Bankruptcy

A Lesson in Exemptions

By Bill McLeod, Esq.

In May 7 decision the First Circuit Court of Appeals ruled that a debtor was limited to the amount of his stated objections. For those thinking of preparing cases on their own, or for others with perhaps different motives, the case teaches a good lesson: you reap what you sow.

In a chapter 7, all of the debtor?s property becomes property of the estate, and is sold. The proceeds of the sale are used to pay creditors and other administrative expenses. The debtor is permitted to keep property ? what are referred to as exemptions. In addition to other documents, debtors are required to file schedule B, which identifies personal property, and schedule C, which sets forth the debtor?s claimed exemptions. The code requires that if any party wants to object to any claimed exemption of the debtor, the party must file an objection within 30 days following the conclusion of the creditors meeting, or Section 341 meeting. If that is not done, the property slips ?beyond the estate?s grasp.?

In this case, the debtor listed on Schedule B a total of about $170,000 in money that was owed to him. On Schedule C, he claimed that the claims were only worth $8,000 and were otherwise exempt from the estate. No objection was filed. About a year later, the trustee asked the bankruptcy court to approve a settlement in the amount of $100,000.

The debtor argued that the estate had no interest in the lawsuits at all. But the Bankruptcy Court in Puerto Rico ruled that the debtor had not exempted the lawsuits, but only $4,000 partial interest in each suit. It approved a settlement where the proceeds could be paid to the trustee, with $8,000 paid to the debtor reflecting the amount of their exemption. The US District Court for the District of Puerto Rico affirmed and the debtor appealed.

Full post as published by McLeod Law Offices on May 16, 2008 (boomark / email).