Florida Wage Account Exemption Planning
The purpose of this memorandum is to provide an overview of the Florida Statutory provisions that make wages exempt from creditor claims under certain circumstances.
Exemptions are provided by the laws of each state in order to protect specified property interests from being reached by creditors and bankruptcy courts. Each state may adopt its own exemption laws, or may choose to adopt the federal bankruptcy exemptions, or may permit its residents their choice.
Florida Statute Section 222.11 provides that the wages of a "head of family" shall not be subject to attachment or garnishment. This means that such wages cannot be reached by a creditor, except for alimony and child support payments, or except when the right to garnish wages is given to a creditor (such as in loan documents, in connection with a bank loan).
The exemption extends to any bank account maintained by the debtor when the funds in the account can be traced to and identified as wages.
Listed below are some frequently asked questions concerning Florida's wage account exemption:
Q. What are "Wages"?
A. Wages are defined as the payment of money or "other thing" for personal labor or services. Wages include earnings for personal labor or services whether denominated as wages, salary, commission or bonus.
Q. How would a creditor or bankruptcy trustee attack the wage exemption of an independent contractor?
A. Some attacks have been based upon the contention that the term "wages" does not include payments to independent contractors for personal services. The decided cases have held both ways on this issue, but the most recent case has held that payments to independent contractors for personal services will qualify as wages.
Q. How would a credit or bankruptcy trustee attack the wage exemption of a physician in a P.A.?
A. Creditors might make the argument that a physician taking a large salary from his P.A. is receiving a "disguised payment", not wages. The argument is based on the theory that the "wages" are not really the product of the physician's own labor, rather it is only a payment generated by the P.A.'s use of its equipment, and/or the doctor is receiving a share of the fees paid to the P.A. for services of its staff. Carefully drafted employment and other personal service agreements plus careful recordkeeping will go a long way to mitigate this type of attack.
Q. What is a "head of a family"?
A. A person is head of a family if he or she provides more than one-half of the support for a child or "other dependent". "Other dependent" has been defined as a spouse, ex-spouse, adult child, and even an elderly parent by Florida case law. If the support test is satisfied, (i.e. the "child or other dependent" receives more than one half of their support from another person) that person will qualify as a "head of a family" regardless of whether married, divorced, never married, legally separated, widowed, or otherwise living alone. An example of this was illustrated in recent case law where an ex-spouse was dependent upon alimony support which made up half of her total income. Because the ex-spouse's alimony made up at least one half of her total income, the payor was designated "head of the family" and thus his wages were exempt under the statute.
Q. Does the dependent need to live with the "head of the family" to qualify under this exemption?
A. No, case law has determined that the dependent need not live with the person seeking to qualify as the head of a family. So long as the dependent is receiving at least half of their income from the head of the family, they need not live together.
Q. How can wages received, but not spent be preserved?
A. The funds must be deposited into a bank account with the title of "YOUR NAME, WAGE ACCOUNT" where they can be traced and identified as wages. These wages will be protected for six months.
Q. Can wages be placed in managed accounts such as money market accounts and still qualify?
A. No. Cash management accounts with brokerage firms are not bank accounts within the meaning of the Florida Statute protecting wages.
Q. Can wages be co-mingled with other funds?
A. Although the statute states that "commingling of earnings with other funds does not by itself defeat the ability of a head of family to trace earnings," some courts have denied the exemption for wages, which might otherwise have qualified, especially when the wages were commingled with interest payments, capital gains, and other funds. In order to protect your wages, it is best not to commingle them with other funds and keep them in a seperate "Wage Account".
Q. How long will the wages remain exempt?
A. The wages will remain exempt from creditors while in your bank account for up to six (6) months after the earnings are received by the financial institution if the funds can be traced and properly identified as earnings.
Q. What is the safest way to preserve wages?
A. The conservative approach would be to incorporate your business, implement employment and other agreements where appropriate, set up your wage account so that no interest will be credited to it (i.e. have any interest earned on the wage account either mailed directly to you or credited to another account), deposit only the wages of the head of the family into that account, and include the designation "WAGE ACCOUNT" in the account title.
Q. How can the wages be withdrawn from the account?
A. The best way to withdraw funds for use would be remember the rule "first in, first out". The statute states that "Earnings are exempt...from attachment or garnishment for 6 months after the earnings are received by the financial institution...". By employing the first in, first out rule, you would withdraw those funds that have been deposited more than 6 months. These funds are no longer exempt from garnishment, so there is no benefit to keeping the funds in the protected account. To make sure you are withdrawing funds that no longer have exemption status, check your banking records and withdraw only that amount that is no longer protected (i.e. funds that have been in the account for more than six months).
Q. Is it ever permissible to actually allow a creditor to garnish these wages?
A. Yes, you may specifically grant a creditor the right to garnish these wages, but you must do so in writing. An example when this exception might come into play would be if you were borrowing funds from a bank. The bank's loan documents might contain a provision that would allow the bank to garnish your wages if you defaulted on the payments.
When taking advantage of this wage exemption, it is always best to use a conservative approach. Properly document your employment relationship, whether you are an employee, a business owner, or an independent contractor so that funds may qualify as wages under the Statute. Do not commingle funds, as easily traceable funds will more likely to be classified as wages by the courts, and thus qualify for exemption.