Minnesota Bankruptcy Law: Self Employed Debtors Can Claim an Exemption for “Wages”

In Minnesota, a person filing for bankruptcy and choosing to use the Minnesota exemptions has traditionally been allowed to keep 75 percent of wages owed to him or her on the day the bankruptcy was filed, pursuant to Minnesota Statutes Section 550.37 subd. 13. It has been widely believed that this exemption applied only to those in an employer-employee relationship, and that self-employed debtors could not use this exemption, because they had no “employer.”

However, this assumption was recently challenged by the decision of the bankruptcy court in In re Schwab, Bky. No. 07-60188 (Bky.D.Minn.Dec. 4, 2007). This case allowed a debtor who was the sole employee of her wholly-owned corporation to exempt 75 percent of her $11,900 accounts receivable, which existed on the day of her bankruptcy filing.

The debtor in the Schwab case owned and operated a small business which was incorporated. She owned 100 percent of the shares. No one else performed any of the work for which the corporation was paid. The corporation billed for health care related services rendered personally by the bankruptcy debtor. At the time the bankruptcy was filed, the corporation was owed $11,900 for services rendered by the debtor. She claimed 75 percent of these accounts receivable as exempt pursuant to Section 550.37 subd. 13. The trustee objected to the exemption.

The bankruptcy court overruled the trustee’s objection, noting that Minnesota law allowed “reverse corporate veil piercing” where justice required it, if necessary to allow Minnesota exemption law goals to be vindicated. The court observed that the $11,900 accounts receivable technically owned by the corporation was entirely earned from the debtor’s labor. She had no other source of earnings. The corporation also had no creditors.

Accordingly, the court held that the accounts receivable would be recognized as really belonging to the debtor. As such, the $11,900 accounts receivable constituted earnings which the debtor could exempt, up to 75 percent, pursuant to Section 550.37 subd. 13.