Small Business Owners are Entitled to Exempt Reasonable Compensation from the Bankruptcy Estate

(Excerpt) The COVID-19 pandemic greatly impacted small business owners in the United States. In March 2020, the United States Small Business Administration (“SBA”) began aiding eligible small business owners in the form of Economic Injury Disaster Loans (“EIDL”). EIDLs were made available to small businesses that were unable to meet existing financial obligations for necessary operating costs. Those funds can be used to “make regular payments for operating expenses, including payroll.” This article addresses whether small business owners are entitled to pay themselves reasonable compensation as earnings for their efforts, which in turn may be exempted from their future bankruptcy estates. Part I analyzes who has the burden of proving that an exemption is not properly claimed in a bankruptcy proceeding. Part II examines whether a debtor is entitled to amend his or her claim of exemptions until the case is closed. Part III discusses whether the debtor’s reasonable earnings can be exempt from the bankruptcy estate and whether the transfer of EIDL funds from an entity’s account to a debtor’s personal bank account qualify as earnings or as a “transfer of profits.