working or even file for bankruptcy. However, if they perceive dishonesty or a lack of cooperation, they are more likely to escalate enforcement. By respecting creditors’ demands and cooperating early on, you can negotiate manageable payment terms and avoid severe consequences like multiple simultaneous enforcement actions. Being proactive and transparent with your financial situation is often the easiest and most effective way to resolve the issue.
