Many self-employed individuals, especially those who earn commissions such as a real estate agent face a more complex situation when it comes to how wages are treated in bankruptcy. In the bankruptcy case of Smith, Matthew J., In re (Smith v. Hanra¬han) a real estate agent was required to turn over his sales commissions to the bankruptcy trustee despite closing the deals and receiving the commissions after he filed bankruptcy.
The details of the bankruptcy case:
The debtor was a self-employed real estate agent who worked as an independent contractor for a realty company. Prior to filing his bankruptcy petition, the debtor represented a buyer in connection with the purchase of two adjacent parcels of real estate. Each parcel was owned by a different vendor. The debtor negotiated contracts to buy with each vendor. Some months thereafter, the debtor filed for Chapter 7 relief. The two deals had not yet closed.
Apparently, the real estate agent worked on the deals before and after filing bankruptcy. Well, the bankruptcy court ruled that the debtor actually earned the commissions before filing bankruptcy and because of this the commissions were the property of the bankruptcy estate. For self-employed debtors considering bankruptcy, take a careful look at your earnings.
Any wages earned before you file bankruptcy, but paid to you afterwards will most likely become the property of the bankruptcy estate, so plan accordingly.