Bankruptcy Exemptions: The Wages of Benn

by Wendell Sherk,

In the on-going saga of Missouri bankruptcy exemptions, some apparently-settled debtor protections have recently been destabilized.  And this caused an apparent split among bankruptcy judges on at least some of these protections.

Recently, this on-going evolution visited the daily wages of consumers.  Missouri has a law which protects a large portion of an individual's income from her own services from collection by creditors, often called the "wage" exemption.  It is similar to a federal law which sets the outside maximum a creditor can garnish from personal income.

In years passed, the U.S. Supreme Court has held that the federal law is not intended as an exemption in a bankruptcy case.  And some states have followed this as to their own "wage" protection laws.

But as we know, states can  make their own laws about exemptions to be used in bankruptcy.  And Missouri has opted to go the other way.

Beginning 22 years ago in bankruptcy court with In re Sanders, 69 B.R. 569 (Bankr.E.D.Mo.  1989), Missouri courts began recognizing this statute as a protection for earnings still owed to a debtor.  The Court of Appeals accepted this principle in In re Wallerstedt, 930 F.2d 630 (8th Cir. 1991) and In re Parsons, 280 F.3d 1185 (8th Cir 2002)  — while rejecting it in application in those cases.  These courts consistently held it was a bankruptcy exemption. There does not appear to have ever been a contrary state court decision.

The rule itself provides that an amount owed to a person as compensation for her own labor or "personal services" are protected up to 75% or up to 90% if the person is the financial head of a family.

In 2009, in In re Garst, Judge Venters in Kansas City examined the statute and concluded that the wage exemption would apply to funds on deposit in a bank account, if they could be traced to personal earnings.  This was because the statute used the term "paid or payable" which is identical to Social Security protections – and generally interpreted to mean that the protection follows the money.

But in 2010, Judge Surratt-States in Eastern Missouri declined to follow the Garstlogic, she concluded that the wage protection statute was not an exemption at all, in light of  Benn.  In Parsons (unrelated to the prior circuit case) the court disregarded the pre-Benn decisions applying the  wage statute as an exemption in bankruptcy because Benn entitles the individual to only those statutory enactments which explicitly state they are intended as exemptions.

In effect, Parsons puts every Missouri exemption — even if applied as an exemption for many years and supported by prior case law — to a challenge now.   It concludes there is a federally-mandated definition of "exemption" for bankruptcy purposes.  The origin of this federal mandate appears to be federal common law, not the Bankruptcy Code itself.

The potential here is that many long-accepted Missouri exemptions would seem to be "in play"  in light of the Nathan Smith and Parsons application of Benn.

One other common exemption has also been stuck down by some judges under the same theories described in this series — but this has also provoked the beginnings of a re-examination as well, as we shall see in the next installment.

For more information on these matters, please call our office at 305 548 5020.

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