Chapter 9Chapter 9ExemptionsExemptions

BackgroundBackground• Two primary goals of the debtor are:

• This helps provide the debtor with a fresh start

• Only individual debtor may claim exemptions

• Exemptions allow a debtor to protect property from the reach of creditors or trustee

State Exemptions, The State Exemptions, The Homestead ExemptionHomestead Exemption

• Until recently, exemptions only existed under State Law

• The Homestead exemption offers protection to real property owners in accord with State Law

• The Homestead exemption most likely has its roots in 16th and 17th Century English Bankruptcy Law

California Homestead California Homestead ExemptionExemption

• Provided for in CCP §§704.710, et seq.• CCP §704.730 provides amount of

exemption• Property which is subject to a recorded

declaration of homestead, can be attached.

• The attachment lien attaches to the surplus value of the homestead in excess of prior existing liens and the homestead exemption

California Homestead California Homestead Exemption, Continued...Exemption, Continued...

• Where the property's surplus value may be subject to attachment, the property may not be sold to enforce the judgment obtained in the action in which the attachment is issued if the bid at the sale:

(1) is not at least 90% of the fair market value of the property; or

(2) is not in excess of the amount of the homestead exemption and all existing liens on the property, including the amount of the attachment or judgment lien. (Miller & Star, California Real Estate Law §32.24)

Federal Exemptions: Two Choices – First Choice is State Exemptions Along With

Certain Federal Exemptions• §522(b) provides that a debtor(s) may elect to exempt

property from one or two allowable sets of exemptions:

• A debtor may elect to utilize the exemptions that exist in the state where the debtor has been domiciled for at least 730 days prior to the filing petition, or the place where the debtor resided for a majority of the 180 days preceding the 730 day period,

• along, with any other nonbankruptcy exemptions permitted by federal law,

• plus any property held by the debtor immediately preceding the filing as a tenant by the entirety, various individual retirement accounts, & retirement funds that are exempt

• from federal income taxation; (or second choice on

• next slide)

Second Choice - §522(d)

• A debtor may elect the exemptions provided for under the federal exemption scheme contained in 11 USC §522(d)

• If the time limits prevent a debtor from claiming any exemptions, then a debtor may select the federal exemptions

BAPA Limits on the State Homestead Exemptions

Homestead exemptions under state law are limited to $125,000 unless the property involved was acquired more than 1215 days prior to the filing of the petition

Except for property acquired during the same period from a transfer of the debtor’s principal residence in the same state

“Tom Joad” example on page 123

Stacking (Now Prohibited) “Stacking” is where one debtor claims

exemptions under state law and the other claiming federal exemptions

If joint debtors can’t agree on which exemptions to use, the federal exemptions will be applied

Pursuant to 11 USC § 522(d), state law may prevent a debtor from electing the federal exemptions.

According to your book, debtors domiciled in California have to use the state exemptions

Amounts exempt are stated in CCP § 703.140

Selecting Exemptions If you happen to live in one of the few

states that permit the debtor to choose the exemptions, the you should elect the exemptions that will allow the most property to be exempt

According to your book, the debtor’s ownership of real property subject to a homestead exemption will normally determine which set to select

Federal Exemptions § 104 (b), enacted in 1994, accounts for

the effects of inflation on § 522(d) exemptions

Every third April, starting in 1998, the exemption amounts are increased to reflect changes in the published Dept. of Labor Consumer Price Index – the amounts are published one month before they become effective

The adjustments don’t apply to cases filed before the date of a particular adjustment

Federal Exemptions (§522(d))

§ 522(d) (1) allows a debtor to exempt equity in the residence or real property owned by the debtor and resided in by a dependent or in a burial plot owned by the debtor up to $18,450

Joint debtors up to $36,900

Federal Exemptions -§522(d)(2)

Each debtor may claim exempt $2,950 of equity on one motor vehicle (§ 522(d)(2))

Joint debtors owning only one motor vehicle may only claim one exemption

Federal Exemptions -§522(d)(3) 522(d)(3) allows a debtor to exempt household

goods, household furniture, wearing apparel, books, animals, musical instrument, or crops held primarily for personal or household use

Maximum value of $9,850

Any one item can’t exceed $475

The assets are required to be valued at their “replacement value,” “the price [a] retail merchant would charge for property of the kind considering the age and condition of that property

According to your book, realistically, the asset should be valued at its “liquidation value” “what it could be sold at a forced sale”

Federal Exemptions -§522(d)(3), Continued...

§522(d)(3) states “any particular item” thus, your book’s example of an expensive dining room set can be broken down to the individual chairs & table

It is not necessary to provide a “line-by-line itemization for everything, i.e. “12 t-shirts, 6 Fruit-of-the-Looms”

Federal Exemptions - §522(d)(3), Continued...

Unique collections should be itemized It is advisable to obtain a written appraisal of

any particularly valuable collections, furnishings or wardrobe prior to filing

Counsel’s “reasonable inquiry” requirement may also demand that the attorney obtain a written appraisal

Federal Exemptions - §522(d)(4)

§522(d)(4) allows the exemption of $1,223 in jewelry held for personal use of the debtor or a dependent

Potentially valuable jewelry items should be appraised

Federal Exemptions - §522(d)(5)

§522(d)(5), the “catch-all exemption,” consists of any unused portion of the federal homestead exemption up to $9,250 plus $975 = $10,225, in any property of any kind

According to your book, absolutely anything may be claimed under this exemption

Exception: fraudulent transfers and transfers not disclosed

Federal Exemptions - §522(d)(6), (7) & (8)

§522(d)(6) allows a debtor to exempt $1,850 of value in tools of the trade or professional implements

§522(d)(7) exempts unmatured life insurance contract, this also includes term insurance or policies with no cash value

§522(d)(8) allows a debtor to claim as exempt cash value in an insurance policy up to $9,850

Federal Exemptions - §522(d)(9),(10), (11) & (12)

§522(d)(9) exempts professionally prescribed health aids of a debtor o a debtor’s dependent, such as glasses, contact lens or orthopedic shoes – no dollar limit

§522(d)(10) exempts SS benefits, welfare, veterans benefits, alimony, qualified pension and profit sharing plans (ERISA) and disability & unemployment

§522(d)(11) exempts certain aspects of personal injury compensation

§522(d)(12) permits retirement funds exempt for taxation pursuant the IRC to be claimed exempt

Unaffected Claims

Exemption don’t protect otherwise exempt property from:

a. Properly secured liens b. Properly filed tax liens c. Nondischareable taxes; d. Nondischargeable domestic support obligations; e. Debts incurred by fraud in obtaining school financial aid

Conversion of “Nonexempt” to “Exempt” (Not Prohibited) §522 states, “...the debtor will be

permitted to convert nonexempt property into exempt property before filing a bankruptcy petition. However, the excessive conversion of nonexempt to exempt property on the eve of a bankruptcy filing can result in the denial of a debtor’s discharge.”

i.e., selling antique jewelry prior to filing to buy a refrigerator

Lien Avoidance to Preserve Exemption A debtor may avoid a judicial lien or a

nonpossessory nonpurchase money security interest in consumer, personal goods or household goods, tools of the trade, or professionally prescribed health aids to the extent that any such lien impairs an otherwise allowable exemption

This can be avoided to the extent that the collateral can be claimed exempt

Book’s example of a loan from the “friendly neighborhood finance company” for a vacation that is secured by household furniture – the debt will be discharged

Claiming Exemptions

The debtor must file a list of exemptions with the court

A debtor’s claim of exemptions is to be filed at the same time as the Statement and Schedules, within 15 days of the date of filing

The exemption schedule may be amended at any time prior to the close of the proceeding

Objecting to Exemptions

The trustee or any creditor may object to a claim of exemption

The objection must be filed via noticed motion, within 30 days of the conclusion of the creditors meeting or within 30 days after any amendment if filed unless the court orders otherwise

Unless an objection is made, the property will be claimed “exempt” is “exempt”

The party raising the objection has the burden of proving the impropriety of the objection