BANKRUPTCY debtors are able to keep property that they claim exempt under applicable law. To illustrate, debtors filed Chapter 7 last week, declare in schedule A and D that their residence has a fair market value of $400,000 with an outstanding balance on the first mortgage of $300,000. They claimed the entire $100,000 equity as exempt using 704.730. No problem. Trustee has no legal ground to object to that claim of exemption. Debtors get to keep their residence despite bankruptcy. But let’s imagine an unlikely situation in this recession. Let’s pretend that the fair market value of the house increased to $500,000 two months from now resulting in equity of $200,000. Just because the entire equity of $100,000 was exempt does not mean that the rest of new equity, another $100,000, is exempt. Well, this does present a problem doesn’t it? Trustee will argue that he can take the residence, sell it for $500,000, give debtors their exempt equity of $100,000 in cash from proceeds of sale, and use the other nonexempt $100,000 to pay creditors of debtors and trustee fees. Is this argument correct? Yes it is legally correct. Will debtors lose their residence? Yes. Do they get to keep their $100,000 of exempt equity even though the trustee sells their house? Yes.
We do not see this kind of ‘appreciating asset’ problem nowadays because house values are going south and most debtors own houses that have no equity whatsoever. Upside down is the norm now. But 5 years ago, the situation was reversed. House values before the housing bubble burst were going north every month. Bankruptcy trustees were able to get debtors’ houses and sell them, give debtors their exempt equity from sale proceeds, and use the rest to pay off creditors and trustee expenses. Thus, at that time, trustees would keep cases open for several years, hoping that the fair market value of debtor houses would significantly surpass exempt equity and make it economically viable to sell the houses.
In Schwab v. Reily, (June 17, 2010), Supreme Court ruled that debtors do not exempt the full value of property by asserting an exemption equal to the property’s full scheduled value. All they are exempting is their interest in the property up to the value of the scheduled exemption. Writing for the six member majority, Justice Clarence Thomas said trustees may evaluate the propriety of asserted exemptions based on the debtor’s description of the property claimed as exempt, the Bankruptcy Code provision governing the exemption, and the amount listed in the column marked ‘value of claimed exemption.’ If it later turns out that the property is worth more than the scheduled amount, the trustee may assert the bankruptcy estate’s interest in the excess value even though the trustee did not object to the debtor’s claimed exemption in the full scheduled amount of the property.
Reilly filed for Chapter 7 relief after her catering business failed. In an effort to shield her catering equipment from creditors’ claim, she asserted that $1,850 was exempt under Section 522(d)(6) as tools of trade, and $8,868 was exempt under Section 522(d)(5)’s wild car exemption. The total value of her asserted exemptions in the equipment, $10,718, equaled the equipment’s market value listed on Schedules B and C. The Chapter 7 trustee did not object to the exemptions. Later on, however, an appraisal revealed that the equipment was worth more than the debtor said it was. In fact, the appraiser said the equipment might be worth $17,000 so the trustee asked the court for permission to auction the equipment so the nonexempt value of $6,282 could be used to pay creditor claims. Reilly opposed the motion on the basis that the equipment was fully exempt, and trustee was required by rule 4003(b) to object to debtors’ claimed exemption within 30 days after the 341a meeting of creditors, citing Taylor v. Freeland & Kronz (US 1992).
I will analyze your case personally. Contact my office for debt relief.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803. (Advertising Supplement)
( Published August 28, 2010 in Asian Journal Los Angeles p. C4 )
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