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Utah Supreme Court Rules Bankruptcy Debtor May Not Exempt 75 Percent of Wages - Gladwell v. Reinhart

December 10, 2012

Vincent Howard and our San Bernardino personal bankruptcy lawyers were interested to see a novel attempt to exempt wages from bankruptcy. All states and the federal government provide a list of personal property that can be exempted from bankruptcy; this reliably includes a portion of home equity, as well as personal items like wedding rings and work-related tools. However, wages paid in the future are generally part of the bankruptcy plan for a debtor like the one in Gladwell v. Reinhart. Dr. Douglas Reinhart cited the federal Consumer Credit Protection Act and, alternatively, the Utah Consumer Credit Code as support for his bid to exempt 75 percent of his wages from the bankruptcy. The bankruptcy court permitted the exemption over the objections of trustee David Gladwell and the district court affirmed, but the Tenth U.S. Circuit Court of Appeals reversed on the federal law, and the Utah Supreme Court on the state law.

Reinhart is a doctor who operates through a professional corporation. In 2004, Gladwell started an adversary proceeding against Reinhart and his corporation to recover at least $49,000 in salary, bonuses and interest paid or owed to Reinhart by the corporation after his bankruptcy petition. While this was resolved, Reinhart revised his bankruptcy papers during the adversary proceeding in order to claim an exemption for 75 percent of his pre-petition wages. He cited both federal and state consumer credit laws, as well as a case stemming from the federal law. The trustee raised an objection to this, but the bankruptcy court overruled the objection without explaining its reasoning. The district court affirmed for no reason reported in the opinion. However, the Tenth Circuit reversed as to the federal Consumer Credit Protection Act, saying Kokoszka v. Bedford precluded the federal claim. It sent the state claim to the Utah Supreme Court for review.

That court rejected the state-law claim as well, ruling that the relevant law does not apply to bankruptcy, but limits a creditor's ability to garnish disposable income after a judgment based on an individual credit agreement. The language of the law says the maximum part of an individual's earnings "subjected to garnishment to enforce payment of a judgment arising from a consumer credit agreement" can be no more than 25 percent. Reinhart argues that courts should construe the section liberally, and that a bankruptcy court case had analyzed a predecessor statute and found it created a bankruptcy exemption. The Utah Supreme Court did not agree. The plain language of the statute shows that it was not intended to create a general bankruptcy exemption, it said; its references to a consumer credit agreement and a judgment debt show it doesn't apply to just general indebtedness. It also rejected the older bankruptcy case as incorrect before sending the case back to the Tenth Circuit.

Vincent Howard and our Moreno Valley consumer bankruptcy attorneys applaud attempts to exempt more in bankruptcy, even though it doesn't look like this attempt worked. More exemptions are better for our clients because they mean there's more to live on during the repayment period (in Chapter 13) or more property left after selling off assets (in Chapter 7). An experienced Costa Mesa bankruptcy lawyer at Howard Law, P.C., can structure a bankruptcy in order to protect the items that matter most to you, such as a home, or maximize the assets available when you start the slow process of rebuilding your financial life.

If you're deep in debt and you don't believe you'll be able to climb out without a helping hand, you should call Vincent Howard and the team at Howard Law to discuss whether bankruptcy is right for you. To learn more or set up a consultation, send us an email or call 1-800-872-5925.

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