Wednesday, March 02, 2011

Bankruptcy Exemptions

OK, enough ranting and back to some nuts and bolts.

Last June the SCOTUS a decision in Schwab vs. Reilly concerning when a party could challenge a claimed exemption. Debtor had claimed an exemption in some personal property and set the value for it at exactly the exemption amount. It turned out the property was worth more than that, and the trustee wanted to liquidate the property and distribute the difference. Problem was that the trustee didn't object by Rule 4003's 30-day deadline. The majority ruled, "Sorry, Debtor, notice matters, you gave no notice there was anything to be objected to, so you only protected the property up to the value you listed, and the trustee can pursue the overage." The dissent wrote, "30 days means 30 days. Period. The property should be fully exempt."

This case arose because Debtor was in a state that had not opted out of the Federal exemptions and so had a "floating exemption" that she could split among different pieces of property. That's why she low-balled the value of the property at issue; she would have more of the exemption left over for other property. Some states have that floating exemption too. For those of us in opt-out states that don't provide a float, the opinion was not very exciting. Here in Utah, you get a $2,500 exemption for your car. You list its value as $2,000 but it turns out to be $3,000, you get the same exemption.

But what about exemptions that don't have set limits? Suppose you valued the exempt property at X, but it turns out to be worth twice that. Can the trustee come in at any point and say, "You only exempted the claim amount, and I'm taking the rest"? I don't know. I do know that in Section III of its opinion, the SCOTUS reaffirmed Taylor, which held that listing an exemption value as "unknown" gives notice of a valuation issue and sets the 30-day clock running (Yes, Taylor concerned an exemption with a fixed limit, but to me, the issue is notice, and "unknown" is a red flag.). I've always used "unknown" in the schedules when we didn't know a value. Some people get bent out of shape by that, but until they amend the Code or the Rules, I'm going to keep on using it, and now I have an extra reason. Setting a value where I don't have one is nothing but a trap for the debtor.

On a side note, the alignment of justices in Schwab was perhaps more interesting than the opinion. The majority was written by Thomas (?) and joined by Scalia, Alito, Kennedy, Sotomayor (!), and Stevens (!!). The dissent was written by Ginsburg and joined by Breyer (!) and Roberts (!!!!!!!!!!!!!). Go figure.