Here’s an edited version of my colleague’s question:
A Chapter 7 debtor who is a real estate broker had some listings prepetition. He opened escrow postpetition, and eventually sold the properties. He received a $20,000 commission, none of which can be exempted. The Trustee has demanded all the commission received. What can be done?
Here’s my response:
Three cases that help to answer the question from different vantage points are: In re Fit zsimmons, 725 F. 2d 1208 (9th Cir. 1984), In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984), and In re Wu, 173 B.R. 411 (B.A.P. 9th Cir. 1994).
I. The Key Statutory Provision
According to 11 U.S.C. § 541(a), when a debtor files for bankruptcy protection, the act of filing the papers “creates an estate.” The prepetition debts then become postpetition claims against that estate.
In a Chapter 7 bankruptcy, the Chapter 7 Trustee liquidates the estate to produce a dividend to the debtor’s creditors. The debtor can exclude assets from that estate by appealing to an appropriate exemption table (Cal. Civ. Proc. Code § 704 for homeowners with equity in their principal residence, and Cal. Civ. Proc. Code § 703.140 for everyone else). Anything the debtor cannot exempt is fair game for the Trustee to seize.
What goes into the estate? The gist of 11 U.S.C. § 541(a) is that everything the debtor owns or has an interest in on the day of filing the bankruptcy papers, anything the debtor becomes entitled to through bequest, inheritance, devise, or through life insurance proceeds during the 180 days after the petition day, and anything that is the fruit of estate assets (e.g., interest earned on an estate asset) is part of the estate.
But § 541(a)(6) has a carve-out for income earned by the debtor for services rendered postpetition. It is this provision that is at the heart of the answer to my colleague’s question.