Wage Accounts and the Head of Household Exemption
Many small business owners deposit their paychecks into so-called "wage accounts", believing that doing so makes their wages exempt from creditors pursuant to the “head of household” statutory exemption. But most of them are fooling themselves.
While several Florida cases hold that wages are exempt if paid pursuant to an arms’ length employment agreement, the real issue is whether the money is truly wages or instead business (independent contractor) income.
Case Example: In re Zamora
In In re Zamora, 216 B.R. 451 (S.D. Fla. 1997), the question was whether a dentist could exempt wages paid by his P.A., where he was a 50% stockholder. The court was skeptical:
“And last, the Employment Agreement was not an arms’ length negotiated contract. The negotiation of the Employment Agreement conjures up a picture of Woody Allen in ‘Take the Money and Run’ cross examining himself.”
Control as a Crucial Factor
Control is often decisive. If the debtor directly or indirectly controls the employer, the exemption is usually lost. Labeling payments as wages carries little weight when the debtor controls how much is distributed as wages versus dividends.
Other Key Cases
- In re Manning, 163 B.R. 380 (Bankr. S.D. Fla. 1994): Exemption denied where the debtor’s wife owned the stock.
- In re Stroup, 221 B.R. 537 (Bankr. M.D. Fla. 1997): Minority stockholder (1/3rd interest) denied exemption on deferred compensation. Court reasoned payments resembled dividends or severance pay, neither of which are exempt.
- In re Montoya, 77 B.R. 926 (Bankr. M.D. Fla. 1987): Exemption allowed for physician only after selling his stock to the other 50% stockholder at market value.
Bottom Line
Ultimately, it is a fact-specific question. Courts’ findings are rarely overturned on appeal, and once in court, the debtor is usually already viewed unfavorably. Stockholders and officers are generally not in a strong position to claim this exemption.
Practical Note
Labeling a bank account as a “wage account” provides little extra protection. For married couples, a standard tenancy by the entireties account (to which only wages are deposited) serves the same purpose. It is a tracing question, not a labeling question.
