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When does a New Jersey resident lose all right to funds in a bank account levied by a judicial officer on behalf of a judgment creditor? 

The answer:  “When the Superior Court of New Jersey enters an order compelling the bank to turnover or surrender the funds.”  If a turnover order is entered before a bankruptcy petition is filed, the debtor loses any interest or claim against the funds and cannot use a bankruptcy filing as a means to recover the funds. 

To better comprehend the issue requires a general understanding of the New Jersey debt collection process.

Writ of Execution and Levy

Pursuant to New Jersey Court Rule 4:59-1(a), a writ of execution is a method used to enforce a judgment for the payment of money.  Once a judgment creditor obtains a writ of execution the judgment creditor can cause a judicial officer (i.e., a county sheriff) to levy funds held by a bank in an account belonging to the judgment debtor.  Once a bank levy is made the judicial officer is required to mail notice of the levy to the judgment debtor.  New Jersey Court Rule 4:59-1(g).

Funds subject to a bank levy are viewed as a “debt owed” by the bank to the account holder or judgment debtor, and thus are subject to garnishment under New Jersey’s garnishment statute, N.J.S.A. 2A:17-63.  This statute, which requires a turnover motion to be filed after the levy is made, provides that:

After a levy upon a debt due or accruing to the judgment debtor from a third person, herein called the garnishee, the court may upon notice to the garnishee and the judgment debtor, and if the garnishee admits the debt, direct the debt, to an amount not exceeding the sum sufficient to satisfy the execution, to be paid to the officer holding the execution․

Id.

A turnover order issued pursuant to N.J.S.A. 2A:17-63 is a mechanism that direct[s] a bank holding the debtor’s funds to pay those funds over to creditors rather than to the debtor.” In re Flores, No. 10-34546, 2011 WL 44910 (D.N.J. Jan. 6, 2011).  A turnover order is granted only when “there has been a levy on a ‘debt due’ [to] a ‘judgment debtor’ and the ‘garnishee’ admits the ‘debt.’” PRA III, LLC. v. Capital One, N.A., No. L-1424-07, 2009 WL 2176656, at *9 ( App. Div. 2009) (quoting N.J.S.A. 2A:17-63).

In In re Gardner, Case No. 15-15192 (Bankr. D.N.J. March 31, 2016), the Honorable Michael B. Kaplan explained the turnover process and how the entry of a turnover order strips the judgment debtor of any interest in the levied funds:

The turnover proceeding represents the courts final determination as to the debtor’s interest in the property, as well as allowing all parties a final opportunity to be heard regarding the disposition of the property interest. In re Paul, No. 12-cv-07855(FLW), No. 11-31653(RTL), 2013 WL 3446994, *4 (D.N.J. July 9, 2013) (citing In re Flores, No. 10-34546(DHS), 2011 WL 44910, *3 (Bankr. D.N.J. Jan. 6, 2011)) . . . Therefore, once the turnover order is entered, the debtor is divested of his interest in the property, as that interest now belongs solely with the levying creditor. In re Flores, No. 10-34546(DHS), 2011 WL 44910, *3 (Bankr. D.N.J. Jan. 6, 2011).

Id. (emphasis added).

So what is the moral of the story for a judgment debtor contemplating a bankruptcy filing?

When served with a motion for turnover file for bankruptcy before a turnover order gets entered.  A bankruptcy filing creates an automatic stay that prevents a judgment creditor from obtaining a turnover order. However, a judgment debtor who files for bankruptcy after a turnover order is entered on a bank levy has no legal or equitable interest in the levied funds.  In re Paul, No. 12-cv-07855(FLW), No. 11-31653(RTL), 2013 WL 3446994, *4 (D.N.J. July 9, 2013).