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Court says income is part of bankruptcy estate

Ohio residents who file for Chapter 7 bankruptcy must turn over all of their nonexempt assets to a bankruptcy trustee so that the assets can be liquidated to pay off creditors. If an individual earns income after a bankruptcy case has commenced, this money does not have to go to the trustee. However, a person who is paid after a bankruptcy filing for work performed before the bankruptcy filing may have to give this money to the trustee.

On Aug. 17, a bankruptcy court in Massachusetts ruled that a man who had filed for Chapter 7 bankruptcy must give $10,000 of income he acquired post-bankruptcy to his trustee. The debtor worked as an attorney, and the income in question had been earned from payments that were made to him for services that he rendered before the bankruptcy filing.

In the attorney's bankruptcy case, the court ruled that the income the attorney earned was property of the bankruptcy estate and not exempt from liquidation. Though the debtor had argued that the income was earned for post-bankruptcy services, the court found no evidence that this was true. The court also concluded that the debtor continued to represent the client who had paid him the $10,000 because he was obligated to do so.

Chapter 7 bankruptcy is sometimes referred to as liquidation bankruptcy because a debtor's assets are sold and used to pay outstanding debts. However, many people who file for Chapter 7 bankruptcy are not harshly affected because most of their assets are exempt. A bankruptcy law attorney can explain the extent of the protection along with outlining the chapter's eligibility requirements.

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