OPINION
The Illinois Legislature has not chosen to include a general exemption for wages in the Illinois Personal Property Exemption law. It has, however, in two separate statutes, set a ceiling on the amount of a debtor’s wages that may be garnished under a wage deduction order and a wage assignment. The question raised in this case is whether those two statutes should be construed as creating an exemption in the nongarnishable wages that should be allowed to a debtor in bankruptcy pursuant to 11 U.S.C. § 522(b)(2).
The DEBTOR filed his Chapter 7 petition on November 16, 2004, without scheduling the anticipated bonus on his schedule of personal property (Schedule B) or schedule of property claimed as exempt (Schedule C). Shortly after the first meeting of creditors was held, the Chapter 7 Trustee, Gary T. Rafool (TRUSTEE), filed a Motion to Compel the DEBTOR to turn over a ratable portion of the bonus attributable to his prepetition 2004 employment. Subsequently, the DEBTOR amended Schedules B and C, disclosing a 2004 incentive bonus in the gross amount of $3,375.66 and an after-tax net amount of $2,133.42, claiming the bonus exempt under 735 ILCS 5/12-803 or 740 ILCS 170/4. The TRUSTEE filed an objection to the claim of exemption. The matter has been briefed by both parties.
In light of the fact that the bonus is an annual one in compensation for work performed during calendar year 2004, the TRUSTEE seeks turnover of the prorated portion of the net bonus amount commensurate with the proportion of 2004 that had elapsed at the time of the filing. The TRUSTEE concedes that the postpetition proportion of the bonus is not property of the bankruptcy estate. The DEBTOR concedes that the prepetition proportion of the bonus is property of the bankruptcy estate. Since 320 of the 366 days in 2004 had elapsed as of the filing, eighty-seven percent (87%) of the net bonus amount is property of the estate, or $1,856.08 ($2,133.42 x .87).
Although exempt property starts out as property of the bankruptcy estate, when an exemption is claimed and allowed, the exempt property passes out of the estate and back to the debtor by operation of law.
Matter of Yonikus,
In his brief, the DEBTOR relies primarily on the Illinois statute that sets a ceiling on the amount of a judgment debtor’s wages that may be garnished under a wage deduction order, as follows:
Maximum wages subject to collection. The maximum wages, salary, commissions and bonuses subject to collection under a deduction order, for any work week shall not exceed the lesser of (1) 15% of such gross amount paid for that week or (2) the amount by which disposable earnings for a week exceed 45 times the Federal Minimum Hourly Wage prescribed by Section 206(a)(1) of Title 29 of the United States Code, as amended, in effect at the time the amounts are payable. This provision (and no other) applies irrespective of the place where the compensation was earned or payable and the State wherethe employee resides. No amounts required by law to be withheld may be taken from the amount collected by the creditor. The term “disposable earnings” means that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld.
735 ILCS 5/12-803.
Alternatively, the DEBTOR relies upon an identical statutory ceiling in the Illinois Wage Assignment Act, as follows:
The maximum wages, salary, commissions, and bonuses that may be collected by an assignee for any work week shall not exceed the lesser of (1) 15% of such gross amount paid for that week or (2) the amount by which disposable earnings for a week exceed 45 times the Federal Minimum Hourly Wage prescribed by Section 206(a)(1) of Title 29, U.S.C., as amended, in effect at the time the amounts are payable. This provision (and no other) applies irrespective of the place where the compensation was earned or payable and the State where the employee resides. No amounts required by law to be withheld may be taken from the amount collected by the creditor. The term “disposable earnings” means that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld. If there is more than one assignment demand received by the employer, the assignees shall collect in the order or priority of service of the demand upon the employer, but the total of all collections shall not exceed the amount that could have been collected if there had been one assignment demand.
Benefits and refunds payable by pension or retirement funds or systems, any assets of employees held by those funds or systems, and any moneys an employee is required to contribute to those funds or systems are exempt and are not subject to a wage assignment under this Act.
A fee of $12 for each wage assignment shall be collected by and paid to the employer and the amount so paid shall be credited against the amount of the wage-earner’s outstanding debt.
740 ILCS 170/4.
Based on his wage rate, the DEBTOR is subject to the first alternative calculation in each statute, that the maximum that may be garnished is fifteen percent (15%) of his gross pay. The DEBTOR contends that since bonuses are expressly included within the pay that is subject to the fifteen percent (15%) garnishment ceiling, the DEBTOR’S bonus is exempt to the extent of eighty-five percent (85%). The DEBTOR assumes without elaboration that the wage garnishment ceiling has the effect of a general exemption law, an assumption that the TRUSTEE disputes. Effectively, it is the DEBTOR’S position that these statutes provide a general exemption for accrued wages, applicable in bankruptcy, that is unlimited in amount and that applies regardless of whether the amount due is for regular, periodic pay or is compensation over and above one’s regular paycheck, such as the annual bonus at issue here.
Some states have laws that specifically exempt a judgment debtor’s earnings from execution, such as where the debtor satisfies a court that the “earnings are necessary for the use of a family supported wholly or partly by his labor.” N.C.G.S.A. § 1-362. Illinois has no such statutory provision. The general personal property exemption law in Illinois, codified at 735 ILCS 5/12-1001 through 1006, contains no express exemption for wages, paid or unpaid. It has long been recognized by courts, however, that the “wild card” pro
Whether a garnishment cap provision has the force and effect of a general exemption for nongarnishable wages is an issue that has been addressed by a number of courts applying the laws of other states. Some courts have held that similar wage garnishment caps are not general wage exemption provisions available to a debtor in bankruptcy.
In re Riendeau,
The bankruptcy court below correctly reasons that if Tenn.Code Ann. § 26-2-106 does not provide for the complete sequestration of the debtor’s earnings from creditors and instead merely limits the amount of earnings a creditor can obtain through the garnishment of a third-party garnishee, Congress does not intend in the Bankruptcy Code for § 26-2-106 to be recognized and applied as an exemption for disposable earnings in bankruptcy proceedings. This Court agrees with the bankruptcy court’s analysis. When Congress enacted 11 U.S.C. § 522(b), it intended to provide for exemptions of property from bankruptcy where the state statute fully, permanently and unequivocally exempts the debtor’s property from the reach of his creditors. If creditors are permitted under TenmCode Ann. § 26-2-106 to attach and execute on earnings in the debtor’s possession where the earnings are no longer possessed by a third-party garnishee, then such earnings cannot be “exempt” property in bankruptcy pursuant to 11 U.S.C. § 522(b).
This Court also agrees with the bankruptcy court’s conclusion that when earnings are paid and distributed to a debtor in Tennessee, the earnings do not retain their exempt status in the debt- or’s hands and bank accounts under Tenn.Code Ann. § 26-2-106. Once earnings come into the debtor’s possession, creditors have the right under Tennessee law to attach and execute on the earnings to collect debts except to the extent that another statutory exemption may apply.
Other courts have held to the contrary.
In re Jones,
At the outset, it is important to clarify what is meant by “exempt” property. As denoted by the Supreme Court many years ago, the essence of an exemption is a “present right ... which withdraws the property from levy and sale under judicial process.”
White v. Stump,
In considering whether the statutory provisions in question render the nongar-nishable portion of accrued wages “completely beyond the reach of creditors” and “free from liability for the satisfaction of debts,” it is helpful to compare the language used by the Legislature when creating other exemptions. The Illinois personal property exemption statute expressly provides that the covered property “is exempt from judgment, attachment, or distress from rent.” 1 735 ILCS 5/12-1001. Similarly, the provision exempting certain retirement plans states that such plans are “exempt from judgment, attachment, execution, distress for rent, and seizure for satisfaction of debts.” 735 ILCS 5/12— 1006. Likewise, the statute providing an exemption for workers’ compensation awards quite forcefully states that no such award “shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.” 820 ILCS 305/21. Equally broad is the provision making certain life insurance proceeds “exempt from execution, attachment, garnishment or other process, for the debts or liabilities of the insured.” 215 ILCS 5/238(a). As well, the Illinois Homestead Exemption law makes a person’s right in and title to a homestead “exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes.” 735 ILCS 5/12-901. Thus, the Legislature has a demonstrable pattern, when creating an exemption, of using language that unequivocally protects the identified property against any and all debt collection mechanisms.
The statutory provisions in question do not contain similar language that puts accrued wages beyond the reach of creditors. Rather, those provisions, much narrower in scope, merely mandate the maximum amount that an employer may withhold pursuant to a wage deduction order or wage assignment. It is only by
implication
that the DEBTOR construes that withholding ceiling as a general exemption for the portion of accrued wages that are nongarnishable. The import of the forego
As other courts have recognized, limiting the effect of a wage garnishment cap to a nonbankruptcy garnishment proceeding is consistent with the purpose of such caps, as well as with bankruptcy policies. Addressing a debtor’s argument that a wage garnishment cap contained in the Federal Consumer Credit Protection Act provides an exemption in wages that could be claimed in bankruptcy, the Supreme Court contrasted the policy underlying the garnishment cap with the purpose of bankruptcy relief, as follows:
An examination of the legislative history of the Consumer Protection Act makes it clear that, while it was enacted against the background of the Bankruptcy Act, it was not intended to alter the clear purpose of the latter Act to assemble, once a bankruptcy petition is filed, all of the debtor’s assets for the benefit of his creditors. See, e.g., Segal v. Rochelle,382 U.S. 375 ,86 S.Ct. 511 ,15 L.Ed.2d 428 (1966). Indeed, Congress’ concern was not the administration of a bankrupt’s estate but the prevention of bankruptcy in the first place by eliminating ‘an essential element in the predatory extension of credit resulting in a disruption of employment, production, as well as consumption’ and a consequent increase in personal bankruptcies. Noting that the evidence before the Committee ‘clearly established a causal connection between harsh garnishment laws and high levels of personal bankruptcies,’ the House Report concluded:
‘The limitations on the garnishment of wages adopted by your committee, while permitting the continued orderly payment of consumer debts, will relieve countless honest debtors driven by economic desperation from plunging into bankruptcy in order to preserve their employment and insure a continued means of support for themselves and their families.’ H.R.Rep. No.1040, 90th Cong., 1st Sess., 21 (1967).
See also id., at 7. In short, the Consumer Credit Protection Act sought to prevent consumers from entering bankruptcy in the first place. However, if, despite its protection, bankruptcy did occur, the debtor’s protection and remedy remained under the Bankruptcy Act.
Kokoszka v. Belford,
Moreover, if the Illinois Legislature had intended to create a general exemption for accrued wages in 735 ILCS 5/12-803, it would not have been necessary to repeat the same exemption in 740 ILCS 170/4. The fact that the identical wage withholding ceiling appears in each statute indicates that the Legislature did not view either one as having a general application. Rather, the better interpretation is that the wage withholding ceilings are limited
In addition, construing the statutes as creating a general exemption for accrued and unpaid wages would lead to the anomalous result that wages, exempt while unpaid, would lose their exempt status upon receipt by the employee. The Illinois Legislature has drawn clear distinctions between an exemption for an accrued right to receive payments and the proceeds thereof. See, 735 ILCS 5/12 — 1001(h) (exempting the debtor’s right to receive certain payments as well as “property that is traceable” thereto). There is no reasonable basis to suggest that either 735 ILCS 5/12-803 or 740 ILCS 170/4 provides an exemption for wages that have been paid to an employee which are held in the form of cash or a bank deposit.
In light of the purpose for wage garnishment caps, it is perfectly understandable that Illinois would protect a portion of unpaid wages from garnishing creditors, while affording no special protection to wages once paid. The purpose of garnishment caps is to protect a wage earner living paycheck to paycheck from losing his entire earnings so that he is left destitute with no ability to pay necessary family living expenses. Presumably, by receiving 85% of his pay, he is at least able to pay the rent and put food on the table. 2 Once he deposits the wages into a bank account, however, the funds become fair game for creditors. An insolvent person may not accumulate and shelter funds in a bank account simply because they derive from wages. It is entirely rational that the Legislature would enact wage garnishment caps as a limited, non-bankruptcy protection for accrued wages while leaving the wild card exemption as the sole source of protection for paid wages.
Based upon the cases cited by the parties and this Court’s own research, it appears that no Illinois court has adopted or expressed agreement with the DEBTOR’S position that either 735 ILCS 5/12-803 or 740 ILCS 170/4 is a general exemption statute that renders the nongarnishable portion of wages exempt from liability for the debts of the wage earner. Only one federal court, a bankruptcy court, has, in dictum, accepted that position, in
In re Johnson,
Subsequent to
Johnson,
the Seventh Circuit rejected the general exemption theory in
Wienco, Inc. v. Scene Three, Inc.,
For these reasons, the Court determines that 735 ILCS 5/12-803 and 740 ILCS 170/4 do not give rise to a general exemption for wages earned but not yet paid to an employee and have no relevance to the exemptions that a debtor may claim in a bankruptcy case. The Court holds that those statutes provide no basis for the claim of exemption asserted by the DEBTOR in his 2004 annual incentive bonus and the claim of exemption will be denied. Since the DEBTOR has exhausted his $2,000 wild card exemption on other property, there is no basis for exempting the bonus. The TRUSTEE’S motion for turnover will be granted and the DEBTOR will be ordered to pay to the TRUSTEE the sum of $1,856.08.
This Opinion constitutes this Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED as follows:
1. The DEBTOR’S claim of exemption in his 2004 annual performance bonus is DENIED.
2. The CHAPTER 7 TRUSTEE’S Motion to Compel is GRANTED.
3. The DEBTOR, Edward R. Thum, is directed to turn over the sum of $1,856.08 to the CHAPTER 7 TRUSTEE, Gary T. Rafool, within twenty-one (21) days.
Notes
. In Illinois, "attachment” is a prejudgment remedy whereby a creditor may sequester a debtor's property upon a showing that the debtor, inter alia, has concealed himself, has left the state, or is about to transfer his property. 735 ILCS 5/4-101 et seq.
. The case at bar concerns an annual bonus paid out in the form of a special check, in addition to the regular periodic pay received by the DEBTOR. Thus, the policy behind wage garnishment caps is inapplicable to the facts of this case. It is difficult to imagine any rational policy that would support a blanket exemption for the kind of bonus payment at issue, without regard to its amount or whether it was needed for the support of the wage earner or his family.
. The DEBTOR relies upon
In re Christy,