Fines owed to city exempt from bankruptcy

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
I filed for bankruptcy in February 2014. I have a judgment against me for $3,000 for a Chicago city citation from Streets and Sanitation. My only income is insurance disability income. Should this citation fine have been discharged with the bankruptcy? Is the insurance disability income protected from garnishment? Please let me know your thoughts. -- Cindee


Dear Cindee,
I hope that this debt wasn't a significant part of your decision to file for bankruptcy, because bankruptcy generally wouldn't cause it to be discharged.

Most unsecured debts, such as credit card debts, personal loans and so on are discharged in Chapter 7 bankruptcy -- the wipe-the-slate-clean form of bankruptcy that most people think of. That's what it's for -- giving you a chance to start over, or in your case, so you can survive on disability benefits.

In most cases, however, certain debts are excluded from discharge in bankruptcy. These debts include back taxes, student loans, child support and fines owed to a governmental body. A citation from the city of Chicago is a fine, and so would not normally be dischargable in bankruptcy.

Federal garnishment laws wouldn't keep the city of Chicago from collecting on your private insurance disability payments, either. Federal laws apply to federal payments, such as SSI disability payments, not to private insurance disability payments.

Fortunately, the state of Illinois comes to your rescue in this case. Illinois state statutes on garnishment include a section 12-1001 that exempts "disability, illness or unemployment benefit(s)" from garnishment. According to New York attorney David Reischer, "These assets are called 'exempt,' meaning they cannot be taken by your creditors," says Reischer. "Disability insurance benefits cannot be garnished because they are exempt."

Every state has rules for which assets and forms of income can and cannot be garnished. Private insurance disability income may not be exempt from garnishment in every state. It's always a good idea to check with a lawyer or low-cost legal service in your state for specifics regarding your case.

You may need to take action to make sure your exempt income is not frozen or seized from your bank account, however. Unlike federal payments, such as Social Security benefits or Supplemental Security Income benefits, private insurance payments are not protected by federal rules that went into effect in 2011. That means the bank does not automatically tag your insurance disability income and make sure it's not taken by creditors.

You may want to notify your bank that your only income is from disability insurance, which is exempt from garnishment in the state of Illinois. You can also write to the city of Chicago and tell them the same thing. For help writing the letters, I suggest consulting a legal assistance program for low-income individuals in your state.

The laws of Illinois are meant to protect you from having your bank account garnished in just such a trying situation. Be sure to stand up for your rights so you can keep your benefits and use them for your basic living expenses, as they were intended.

See related: What benefits are exempt from garnishment?

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Updated: 11-12-2018