A SEVERANCE package is money that will be paid to an individual who agrees to terminate employment as compensation for the loss of future earnings. This can be in the form of lump sum money paid coupled with payment of educational expenses to train the individual to obtain skills for another job. Severance pay can be a significant amount. What happens to a severance package when the individual files for bankruptcy relief? This question is relevant in these times when many people lose their jobs because of the recession and are forced into bankruptcy. This question was answered in the matter of "Lewis" but is currently on appeal. H. Robert Pierce, debtor’s counsel in that case shares the unpublished bench opinion to help other debtors in a similar situation.
In the "Lewis" case, debtor accepted a voluntary buyout offer from Ford Motor Company. She opted to participate in the Ford Educational Opportunity Program (referred to by the court as "EDOPP"). That program entitled her to receive tuition reimbursement of up to $15,000 per year for four continuous years of schooling. So, that portion of the severance package is worth at least $45,000. It also provided for her to receive an annual living expense stipend, continuation of health care benefits, and continuation of life insurance for the next four years. This portion of the severance package could be worth another $2,500 a month for four years, or $120,000. In addition, debtor was given the right to terminate her participation in the EDOPP and receive a lump sum payment in lieu of unused benefits. The payment was equal to $100,000, minus amounts already paid under the program. In exchange for receiving this benefit, debtor agreed to be voluntarily separated from her employment. Hence, her severance package was equal to $265,000 of cash and other benefits.
Debtor sought bankruptcy relief to discharge accumulated debt and relied on Section 522(d)(11)(E) to exempt her severance package valued at $265,000. That provision exempts "a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." The bankruptcy trustee objected to this claim of objection and argued that the $265,000 should become property of the bankruptcy estate. If the court agreed with the trustee, debtor would have to forfeit the $265,000 to the trustee. However, Judge Tucker said that Section 522(d)(ll)(E) is not limited to income interruptions cause by physical injury or impairment, but includes benefits paid to debtors as part of a severance package from their employers. Judge Tucker concluded that the benefits obtained by debtor under EDOPP were "compensation for loss of future earnings" within the meaning of Section 522(d)(11)(E). "This is so because those benefits were benefits given to compensate for an event that adversely affected the debtor’s future earnings in some way," the court said.
"The debtor being terminated from her employment with Ford Motor Company obviously was suffering and suffering an event that would, while not impair her ability to work for other employers elsewhere on some other job in the future, it did adversely affect her future earnings in a way sufficient in my view to bring this benefit within the meaning of the Section 522(d)(11)(E) phrase, compensation for loss of future earnings."
Obviously, the trustee did not agree with this ruling and the ruling is currently on appeal. If the appeal confirms the court’s ruling, then it can be used as a precedent for claiming this exemption in California. But this is not a California bankruptcy court ruling and the appeal is not to the 9th circuit and will not have a binding effect on California cases. But it does have some persuasive value for California. Debtors are forewarned that nothing on this issue is final in California.
Contact my office if you need debt relief. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published on April 25, 2009 in Asian Journal Los Angeles p. C4 )
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