SCOTUS: Debtors must claim full value of exemptions

Debtors’ attorneys who are accustomed to having their clients’ schedules of exemptions sail through the bankruptcy process may be unpleasantly surprised to find the interim trustees ratcheting up their objections.

Blame it on Justice Clarence Thomas and the other five justices of the U.S. Supreme Court who constituted the majority in Schwab v. Reilly. Some say that the case means that trustees will have a duty to object to exemptions that are not artfully claimed.

In Schwab, the debtor claimed as exempt business equipment worth about $11,000 using the tools of the trade exemption of sec. 522 (d) (6) and the wildcard exemption of (d) (5).  Although the trustee did not object within 30 days, a later appraisal showed the property to be worth about $17,000. The trustee claimed as property of the estate the value of the equipment over the exempt amount. The lower courts ruled for the debtor, saying she had indicated her intention to claim the property’s full value.

But the U.S. Supreme Court disagreed.

“Because [the debtor] gave ‘the value of [her] claimed exemption[s]’ on Schedule C dollar amounts within the range the Code allows for what it defines as the ‘property claimed as exempt,’ [the trustee] was not required to object to the exemptions in order to preserve the estate’s right to retain any value in the equipment beyond the value of the exempt interest,” Justice Thomas wrote.

Since the amounts listed by the debtor were within the statutory exemptions, the trustee had no duty to object within the time limits, the court said.

A ruling for the debtor would convert the bankruptcy code’s promised “fresh start” into a “free pass,” Thomas wrote.

The opinion encourages debtors to make their intentions clear, for instance, by seeking to exempt the “fair market value” of an asset, and also encourages trustees to object promptly.  If the debtor exempted the full value, failure to object promptly could mean a loss to the estate because the value over the exempt amount would remain with the debtor.

The dissent would have barred the trustee’s objection as untimely.

Exemptions must have a dollar value

The debtor argued that she had intended to claim the property itself, not its value.  But the bankruptcy code doesn’t provide for in-kind exemptions, or in other words, exemptions not subject to a dollar value, said Lake Elmo attorney Michael Iannacone, who serves as an interim trustee. (There is one local exception, Iannacone noted. The Minnesota exemption scheme allows a debtor to exempt “one watch.”)

“Arguably you’re going to have to interrogate everyone at the creditor’s meeting,” Iannacone said. Even though the code doesn’t allow for in-kind exemptions, that in essence is what a debtor does if the debtor doesn’t list a value, or claims an exemption in excess of the amount listed, he explained.  “I’m going to ask, ‘Are you attempting to claim any in-kind exemptions?'”

Sometimes debtors have listed the value of their exemption as unknown, Iannacone said.  That’s now going to draw an objection unless the debtor amends the schedule and puts a dollar amount in, he said.

The best practice is to claim the full value of the exemption permitted by the Minnesota statute or the bankruptcy code, Iannacone said.  “You use it or lose it.  Why get into an argument over what the property is worth?” he said.

St. Anthony attorney John Hedback, who also serves as an interim trustee, said that debtors must take some step to make it clear that they are exempting 100 percent of the value of the property, or he believes he will be forced to object.  Before Schwab, he would probably not object unless he had reason to believe the debtors’ numbers were “off,” he said.

It’s foreseeable that a trustee may object to the debtors’ numbers, he added.  “I and most of the trustees have been doing this long enough, we have a feel. Most trustees can tell” when the debtors’ values are inaccurate, he said.

Effect on Chapter 13s

Chapter 13 trustees may also start objecting to exemptions because they need to obtain for the bankruptcy estate at least as much as the creditor would receive in a Chapter 7, said Thomas E. Johnson, attorney in the Chapter 13 trustee’s office.

“We may have to object more,” Johnson said. “Debtor’s attorneys tend to exempt low.  We don’t always go after that money but we can [under the] best interests of the creditors test.”

Johnson agreed with Iannacone that a good practice is to claim the full amount of the allowed exemptions.  “Then you don’t run into problems with the trustee,” he explained.

Johnson also pointed out that the Schwab ruling was foreshadowed in the 8^th Circuit by a Bankruptcy Appellate Panel ruling involving a Minnesota case.  In Soost v. NAH, the panel upheld a decision by Minnesota bankruptcy Judge Dennis O’Brien that the debtor’s exemption was limited to the amount claimed on his schedules.   In that case, the debtor had claimed real property as exempt with a value of $1, with no objection, and the creditor was allowed to place a lien on all but $1 worth of the property.

The case was not reviewed by the 8^th Circuit but has provided the standard for Minnesota bankruptcies, Johnson said.