People from all walks of life file bankruptcy, and often people who work in commission-based jobs are more at risk for running into financial trouble than their salaraied brethren. So imagine the following scenario: You are a real estate agent who has run into a dry-spell, but right before you file for bankruptcy, you close a big deal, open escrow, and receive the money a day AFTER you file. What can you do?
What Happens When You File Bankruptcy
First we need to discuss what happens when you file a Chapter 7 bankruptcy. Under Section 541 of the Bankruptcy Code (11 U.S.C. sec. 541), a bankruptcy “estate” is created when a person files for bankruptcy protection. This estate is comprised of everything the debtor owns or has an interest in on the day of filing the bankruptcy papers, anything the debtor becomes entitled to through bequest, inheritance, devise, or through life insurance proceeds during the 180 days after the petition day, and anything that is the proceeds of estate assets. In a Chapter 7 bankruptcy, the Chapter 7 trustee is the individual assigned to sell off your assets for distribution to your creditors. This could include sales commissions if the services earning the commission were performed before you filed bankruptcy.
Fortunately, Section 541(a)(6) specifically exempts, or carves-out, the post-petition income of the debtor from property of the estate. What this means is that any money or services you earn as a result of post-petition work performed is not property of the estate and cannot be seized by the Chapter 7 trustee to distribute to your creditors.
So Can I Keep My Sales Commissions or What?
In the case of the hypothetical real estate agent, the answer is not clear. While the debtor closed the sale of his client’s real property after the bankruptcy was filed and did not theoretically earn the fee until the deal was closed, a majority of the work (showing the house, listing the house on the MLS, etc.) that the agent was being paid a commission for was performed pre-petition. In situations like this where there are no prior court cases on point to give the court guidance, your lawyer would likely try to work out a favorable deal with the Chapter 7 trustee to pay over only a portion of the commissions given the chances that a judge could rule either way on the issue. The more work performed pre-petition for money received post-petition, the more likely the trustee will be successful in asking the court to order the debtor to turn over the commissions. However, a very good argument could be made that no commissions are property of the bankruptcy estate that were paid after the bankruptcy case was filed because the real estate agent did not yet have a RIGHT to those commissions until closing. Practically speaking, litigation is expensive, and working out a deal with an aggressive trustee is usually going to be the best route, depending on how much money is at stake.