Bankruptcy – Exemptions

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7^th Circuit Court of Appeals

Case Name: George Burciaga v. Alex Moglia

Case No.: 19-2246

Officials: BAUER, EASTERBROOK, and SYKES, Circuit Judges.

Focus: Bankruptcy – Exemptions

George Burciaga lost his job in May 2018 and filed for bankruptcy a week later. On the date the bankruptcy proceeding began, Burciaga’s former employer owed him approximately $24,000 for unused vacation time. Illinois, where Burciaga lives, treats vacation pay as a form of wages. 735 ILCS 5/12-801 (final paragraph, defining “wages” to include all compensation that an employer owes to an employee). Exemptions for debtors in Illinois rest on state law, for it has exercised its right under 11 U.S.C. §522(b)(2) to make local exemptions exclusive. See 735 ILCS 5/12-1201. Burciaga asked the district court to treat 85% of the vacation pay as exempt from creditors’ claims. (Illinois permits creditors to reach 15% of unpaid wages but forbids debt collection from the rest. 735 ILCS 5/12-803.) Alex Moglia, the Chapter 7 Trustee, objected to this request. Both a bankruptcy judge and a district judge sided with the Trustee. 602 B.R. 675 (N.D. Ill. 2019).

The district judge concluded that unpaid wages are not exempt in bankruptcy. That’s not because of anything in the federal statute, which points to state law as a source of exemptions. Nor is it because of anything in Illinois law, which exempts 85% of unpaid wages from all forms of collection authorized by state law. Rather, the district judge stated, it is because Illinois did not “intend” to exempt vacation pay from creditors’ claims in bankruptcy, as exemplified by the fact that the state’s statutes do not specifically mention bankruptcy law. The only intent the district judge could find was to exempt vacation pay (and other employment-related compensation) from creditors’ claims in state court, through garnishment and similar proceedings.

Because 85% of unpaid wages are exempt from creditors’ claims in Illinois, and vacation pay is a form of wages, the decision of the district court is reversed.

Reversed

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.