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Bankruptcy Exemptions: One Debtor's Misfortune May Be Your Lucky Break

Posted By admin || 21-Jul-2010

Bankruptcy Exemptions: One Debtor's Misfortune May Be Your Lucky Break The Supreme Court 6-3 decision authored by Justice Clarence Thomas, ruled that a bankruptcy trustee could seek to recover a debtor's personal property that she had declared exempt in her Chapter 7 bankruptcy case even after the time to object to the exemption had expired.

In Schwab v. Reilly, the debtor had indicated in her bankruptcy schedules that she wished to exempt certain property and the trustee failed to object during the 30-day time period. But he later objected to the exemption when an appraisal revealed that the value of the property might exceed the debtor's estimated value.

The bankruptcy court ruled that since the bankruptcy debtor did not provide clear language that would indicate her intention to exempt the full value of the asset, the bankruptcy trustee had a right to object after the 30-day time limit had expired.

In the bankruptcy case noted above, the debtor had listed as exempt equipment on her Schedule C using her "tools of the trade" exemption of $1,850 and her "wildcard" exemption of $8,868.  The bankruptcy trustee failed to object to the exemption within the 30-day period prescribed by Federal Rule of Bankruptcy Procedure; but when the property was appraised, it revealed that the equipment was worth as much as $17,200. As a result of the appraisal, the bankruptcy trustee ordered the seizure of the property and its sale so that the amount above and beyond what was exempt could be distributed to creditors.  As a result of the ruling the court has issued new and clear guidance on how bankruptcy exemptions should be handled:

"Where, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as 'full fair market value (FMV)' or '100% of FMV.' Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits...If the trustee fails to object, or if the trustee objects and the objection is overruled, the debtor will be entitled to exclude the full value of the asset. If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption," the court said.

It has already been noted that most pro se debtors filing bankruptcy without the help of an attorney will probably fail to include the right language to properly protect their property with bankruptcy exemptions.  If this debtor had made it clear that she wanted to exempt the entire value of the property, she would have been better positioned to save her asset when challenged by the bankruptcy trustee.

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