The Utah Supreme Court gave debtors a lump of coal for Christmas in the form of its opinion in Gladwell v. Reinhart, 2012 UT 82 (December 4, 2012), a case certified to it by the Tenth Circuit Court of Appeals in Denver to answer a question of state law. The issue arose in Dr. Reinhart's bankruptcy. Dr. Reinhart claimed an exemption in 75% of the wages owed to him but unpaid as of the date of his bankruptcy petition. This is common practice among bankruptcy attorneys in Utah and it had been universally recognized. Occasionally a trustee would demand the other 25% that wasn't exempt under Utah's exemption statute, but most of the time the debtor kept 100% of any unpaid wages as of the filing date.
In the Reinhart case, the Chapter 7 trustee challenged the claim of exemption. The bankruptcy court denied the trustee's objection, following the practice that had been in place for years. The district court upheld the bankruptcy court. On appeal to the Tenth Circuit, the Court of Appeals certified the case to the Utah Supreme Court. "Certification" is a process by which a federal court, called upon to answer a previously unanswered question of state law, can ask the highest court of the state to determine the answer.
On certification the Utah Supreme Court held that the exemption statute in question, Utah Code section 70C-7-103, does not to allow a debtor in bankruptcy to claim an exemption for 75% of the wages owed to him but unpaid as of the date of filing. In other words, 100% of what a debtor is expecting in his next paycheck after he files is subject to being taken by the bankruptcy trustee as "property of the estate."
In the past most debtors' attorneys have timed the filing of the bankruptcy petition to a date just before a payday so that what is in the debtor's checking account at the time of filing is almost nothing, relying on section 70C-7-103 to exempt what is owed to the debtor. With the ruling in Reinhart debtors risk losing their entire next paycheck after they file. And, if they wait and file the day after payday, so that what is owed but unpaid is a small amount, any money still in their account from that paycheck on the day they file is subject to being taken. The Utah Supreme Court has effectively ruled that the debtor's last paycheck before filing is forfeited to his estate, meaning debtors will have to skip a payday in order to file.
Utah being the debtor-unfriendly state that it is, don't expect the Utah legislature to correct this problem any time soon.
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