Employee Bonuses in Bankruptcy

A recent case should be of interest to bankruptcy lawyers in Colorado. When filing a bankruptcy for a Debtor who is working, it is always a question exactly how much in wages are due the debtor on the date of filing bankruptcy. This is because the bankruptcy law tracks Colorado’s wage garnishment law. In other words, the bankruptcy trustee can collect 25% of the debtor’s gross wages and use that money to pay creditors.

In this recent bankruptcy case, at the time of filing, the Debtor was eligible for a quarterly bonus and a year end bonus. The bonus program states that “no employee earns or otherwise becomes entitled to a payment…..prior to payment…(by the Company).” The company’s bonus program states that the restriction applies to both quarterly and yearly bonuses, and that such bonuses are paid 60 days after the end of the relevant period.

The Debtor filed bankruptcy after the end of these periods but before the payment(s) had been made by the Company. After the meeting of creditors the Debtor’s attorney discussed the quarterly bonus with the Trustee in the case but failed to mention the year end bonus. The quarterly bonus ended up being approximately $8,000 and the year end bonus ended up being $16,000.

After finding out about both bonus payments the trustee moved the bankruptcy court to revoke the bankruptcy discharge and turn over the $24,000 received by the Debtor. The bankruptcy court did revoke the Debtor’s discharge and ordered turnover of the bonuses.

The Debtor appealed and the appellate court reversed the bankruptcy court concerning all issues. The Court reasoned that since the Company’s documents relative the bonus program made clear that the Debtor had no right to the payments until the Company makes the actual payment, the Debtor had no ownership interest in the bonuses to disclose on her bankruptcy papers. Since the bonuses were not paid until after the case was filed the bonuses did not become property of the Debtor until actually paid by the Company.

A few things should be obvious from this case. First, the exact nature of any bonus program must be examined before filing for bankruptcy where an employee is potentially to receive bonuses after the bankruptcy is filed. Second, a bankruptcy lawyer should always disclose bonuses, even if they are ultimately property of the debtor and not subject to seizure by the bankruptcy trustee.

Your Colorado bankruptcy lawyer should also be aware that this case is not necessarily binding precedent in Colorado, but that the issue of bonuses pending at filing bankruptcy should be analyzed.

The Case is Siaver v. Klien- Swanson 12-6054 (8th Cir BAP March 22, 2013).

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