Given the way the economy has been shaken up, it’s totally reasonable to assume that realtors need to worry. When houses aren’t moving, banks are on the fence about lending and contractors are fighting to stay above water; things look fairly grim for an industry that has been unzipped.

That’s not to say that navigating these rough economic waters is impossible.

Some folks have been able to stay afloat in spite of the problems plaguing their industry, but for many it’s not that easy. Naturally, the question eventually surfaces where people asked if Realtors filing for Bankruptcy are allowed to keep their commissions.

When Tom was asked about Realtors being able to keep their commissions in the midst of their Arizona Chapter 7 Bankruptcy, he replied with the following:

Maybe, maybe not.

The analytical framework is understood by most experienced Arizona bankruptcy lawyers, because a lot of our clients over the last three decades that we’ve worked have been realtors.

Here’s the Reader’s Digest version of the story: maybe you get to keep the real estate commission you receive after you file your bankruptcy, and maybe you don’t.

Clear?

Just kidding.

The statute that controls is 11 USC 541, Property of the Estate. Remember that when any bankruptcy is filed, an estate comes into existence automatically, and the important exception to property of the estate in a Chapter 7 is “except such as are earnings from services performed by and individual debtor after the commencement of the case”.

Courts have held that the earnings exception applies only to earnings generated by services personally performed by the individual debtor post petition, and NOT to invested capital, accounts receivable, goodwill, employment contracts with the firm’s staff, client relationships, fee agreements, and so on.

Cut to the chase: if you did a bunch of work on a real estate deal prior to filing your Chapter 7 bankruptcy in Arizona, and you list your real estate contracts as assets AS YOU ARE REQUIRED TO DO in your schedules, you may:

-get a Chapter 7 trustee who demands 100% of your commissions received post-petition, that were based on pre-petition contracts;

-get a Chapter 7 trustee who understands that a commission that was partly earned pre-petition and partly post-petition should be pro-rated because it’s partly property of the debtor and partly property of the bankruptcy estate;

-get a trustee who doesn’t care what the facts are or the law is, he wants your commissions and he means now.

If you get a smart trustee who understands the law well, or a smart trustee lawyer, there will be a discussion in which In re Wu, 173 B.R. 411, figures prominently.

In re Wu tells us that an “all or nothing” analysis is probably not correct, and that it’s difficult to precisely determine the amounts that are property of the estate, and that legal proceedings to make that determination can take years and cost a lotta dough.

Enter smart trustees and smart counsel for trustees.

Your best friends.

They don’t want to torture you without necessity. They just want to do their job and get the dough that belongs to the estate over to creditors, which means extracting it from you, the debtor.

But if a realtor has not decided to go on vacation for six months prior to filing, which might have the effect of making the means test pretty easy, and letting cases close pre-petition and living off those commissions pre-petition, and then filing a Chapter 7 bankruptcy, the realtor will need to list the outstanding contracts in the bankruptcy schedules as an asset, and take his chances (or, of course, her chances) on the precise nature of the trustee or his lawyer in the case.

The best result that’s available is when the trustee is smart, knows the caselaw, and says if you kept hourly records, we can pro-rate the commission based on pre and post petition hours.

Or if you didn’t keep time records, and there’s clear evidence that you were doing work (your daytimer shows all the meetings you had both pre and post), then maybe you prorate based on the number of days prepetition and post, after the contract was signed.

Recently I watched a smart trustee (who’s also a pretty tough customer) ask a realtor with a smile, “I see that you received a seven thousand dollar commission two days after your filed your Chapter 7 bankruptcy; that was already in the hopper when you filed, wasn’t it?”

The debtor’s lawyer was clueless about the reason for the question, and about what was about to happen.

But it wasn’t good for his client.

If you’re a lawyer and want to figure out how the analysis goes for realsies, just plug In re Wu into fastcase.com and you’ll be able to wander through cases to your heart’s content. And the State Bar of Arizona GIVES fastcase.com to Arizona lawyers for My Favorite Price!