There have been several Florida appellate decisions which have denied the exemption to debtors who paid themselves salary from a business they owned by themselves when the debtor alone controlled the amount of his salary and profit distributions. Most of these cases involved debtors who manipulated compensation to take advantage of the wage exemptions. For example, one debtor paid himself “salary” in varying amounts depending upon his business cash flow, and another disbursed himself a large amount of money from his business as a “bonus” just before filing bankruptcy. In these cases, the owner’s compensation was not a fixed periodic payment of salary.
I came across the issue again in a Florida bankruptcy decision decided last year. The bankruptcy court denied the bankruptcy debtor the right to exempt money earned as a sole proprietor under the head of household exemption. The court noted in a footnote that, “This is not an easy decision…” The court followed prior case law, as it should, but it also implied that the precedent from prior case when strictly applied may lead to unintended and unfair results. The court suggested that the issue eventually be referred on appeal to the Florida Supreme Court
I expect that the Florida courts will apply the head of household exemption to self-employed debtors who do not abuse the exemption. The purpose of the wage exemption is to permit debtors to provide for their families, and that this obligation and policy does not change just because the debtor is a self-employed entrepreneur. Court decisions to date make it even more risky for people to launch new businesses if they cannot segregate a portion of cash flow as their basic salary for the support of their family exempt from creditor claims.
Last updated on May 22, 2020