In Chapter 7 bankruptcy, almost all property you have an interest in at the time you file your case is property of your bankruptcy estate. This includes any assets you are legally entitled to but have not yet received. If an asset is property of the estate, the Chapter 7 bankruptcy trustee can use it to repay your creditors unless you can exempt the value of the property.
This means that whether you can keep a bonus you receive after filing for Chapter 7 bankruptcy depends on:
- whether you had a right to receive the bonus prior to filing your case, and
- whether you can exempt the bonus.
To learn more about how your property is treated in Chapter 7 bankruptcy, see our topic area on Your Property in Chapter 7 Bankruptcy.
When Did You Become Entitled to Receive the Bonus?
Even if you don’t receive your bonus check until after you file for bankruptcy, whether your bonus will be considered property of your bankruptcy estate depends on whether you became entitled to receive it before or after filing your case.
The Right to Receive a Bonus Is Vested After Your Filing Date
With a few exceptions, property you acquire or become entitled to after your filing date is not part of your bankruptcy estate. In most cases, whether you were entitled to receive a bonus at the time you filed your case will depend on your particular circumstances.
blurbIn a recent case, the 8th Circuit Bankruptcy Appellate Panel allowed a debtor to keep a bonus she received shortly after filing her case. In re Klein-Swanson, 488 B.R. 628 (8th Cir. B.A.P. March 22, 2013). The court found that the debtor didn’t have any ownership interest in the bonus because it was entirely discretionary and the employer’s program guidelines stated she was not entitled to the bonus until it was actually paid (which was after her filing date).
But keep in mind that if your bonus is not completely discretionary (for example, if you are guaranteed a bonus based on certain performance criteria), you may have a contingent interest that must be disclosed in your bankruptcy paperwork even if you have not yet met all performance requirements.
Contingent interests are a complicated area of bankruptcy law and courts have differing views on how they are treated depending on what portion of the services necessary to vest your interest were performed prior to bankruptcy. Talk to a knowledgeable bankruptcy attorney in your area if you expect to receive a significant bonus after your filing date.
The Right to Receive a Bonus Is Vested Prior to Your Filing Date
In certain circumstances, you may already be entitled to a bonus before you actually receive it. For example, if your employer’s guidelines state that you are guaranteed a bonus if you meet certain performance goals, your right to receive that bonus will typically vest when you achieve those goals. If you become entitled to receive a bonus prior to your filing date, it will be fair game for the trustee in your Chapter 7 bankruptcy unless you can exempt it (discussed below).
How to Keep Your Bonus in Chapter 7 Bankruptcy
If your anticipated bonus is property of your bankruptcy estate, the Chapter 7 trustee has the power to administer it in your case. If you want to keep your bonus, you must be able to exempt it. Each state (and the federal system) has a set of exemptions debtors can use to protect a certain amount of property in Chapter 7 bankruptcy. But exemptions differ greatly depending on where you live.
Some states have exemptions designed specifically to protect a certain amount of earned wages or bonuses. If your state doesn’t have a specific exemption that applies to your bonus payment, you may be able to use a wildcard exemption (which can typically be used to exempt any type of property) to protect it.
For more information on how exemptions protect your property in bankruptcy, see our Bankruptcy Exemptions topic area.