What Happens to Wages in Chapter 7 Bankruptcy?

Find out if you can keep earned but unpaid wages in Chapter 7 bankruptcy.

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When you file for Chapter 7 bankruptcy, the court appoints a bankruptcy trustee to administer almost all property you own (or are entitled to receive) at the time of filing your case. Unless an asset is exempt, the trustee may be able to take it and use it to pay back your creditors. Whether the trustee can go after your wages in Chapter 7 bankruptcy depends on:

  • whether you earned the income before or after filing your case, and
  • your state’s exemption laws.

To learn more about what happens to your assets in Chapter 7 bankruptcy, see our topic area on Your Property in Chapter 7 Bankruptcy.

Income You Earn After Filing Your Case

With a few exceptions, the trustee can’t go after property you become entitled to receive after filing for Chapter 7 bankruptcy. This means that you can keep all wages earned for work you did after filing your case. But if you are waiting to get paid for work you performed before your filing date, the trustee may be able to go after those earned but unpaid wages.

Income Earned Before Filing Your Case

If you are entitled to receive wages for work you performed before filing for Chapter 7 bankruptcy, those expected wages are property of your bankruptcy estate. You must disclose any earned but unpaid wages as an asset in your bankruptcy paperwork.

Because your earned but unpaid wages are part of your bankruptcy estate, they are fair game for the trustee. But whether the trustee will be able to take those wages depends on:

  • whether they are exempt, and
  • whether you need the money for necessary expenses.

How to Protect Your Earned But Unpaid Wages

In general, if you want to keep wages you earned before filing for bankruptcy (but will not receive until after your filing date), you must:

  • exempt them, or
  • prove to the court that you need them to cover your necessary expenses.

Exempt Your Wages

If you want to protect an asset in Chapter 7 bankruptcy, you must exempt it. This is also true for earned but unpaid wages. Depending on how often they get paid, most debtors will have some amount of earned but unpaid wages when they file for bankruptcy. Luckily, most states have a law that allows debtors to protect a certain amount of earned wages. In addition, some states have a wildcard exemption you can use to exempt any type of property including wages.

As a practical matter, if you are on a regular pay schedule and you get paid more than once a month, your unpaid wages will likely be small enough to exempt or not be worth the trustee’s time. But if you are expecting a sizeable amount of income, you may have to explain to the court why you should be allowed to keep it (discussed below).

For more information on how to use exemptions to protect your property, see our Bankruptcy Exemptions topic area.

Prove That You Need the Money for Necessary Expenses

If your employer owes you a significant amount of unpaid wages (perhaps for a project you completed prior to filing your case), you may not be able to exempt all of that anticipated income. However, you may still be able to keep your wages if you can prove to the court that you need the money to pay necessary expenses.

Whether the court will allow you to keep your nonexempt wages depends on numerous factors such as the amount of your anticipated income and your necessary expenses. As a result, talk to a knowledgeable bankruptcy attorney in your area before filing your case to learn whether you may be able to keep your wages.

by: , Attorney

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