EXEMPTIONS AND BANKRUPTCY PLANNING
•POLICY
CONSIDERATIONS
•Fresh
Start: Retain minimal assets to enable debtor and dependents on which to live and provide a basis for maintaining a living.
•Exemptions
are based on state laws which provide that certain property is exempt from enforcement of judgments. The exemption laws in some states are quite generous (such as Texas and Florida) while others were quite limited.
•Since
the 1898 Act creditor groups sought to have uniformity in bankruptcy by seeking to impose a uniform exemption scheme in bankruptcy thereby eliminating the inherent unfairness resulting from the variance in state exemption law.
•Compromise:
Federal or state exemptions apply unless a state “opts out” of the federal exemptions pursuant to 11 U.S.C. §522(b). If so then only the state exemption laws will apply in bankruptcy.
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CHOICE OF EXEMPTIONS
In non “opt out” states debtors can choose one of two sets of exemptions:
Federal “bankruptcy” exemptions contained in §522(d). 11 U.S.C. §522(b)(1) ; or Applicable non-bankruptcy exemptions (typically state exemptions) under §522(b)(3), tenancy by entirety and joint tenancy property to extent exempt from process under applicable non-bankruptcy law and certain retirement funds. 11 U.S.C. §522(b)(3).
In “opt out” states debtors limited to the §522(b)(3) exemptions. 2005 Act Limitation: The applicable state exemption laws is based on the state of domicile for the 730 days prior to the petition date. If the debtor was not domiciled in a single state for 730 days before bankruptcy then the applicable state is where the debtor was domiciled for the 180 day period immediately preceding the 730 day period prior to filing. 11 U.S.C. §522(b)(3)(A).
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INSULATION OF EXEMPT PROPERTY CARRIES OVER POST-PETITION
Insulation of exempt property from claims of pre-petition creditors carries over to the post-petition period. 11 U.S.C. §522(c). In general debtors retain exempt property free from pre-petition claims. Exceptions: Under 2005 Act for enforcement of domestic support claims. 11 U.S.C. §522(c)(1); Debt secured by exempt property that is not avoided or a tax lien properly perfected. 11 U.S.C. §522(c)(2); Certain non-dischargeable debts owed primarily by principles of failed financial institutions. 11 U.S.C. §522(c)(3); and Debt in connection with fraud in obtaining any scholarship, grant, loan etc. for purposes of education financing. 11 U.S.C. §522(c)(4).
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PROCEDURE FOR CLAIMING EXEMPTIONS.
Debtor files a schedule of exempt assets together with the schedules of assets and liabilities. §522(l).
In California Debtor has choice of two sets of exemptions in bankruptcy
Cal. Code Civ. Proc. §§703.140 Et. Seq. (Compare to 11 U.S.C. §522(d)); Cal. Code Civ. Proc. §§704.020 (exemptions from enforcement of judgments).
Trustee and creditors have a right to object to claimed exemptions provided they do so within 30 days after the meeting of creditors held pursuant to 11 U.S.C. §341(a) is concluded or 30 days after any amendment to the schedules is filed, whichever is the later to occur. Fed. R. Bankr. Proc. 1007 and 4003. Wrongful Claim of Exemption. Even if debtor has no colorable basis for claiming an objection and parties fail to object in a timely manner then the property will be exempted from the estate. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). If debtor late in claiming the property will not be exempted. Petit v. Fessenden, 80 F. 2d 29 (1st Cir. 1996).
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RETIREMENT EXEMPTIONS
Retirement Accounts (IRA’s) Compare with ERISA qualified plans which are not property of the estate. Consequently, with 401K plans the question of exemption does not arise.
Prior to the effective date of the 2005 Act there was a split of authority as to the exempt status of IRA’s in bankruptcy. A few days before enactment of the 2005 Act the U. S. Supreme Court held that debtors can exempt IRA’s under 11 U.S.C. §522(d)(10)(E) in that they are similar plans or contracts to plans specified in 522(d)(10) and are on account of age. The court did not address the additional statutory requirement that the funds are exempt only “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. That issue was not raised on appeal. 2005 Act Favorable Change to Debtors: Now debtors can exempt retirement funds to the extent that those funds are in a fund or account that are exempt from taxation under IRC Sections: 401[qualified plans], 403 [annuities], 408 [IRAs], 408A[Roth IRAs], 414[hybrid plans], 457 [deferred compensation plans] and 501(a) [Employee contribution plans]. Those plans are exempt under both the state [§522(b)(3)(C)] and federal [522(d)(12)]. $1Mil Cap on IRAs, except “rollovers.” §522(n).
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HOMESTEAD EXEMPTION
Homestead exemption allows debtors to exempt from creditors the land and building which make up the family residence. Many states place dollar limits such as California ($100,000) and can be as low as $20,000 in some states. Other states, most notably, Texas and Florida have no limit. Effort to impose a uniform limit of $125,000 on all homestead exemptions for bankruptcy purposes was rejected. 2005 Compromise: §522(q)(1) provides under state exemptions amounts asserted as exempt over $125,000 are not exempt if: Debtor was convicted of a felony under circumstances that the filing was an abuse of the bankruptcy code; or Debtor owes a debt arising from violations of security laws, fraud while acting in a fiduciary capacity or in connection with securities transactions. New limitation to discourage opportunistic behavior by seeking to select the filing venue.
§522(b)(3)(A) general 730 day (approx. 2 year.) domicile requirement §522(p) 40 month (1215 days) period to claim a homestead in excess of $125,000.
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IMPAIRMENT OF EXEMPTIONS
Debtors are allowed to avoid non-purchase money liens on exempt assets as they impair a debtor’s fresh start. §522(f).
Concept: liens on consumer goods have little value but great coercive value to secured creditors. To allow them impairs the debtor’s fresh start.
Section 522(f) authorizes the avoidance of the following types of nonpurchase money liens:
Judicial liens (other than domestic support obligation claims) [§522(f)(1)(A)]; Nonpossessory, nonpurchase money security interests in any of the following
Household furnishings and goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for personal family or household use of the debtor or a dependent of the debtor; Implements, professional books, or tools of the trade of the debtor or dependent of the debtor; Professionally prescribed health aids for the debtor or debtor’s dependent. What is a tool of the trade? In re Liming (Text pg. 46) Impairment of exemption: In re Silveira (Text pg. 54)
2005 Act provides new definition of household goods for purposes of §522(f). 11 U.S.C. §522(f)(4).
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