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The Head of Household Exemption Myth

Many physicians deposit their paychecks into so-called "wage accounts" with the belief that doing so makes their wages exempt from creditors pursuant to the so-called "head of household" statutory exemption. But most of them are fooling themselves. 

While it is true that there are several Florida cases which hold that wages are exempt if paid pursuant to an arms’ length employment agreement, the question ultimately revolves around whether the money is properly considered as wages or business (i.e., independent contractor) income for purposes of the exemption statute. For example, the case of in re Zamora, 216 B.R. 451 (So. Dist., Fla. 1997) involved the question of whether a dentist could exempt wages paid by his P.A. The dentist was a 50% stockholder in the P.A. The following quote illustrates the court’s attitude: "And last, the Employment Agreement was not an arms’ length negotiated contract. The negotiation of the Employment Agreement conjures up a picture of Woody Allen in ‘Take the Money and Run’ cross examining himself."

Control is often a crucial factor. Being directly or indirectly in control of the employer ruins the exemption. This is so because labeling the payments as wages has little significance if the debtor is in position to decide how much is paid out as wages verses how much is paid out as dividends.


In the case of in re Manning, 163 B.R. 380 (Bkrtcy, S.D. Fla., 1994) the exemption was denied because the debtor’s wife owned the stock.

In the case of in re Stroup, 221 BR 537 (Bkrtcy., M.D. Fla. 1997), the court denied a minority-stockholder-physician’s claim that deferred compensation on termination of employment was exempt. The debtor in that case only owned 1/3rd of the stock. The court relied on several theories, one of which was that the payment was akin to a dividend on the physician’s stock in the P.A. Another theory relied on by the Court was that the payment was akin to severance pay, which is never considered exempt.

On the other hand, if the physician is not a direct or indirect stockholder, the exemption may very well be available. For example, in the case of in re Montoya, 77 B.R. 926 (Bkrtcy., M.D. Fla., 1987), the court held that a physician was entitled to the wage exemption AFTER he sold his stock to the other 50% stockholder at market value.

The bottom line is that it’s a fact question, the court’s finding rarely could be overturned on appeal, and the court will have already found that the defendant is wearing the black hat. Obviously, stockholders and officers are not in a good position.

By the way, there is not much point in a married physician labeling a bank account as a wage account. A standard tenancy by the entireties account to which only wages are deposited serves the same purpose. It’s a tracing question, not a labeling question.

©2007 Steven M. Chamberlain, Esq. All rights reserved. Republication with attribution is permitted.