Bankruptcy

Prospective Sales Commission Income In Bankruptcy Means Test

By Jonathan Alper

An attorney emailed me with a question about a prospective bankruptcy client who is in the real estate sales business. The real estate salesman has a few contracts in the pipeline- sales contracts are signed subject to financing contingency and other conditions. If the sales close the realtor will earn a commissions. The question is whether the salesman has to value and report these future earnings on a Chapter 7 bankruptcy petition either as an asset or as income. The attorney wonders whether the debtor should discount the present value of the future commissions based on their probability and timing.

I think this question depends on the laws pertaining to real estate contracts and brokerage commissions. I consulted another attorney who specializes in real estate law. The real estate attorney explained that the answer depends upon certain unknown facts. If the debtor is a real estate salesman, not a broker, the salesman?s contractual relationship is with his broker. The real estate commission is payable to the broker pursuant to the contract. In that event, the commissions are not a contractual interest and are just possible future earnings that will be earned if an when the sales close. Many debtors have sales jobs, and they typically do not list commissions on deals they are working on before they commissions are earned. All sales people have possible future commissions at any point in time.

If the debtor is a broker the debtor may have a contractual interest in the sales contracts. However, many real estate contracts state that commissions will be due but do not state the amount. In such case, the broker does not have a definite financial right in the real estate contract. Some brokers are paid under an independent broker contact; some broker contracts state that the broker is entitled to some commission when a sales contract is signed in which case this debtor would list the amount as commission income.

There is a general legal principal that real estate commissions are not due and payable until the sales contract has no contingencies. Even after all contract legal conditions are satisfied either party can still breach the contract and no commission would be received (pending a suit for commission). Or, for example, a bank can withdraw a financing commitment. I think there is a valid argument that no commission is earned until the closing. In my own bankruptcy cases I typically do not include prospective commission income on any sale by any commissioned salesperson until closing is certain. I believe that all commissions are speculative until closing. As any sales professional will tell you there are too many things that can kill a deal until the money passes hands.

Full post as published by Florida Bankruptcy Law on December 01, 2009 (boomark / email).