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  1. #1

    Default Is a Draw from a Former Employer Dischargeable in Bankruptcy

    My question involves chapter 7 no asset bankruptcy in the state of: Indiana

    a couple of years ago my husband worked for a life insurance company. When he quit, he still owed money on a draw-loan (company refers to it as a loan). They have been paying it back by confiscating continued commissions on his sales when with the company. Due to massive medical bills he has filed for bankruptcy. The "loan" was listed as a creditor. The company is continuing to collect on this loan, sending him a W2 for a salary he did not receive because it went to repayment. When he mentioned it to the company, they said bankruptcy does not affect them. The company has stated when commissions end they will be coming after him for the balance. When we ask our attorney if they can do that, he sidesteps the question with telling us he doesn't know but will find out. Does anyone out there know?

  2. #2
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    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    Quote Quoting cayla99
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    My question involves chapter 7 no asset bankruptcy in the state of: Indiana

    a couple of years ago my husband worked for a life insurance company. When he quit, he still owed money on a draw-loan (company refers to it as a loan). They have been paying it back by confiscating continued commissions on his sales when with the company. Due to massive medical bills he has filed for bankruptcy. The "loan" was listed as a creditor. The company is continuing to collect on this loan, sending him a W2 for a salary he did not receive because it went to repayment. When he mentioned it to the company, they said bankruptcy does not affect them. The company has stated when commissions end they will be coming after him for the balance. When we ask our attorney if they can do that, he sidesteps the question with telling us he doesn't know but will find out. Does anyone out there know?
    When he originally got the draws/loans did they treat them as salary at that time and include them in his W2?

  3. #3
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    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    The employer is wrong in part:

    1. Bankruptcy does apply to them.
    2. They are indeed enjoined from collecting the draw reimbursement while the bankruptcy is in progress.
    3. They are a debtor like every one else.

    And they are correct in part:

    1. Draws are taxable and indeed need to be reported on W-2s if not recovered.

    And then there's the part we don't know is how much of the draw is recoverable. The part of the draw that is used to meet the minimum wage is NOT recoverable, at all (unless it was paid out for a period the employee didn't work). Whether the rest is recoverable is determined by state law and I'm not sure about Indiana (nor can I find it with a casual search).

    You should tell the employer that the employee is in chapter 7 bankruptcy and collection efforts are STAYED. You do seem to have properly listed it on your filing.

  4. #4
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    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    Quote Quoting flyingron
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    You should tell the employer that the employee is in chapter 7 bankruptcy and collection efforts are STAYED.
    Not necessarily.

    The US BK Court for the Southern District of Illinois in 1991 addressed a similar issue in a 34 page decision involving a complex analysis of a life insurance agent's draw vs commission contract and noted (interestingly enough) that:

    "While characterized as a "loan," the advances are actually advance compensation or prepayments on commissions that will be generated from the policy. The agent, having already received commissions on the policy, is not entitled to further commissions until the advance commission is repaid in full."

    "Since, under the contracts, the debtor's right to commissions did not arise until his indebtedness to the companies had been satisfied, the companies had no obligation to the debtor for payment of commissions so long as he had an outstanding liability to them. Consequently, the companies' withholding of commissions pursuant to their contracts with the debtor did not constitute the offsetting of prepetition obligations against postpetition debts."

    "the companies' relationship to the debtor here was not that of a creditor holding security for a debt"

    "The Court finds, therefore, that the company defendants have a superior right to commissions generated on the debtor's prepetition policies to the extent necessary to satisfy the debtor's liabilities, and these rights are not defeated by the trustee's strong arm powers under 11 U.S.C. 544."

    "If, in fact, commissions on these policies are insufficient to satisfy this liability, the remainder of the indebtedness owing to the companies will be discharged in the debtor's bankruptcy proceeding just as any other prepetition debt.19 If, on the other hand, the debtor's prepetition liability is completely repaid by such commissions, then any subsequently accruing commissions must be paid over to the trustee as property of the estate to the extent the debtor was entitled to them at the time of filing his bankruptcy petition."
    I've taken those quotes out of context just to illustrate a couple of points:

    1 - The insurance company is likely correct in applying current commissions to pay back the draw.

    2 - The insurance company is likely incorrect in its assertion that it will be coming after him for the balance.

    I use the words "likely" because an in-depth analysis of the agent's contract is necessary. The complexity of the decision is likely why the agent's bankruptcy attorney sidestepped the issue.

    Might be a good idea for OP to have the attorney read the decision and search for any similar decisions subsequent to that one.

    Here it is:

    http://www.ilsb.uscourts.gov/sites/d...%296-19-91.pdf

  5. #5
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    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    so per that decision, at least this is improper
    Quote Quoting cayla99
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    The company has stated when commissions end they will be coming after him for the balance.
    so cayla99, take note of the opinion adjusterjack provided. Obtain a copy and flop it onto your attorney's desk.

  6. #6
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    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    When I said collection was stayed, I meant them coming after him directly (rather than attaching the pending commissions). Thanks for the details, JK.

  7. #7

    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    no, they noted it as "loan"

  8. #8
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    Default Re: Is a Draw from a Former Employer Dischargeable in Bankruptcy

    Quote Quoting cayla99
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    no, they noted it as "loan"
    Again, they can recover the draw against the commissions, but any further recovery is part of the bankruptcy and they should not be attempting to communicate with him or do anything further about collecting it while the bankruptcy is in progress. JK gave you the best answer.

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