Court Finds Self-Employed Debtor Cannot Exempt Wages As Head Of Houshold

Creditors cannot garnish wages paid to a person who is head of household. I have written previously about state court decisions which denied this exemption to debtors who were paid from a small business the debtor owned and controlled. State courts have made if it difficult for business owners to pay themselves exempt wages.Now, a Florida bankruptcy court has issued a decision on this topic, finding once more that a business owner could not exempt wages he received from his own business. Theoretically, self-employed debtors are not prohibited from exempting that part of compensation denominated as wages, salary, or commissions. The problem arises when the business owners pattern and practices make their compensation look more like business profits rather than a steady wage. A business pays its employees in most cases a consistent periodic wage. Payments look more like profit distributions when the payments  vary with the profit and cash flow of the business. Profit distributions to a head of household are not exempt. Increasing the debtor’s salary at the expense of profit distributions shortly before a judgment is entered also makes suspect the wage characterization. In this latest court decision on the issue the bankruptcy court denied the wage exemption of money the debtor received from his own business considering the absence of a written employment agreement, the irregularity of the timing and amount of “salary” payments, and the fact that salary resumed and increased in the months just before the bankruptcy. This bankruptcy case illustrates, as did the prior state court cases, that the self-employed debtor’s eligibility for head of household wage exemption depends on the facts of each case and particularly on whether the debtor’s compensation is similar to compensation payable to non-owner employees in the same business.  In re McDermott, Case No. 6:09-10942

Page last updated on May 22, 2020

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