Commissions and Residual Payments In Bankruptcy

Posted by Wesley Scott on May 28, 2020 at 10:29 AM
Wesley Scott

Bankruptcy PaymentsI’ve written a couple posts about property ownership and what owning property means in bankruptcy law.  Determining whether an asset is property of a bankruptcy estate, and thus subject to administration by a chapter 7 bankruptcy trustee is a critical part of a debtor’s attorney’s job.  And as I wrote earlier, one of the tricky issues is that property of the bankruptcy estate can include property that a debtor does not yet control or possess. 

Two examples of the not-yet-held but still property are earned, but unpaid commissions and residual payments owed to a bankruptcy debtor.  Real estate agents who sell property will have the buyer and seller sign a purchase agreement; that sale that will close at a later date.  Bankruptcy law says that when the purchase agreement is signed, the real estate sales commission that the agent will be paid has been earned and thus is the agent’s property.  If a real estate agent files a chapter 7 bankruptcy case prior to closing a sale, that earned-but-unpaid real sales commission is counted as the agent’s property and may not be exempt from administration.

Life insurance agents are paid something similar to real estate agents.  The Insurance agent’s payment is called a residual.  Residuals are paid to agents every month as insurance premiums are paid.  As insurance agents write more and more policies, they receive more and more in residual payments.  As is the case with real estate agents’ unpaid commissions, the bankruptcy law sees the earned, but unpaid residuals owed to life insurance agents as property of the bankruptcy estate.

Real estate and insurance agents aren’t immune from money problems – but unlike a lot of people, these agents might realize significant financial complications if they file a chapter 7 bankruptcy case.  The best course of action if there is any question about the impact filing a bankruptcy would have on someone’s ability to earn a living is to consult an attorney with knowledge of bankruptcy law, like one of the experienced attorneys at Kain & Scott. Reach out to Kain & Scott at www.kainscott.com.

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