In a recent decision, Judge Eugene Wedoff overruled an objection filed jointly by the Chapter 7 Trustee and a judgment creditor to an exemption for wages. In re: John Edward Mayer, 2008 Bankr. LEXIS 1720 (June 12, 2008).
In Mayer, the debtor, a psychologist, filed his petition for relief under Chapter 7 of the United States Bankruptcy Code on April 30, 2007. Id. at *3. Debtor filed his required schedules, in which he listed his assets and liabilities. Id. Four months after filing his petition, on August 29, 2007, Debtor amended schedules to include $12,232.97 as accounts receivables ("receivables") owed to him for his professional services. Id.The Debtor conceded that the receivables were property of the estate and not post-petition income and asserted an exemption thereto.
Section 11 U.S.C. §542 of the Bankruptcy Code, provides that the debtor shall deliver all property to the trustee who may then use, sell or lease the same to pay creditors. 11 U.S.C. §542. However, 11 U.S.C. §522 provides that a debtor may exempt certain property from the estate. Bankruptcy exemptions are determined and fixed "on the date of the filing of the petition." Id.citing 11 U.S.C. §522(b)(3)(A).
The debtor asserted that 85% ($10,398.00) of the receivables were exempt based on 735 ILCS 5/12- 803, the Illinois Wage Deduction Act ("the Act"). The Act sets the maximum amount that may be deducted from a debtor's unpaid wages by an employer to satisfy the judgment. The amount depends on the debtor's income level. Debtor argued that "[t]he maximum wages, salary, commissions and bonuses subject to collection under a deduction order, for any work week shall not exceed… 15% of such gross amount paid for that week." Id. at *5.
Both the appointed Chapter 7 Trustee and a judgment creditor objected to this claimed exemption on the basis that the exemptions provided in 735 ILCS 5/12-803 and 740 ILCS 170/4 applied only to wage deduction orders and wage assignments, not to receivables.
The court examined the statutory language to determine whether the effect of the exemption for unpaid wages, protected the asset [the receivables] from collection. The Act provides:
"Maximum wages subject to collection. The maximum wages, salary, commissions and bonuses subject to collection under a deduction order, for any work week shall not exceed the lesser of (1) 15% of such gross amount paid for that week or (2) the amount by which disposable earnings for a week exceed 45 times the Federal Minimum Hourly Wage prescribed by Section 206(a)(1) of Title 29 of the United States Code, as amended, or, under a wage deduction summons served on or after January 1, 2006, the minimum hourly wage prescribed by Section 4 of the minimum Wage Law, whichever is greater, in effect at the time the amounts are payable. This provision (and no other) applies irrespective of the place where the compensation was earned or payable and the State where the employee resides. No amounts required by law to be withheld may be taken from the amount collected by the creditor. The term "disposable earnings" means that part of the individual remaining after the deduction from those earnings of any amounts required by law to be withheld." 735 ILCS 5/12-803 (West 2008).
The Act has been held to protect debtors and their families, not creditors. In re: Johnson, 57 B.R. 635, 639 (Bankr. N.D. Ill. 1986). Further, Illinois case law suggests that receivables from clients of an independent contractor should be treated as wages for purposes of the wage deduction law. California Peterson Currency Exch., Inc. v. Friedman, 736 N.E. 2d 616, 618 (1st Dist. 2000).
In California Peterson, the judgment debtor was an outside "consulting" contractor or agent to defendant. Id.at 617. The First District held that the compensation received under the consulting contract fell within the definition of "wage" as defined by the Act, such that debtor was entitled to exempt 85% of that compensation from collection pursuant to section 12-803 of the Act. Id. at 619.
In this case, the court found that "unlike other assets that might be subject to levy, unpaid wages are neither in the possession of the Debtor nor owned by the debtor. Mayer, 2008 Bankr. LEXIS at *7. "Without a statute allowing a creditor to pursue the debtor's entitlement to such wages, they would be immune from collection." Id.The debtor was selfemployed. The court held that the 15% collection limitation of Act imposes an exemption as to 85% of a debtor's unpaid wages, applicable under the Bankruptcy Code. The court further found that the portion [85%] of the debtor's receivables that was not subject to collection as of the petition date was exempt from his bankruptcy estate. Id. *12-13.
Debtors should disclose everything to counsel during pre-bankruptcy counseling, which is why it is best to consult experienced bankruptcy counsel. Timing the filing of a bankruptcy may avoid certain risks and adversary litigation. For instance, if the debtor had collected the receivables before filing, the exemption issue would have been moot.
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Eileen Sethna, an associate in our Chicago office, concentrates her practice in litigation, bankruptcy and creditor's rights. She is admitted to practice in Illinois and the US District Court for the Northern Districts of Illinois and Indiana and the US Court of Appeals for the Seventh Circuit. Ms. Sethna previously gained experience in banking litigation with another Chicago law firm. She also clerked for the ARDC and the Cook County State's Attorney's Office. If you have any questions regarding this article, please call Eileen at 312-540-7648, or via esethna@querrey.com.
