If you receive a bonus from your employer after you file for Chapter 7 bankruptcy, whether you can keep it depends on:
- when you earned the bonus
- when it became payable to you, and
- whether or not it was vested at the time that you filed for bankruptcy.
The Chapter 7 Bankruptcy Estate
When you file for Chapter 7 bankruptcy, a trustee is appointed to liquidate or sell your assets. You are allowed to keep some assets -- called exempt assets. But if an asset is not exempt (called nonexempt property), it comes under the control of the trustee. Your nonexempt property makes up what is called the bankruptcy estate. (Learn more about bankruptcy exemptions in Chapter 7 bankruptcy.)
Generally, the date that you file for bankruptcy is the date that determines what becomes property of the bankruptcy estate. But it includes more than just what you have in your possession on the date that you file. Property that you are entitled to receive may also be included in the bankruptcy estate, even if you have not yet received it. (Learn more about property in the bankruptcy estate.)
Employment bonuses that are paid to you at the sole discretion of the employer are called discretionary bonuses. The employer retains the right to decide whether or not to award the bonus right up until it is paid, and at no point do you have the right to demand payment. This may even be the case where your employer has a written bonus program in place with or without definitive calculations to determine the bonus amount if the employer chooses to award it. The key is whether the employer retains the right to decide whether it will actually be paid.
Bonuses that remain discretionary up until the time they are paid do not become property of the Chapter 7 bankruptcy estate if the case is filed before the bonus is paid. This is because the employee’s right to the bonus does not vest until it the bonus is actually paid.
Bonuses That Have Been Awarded but Not Yet Paid
If your employer has committed to pay a bonus before you file for Chapter 7, but you have not yet received it as of the filing date, it will likely be property of the estate and can be taken by the trustee. As long as you have acquired the right to receive the bonus as of the date of your bankruptcy filing, it is vested and can be used by the trustee to pay your creditors. This is true even if there are strings attached. For example, courts have found that bonuses an employer promises to pay if the company makes a profit, are property of the bankruptcy estate even when the bankruptcy was filed before it was determined that the company would make a profit.
The trustee can’t make the employer pay the bonus before it is due to be paid but, when it is paid, at least the portion earned before you filed for Chapter 7 bankruptcy must be turned over to the trustee.
Bonuses Due Under a Contract
Bonuses due to you under a contract are property of the bankruptcy estate. If your employer has committed to pay you a bonus as part of your compensation, the bonus (or the portion earned before you filed for bankruptcy) is property of the bankruptcy estate because you acquired the right to the bonus before you filed. It doesn’t matter whether there are additional requirements in order to receive the bonus -- such as continuing in your employment or reaching certain sales goals.
Claiming a Bonus as Exempt
If you have determined that your bonus will be property of the estate, and you can’t wait until after you receive your bonus to file for bankruptcy, you still might be able to keep all or a portion of it if you can claim it as exempt. The exemptions available to you differ depending on the state you live in and how long you have lived there before you filed. Even if there is not a specific exemption available for the bonus income, you may be able to claim it as exempt under a wildcard exemption, which can often be applied to property that you choose. (Find the bankruptcy exemptions available in your state.)