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A legal procedure by which a creditor can collect what a debtor owes by reaching thedebtor's property when it is in the hands of someone other than the debtor.

Garnishment is a drastic measure for collecting a debt. A court order of garnishment allows acreditor to take the property of a debtor when the debtor does not possess the property. Agarnishment action is taken against the debtor as defendant and the property holder as

garnishee. Garnishment is regulated by statutes, and is usually reserved for t he creditor whohas obtained a judgment, or court order, against the debtor.

A debtor's property may be garnished before it ever reaches the debtor. For example, if adebtor's work earnings are garnished, a portion of the wages owed by the employer go

directly to the Judgment Creditorand is never seen by the debtor.

Some property is exempt from garnishment. Exemptions are created by statutes to avoidleaving a debtor with no mean s of support. For example, only a certain amount of workincome may be garnished. Under 15 U.S.C.A. 1673, a garnishment sought in federal courtmay not exceed 25 percent of the debtor's disposable earnings each week, or the amount bywhich the debtor's disposable earnings for the week exceed thirty times the federal minimumhourly wage in effect at the time the earnings are payable. In Alaska, exemptions include a

burial plot; health aids necessary for work or health; benefits paid or payable for medical,surgical, or hospital care; awards to victims of violent crime; and assets received from a

retirement plan (Alaska Stat. 09.38.015, .017).

Because garnishment involves the taking of property, the procedure is subject to DUEPROCESS requirements. In Sniadatch v. Family Finance Corp. of Bay View, 395 U.S. 337, 89S. Ct. 1820, 23 L. Ed. 2d 349 (1969), the U.S. Supreme Court struck down a Wisconsinstatute that allowed pretrial garnishment of wages without an opportunity to be heard or tosubmit a defense. According to the Court, garnishment without prior notice and a priorhearing violated fundamental principles of due process.

Garnishment may be used as a provisional remedy. This means that property may begarnished before a judgment against the debtor is e ntered. This serves to protect the

creditor's interest in the debtor's property. Prejudgment garnishment is usually ordered by acourt only when the creditor can show that the debtor is likely to lose or dispose of theproperty before the case is resolved. Property that is garnished before any judgment isrendered is held by the third party, and is not given to the creditor until the creditor prevails inthe suit against the debtor.

Garnishment is similar to lien and to attachment. Liens and attachments are court orders thatgive a creditor an interest in the property of the debtor. Garnishment is a continuing lienagainst nonexempt property of the debtor. Garnishment is not, however, an attachment.Attachment is the process of seizing property of the debtor that is in the debtor's possession,whereas garnishment is the process of seizing property of the debtor that is in the

possession of a third party.

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Methods of lending Tandon Committee Report (A BriefSummary)

Like many other activities of the banks, method and quantum of short-term finance that can be

granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was

exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash

Tandon.

The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was

constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial

institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's

finance for working capital and suggest ways for optimum utilisation of Bank credit. This was the first

elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely

known as Tandon Committee report. Most banks in India even today

continue to look at the needs of the corporates in the light

of methodology recommended by the Group.

As per the recommendations of Tandon Committee, the corporates should be discouraged from

accumulating too much of stocks of current assets and should move towards very lean inventories and

receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-

process and Finished Goods which a corporate operating in an industry should be allowed toaccumulate These levels were termed as inventory and receivable norms. Depending on the size of

credit required, the funding of these current assets (working capital needs) of the corporates could be

met by one of the following methods:

FirstMethod

of

Lending:

Banks can work out the working capital gap, i.e. total current assets less current liabilities other than

bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term

borrowings. This approach was considered suitable only for very small borrowers i.e. where the

requirements of credit were less than Rs.10 lacs

Second

Method

of

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Lending:

Under this method, it was thought that the borrower should provide for a minimum of 25% of totalcurrent assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit

for purchases and other current liabilities will be available to fund the build up

of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities

inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working

capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be

appraised (calculated) under this method.

Third Method of Lending: Under this method, the

borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT

ASSETS, which has been defined by the Study Group as representing the absolute minimum level of

raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity

of production and a minimum of 25% of the balance current assets should be financed out of the long

termfunds

plus

termborrowings.

(This method was not accepted for implementation andhence is of only academic interest).

As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the level

of current assets. The classification of assets and balance sheet analysis, therefore, assumes a lot of

importance. RBI has mandated a certain way of analysing the balance sheets. The requirements of this

break-up of assets and liabilities differs slightly from that mandated by the Company Law Board

(CLB). The analysis of balance sheet in CMA data is said to give a more detailed and accurate picture

of the affairs of a corporate. The corporates are required by all banks to analyse their balance sheet in

this specific format called CMA data format and submit to banks. While most qualified accountants

working with the firms are aware of the method of classification in this format, professional help is

also available in the form of Chartered Accountants, Financial Analysts for this analysis.

When a general lien is imposed, the creditor is granted the right to claim ownership of both

the real and thepersonal property of the debtor in order to settle the debt. This means that thecreditor may choose to seize assets like the balances of any bank accounts the debtorcurrently has, any type of real estate, and even stocks and bonds that are owned by the debtor.

Even property such as motor vehicles, furnishings, and jewelry are subject to the settling of ageneral lien. Any asset that can be converted into cash for the purpose of paying off the debt

is covered under the terms of the lien.

Depending on the laws that apply in a givenjurisdiction, there may be some limitations on

what type of assets can be seized in order to satisfy a general lien. In some countries, it is not

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permitted to seize undeveloped land that is owned by the debtor, unless the land is directlyconnected with the debt itself. Other countries place limits on the seizure of certain types of

property such as the primary residence of the debtor, while allowing the seizure of secondaryproperties that the debtor does not claim as a primary residence. Again, this is based on the

assumption that the primary residence is not directly related to the debt that is being settled

by the lien.

When the general lien is imposed to settle debts such as outstanding taxes owed to a local or

national government tax agency, there are rarely any real limitations on the general lien. The

agency can invoke a lien that includes the right to seize both real and personal property, as

well as the balances of bank accounts and even the wages and salary of the debtor. In any

case, the lien remains in effect until the total balance of the debt is paid.

Related topics

Notice Of Lien

Filing A Lien

Lien Service

General Liens

Mechanical Lien

Lien Release Forms

Construction Lien Law

The imposition of a general lien is usually considered a last resort. Most entities will attempt

to work out payment arrangements with a debtor before proceeding with this serious step.

Only in situations where the debtor has been unresponsive or hostile to those attempts with

the situation escalate to the point where a general lien is imposed.