9.0 EXEMPT PROPERTY
9.1 Federal and State Exemptions
Debtors are given the choice of using state exemptions or, if the state does not prohibit the federal exemptions, federal exemptions of $15,000 (plus wildcard of $800) of equity. The amount of the federal exemption shall be adjusted every three years. Joint debtors must choose only state or federal exemptions. If they cannot agree, they will be deemed to have chosen the federal exemptions if the state has not opted out. There is conflict as to whether spouses in a joint filing can separately claim the exemptions of state law or are entitled only to one set of exemptions.
State law can explicitly prohibit election by the debtor to select the federal exemptions. States prohibiting use of federal exemptions include Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
If a state (such as Tennessee) does not explicitly permit exemptions for tenancies by the entirety in its statutes, but regards such interests as immune from process as a matter of law, the debtor may claim the tenancy as an exemption under state law. If creditors can execute on the right of survivorship of such tenant, then the right of survivorship may not be exempted under state law and may be sold by the trustee. If property is held by debtors as tenants by entireties and can be reached by judgment against both of them, it cannot be claimed as exempt to the extent there are joint creditors. The case of In re Lambert, 34 B.R. 41, 9 C.B.C.2d 805 (Bankr. D. Colo. 1983), held that a bankruptcy effected a severance of a joint tenancy property in Colorado and distinguished entireties property as not being severed by the bankruptcy.
If exemptions under state law are selected, the debtor may schedule as exempt land located only in that state.
A claim of state exemption must apply the state law in effect on the date the bankruptcy petition was filed.
A general claim of a state exemption can be no greater than that actually allowed by state law.
Proceeds and change in character of exempted property after the filing of the bankruptcy will not be property of the estate; once property is exempt, it remains exempt.
If the comparable state exemptions apply only to an equity interest or value or if the federal exemption is used, then the encumbered portion of the property (being that portion equal to the secured debt) remains subject to the bankruptcy until abandoned or until the case is closed. That interest will not be exempted merely by approval of the exemptions or by court order setting aside the exemptions. According to one view, post-petition appreciation of land with exempt and non-exempt equity will inure to the estate. Thus, further court approval or notice and opportunity for hearing must be secured to abandon the encumbered portion of the property or to allow sale of the property.
Company Policy: If an equity interest is scheduled as exempt, verify the exemptions are applicable due to lack of objections more than 30 days after conclusion of creditor's meeting by clerk's certificate, attorney's letter, or file and docket sheet review. Also (1) require the trustee to abandon the encumbered portion of the property by notice, (2) secure a certificate of notice to all interested parties, and (3) require a certificate or letter to verify that no objection was made within 15 days. If only an equity is exempted and the remaining interest is abandoned, you may not insure the sale if the net proceeds to debtor exceed the equity exemption. If the debtor is selling exempted land in a Chapter 12 or 13 proceeding, secure a letter from the trustee evidencing lack of objection to the sale and, if Local Rules require court approval, secure a court order.
The debtor shall list the property claimed as exempt on the schedules. An amendment of the schedules to revise the claimed exemptions may be filed at any time before the case is closed, unless delay in doing so causes prejudice (creditors may object within 30 days of such amendment). A debtor may amend the plan or schedules to change from federal to state exemptions if creditors are not prejudiced. The trustee or creditor may object to the property claimed exempt within 30 days after the meeting of creditors concludes (which meeting may be adjourned and extended) or within 30 days of the filing of any amendment to the scheduled exemptions, unless the court within the 30 day period grants further time. The 30-day provision does not begin to run until the full detail of the exemption is disclosed by (any) amendment. Otherwise, the exemptions are deemed allowed without court order. An objection can be evidenced by assertions in a complaint in an adversary proceeding or by a motion to lift stay filed within the time for objections. A response to a debtor's motion to avoid the claimant's judicial lien that states the debtor is not entitled to an exemption in the residence sufficiently manifests an objection to the exemption within the 30-day period. In the absence of objection within 30 days after the creditors' meeting or after the amendment to exemptions, the property claimed as exempt is exempted even though the claim is invalid. Conversion of a bankruptcy from a Chapter 11 case does not enlarge the 30-day time limit for objection. Conversion of a bankruptcy from a chapter 13 case triggers a new 30-day time limit for objections following the subsequent sec. 341 meeting. A right to a homestead exemption is determined at the time of commencement of the original case, rather than the date of conversion to a case under Chapter 7.
Company Policy: Secure a certified copy of the listed exemptions together with verification of passage of 30 days beyond the meeting of creditors as adjourned with no objection having been filed. Verification can be reflected by a clerk's certificate, attorneys letter, or file and docket sheet review. Unless a party in interest objects, the claimed property or equity interest is exempted. If an equity interest is exempted require the remaining interest of the estate to be abandoned or sold by the trustee or debtor-in-possession.
9.4 Chapters 12 and 13 Exemptions
It has been stated that, until confirmation of the proposed plan, property claimed as exempt may not be divested from the estate. This language appears to be overly broad dictum, and inconsistent with the applicable rules and code provisions. It has been noted that the debtor can waive exemptions and use the exempt property in paying the debts under the plan. This right is irrelevant if the debtor has sold the exempt property prior to filing the plan. Unless the plan and confirmation provide otherwise, the debtor's property is revested in the debtor by the confirmation. If property is exempted in a Chapter 13 case, the debtor does not need a court order to sell and may not sell free and clear of liens or interests. However, Local Rules may require court approval of a sale or refinancing of the debtor?s residence in a Chapter 13 case (even after confirmation).
Company Policy: If the property is scheduled as exempt and time for objections to be filed has passed, verify that the proposed (or confirmed) plan, if any, does not treat the property inconsistently by providing that it will be conveyed to a creditor, remain part of the estate, or be sold to pay debts. Request a letter from the trustee evidencing no objection to a sale or refinance after plan confirmation and before the case is closed.
9.5 Judicial Liens
A debtor may avoid a judicial lien on exempt property to the extent the lien impairs the exemption. A lien impairs an exemption to the extent the lien and all other liens on the property and the amount of the exemption available if there were no liens exceeds the value that the debtor's interest would have in the absence of any liens. This provision does not apply to a judgment arising out of a foreclosure. An avoided lien shall not be considered in the calculation of the amount of liens on the property. This new provision allows avoidance if (1) the debtor has no equity in the property above a lien superior to the judgment lien; (2) the judgment lien is partially secured; and (3) the judgment lien is superior to an unavoidable mortgage which is greater than the value of the land. The proceeding is by motion and notice (not adversary proceeding). No order is necessary if no objection is made.
Company Policy: In all cases involving lien avoidance, we will require a final court order. Do not insure if the court dispenses with notice. Wait until the order is final (30 days after entry) which finality should be evidenced by a certificate of the clerk or counsel and docket sheet review. Since the order will be rendered void if the case is dismissed, do not rely upon the order until the discharge or completion of the plan (if a Chapter 11 proceeding).
This section cannot be used as to a judicial lien attaching before the enactment date of the Bankruptcy Code of 1978 (November 6, 1978). The lien does not attach, however, until the land is acquired.
This section can be used as to judicial liens even if the state exemptions are used and even if state statutes or other law creating the exemptions specifically provide that the exempt property is subject to the judicial liens. Therefore, even if state law allows a judgment lien to attach to property owned by the debtor if it attaches before the property acquires exempt status, the lien may be avoided. However, if the lien attached before the debtor acquired the land or simultaneously with the acquisition of title by the debtor, the lien may not be avoided if it would attach under state law. A lien that affixes before or at the time the debtor acquires the interest, such as a judicial lien fixed at the time the debtor receives the property in a divorce, is not avoidable under Section 522(f); the debtor must have owned the property before the lien attached in order to avoid the lien.
According to one view, Section 522(f) could not be used to avoid a judicial lien to the extent of future appreciation in excess of a state exemption of a fixed dollar amount (e.g., $45,000). This view was abrogated by amendment of Section 522 in 1994.
At the court's discretion, a proceeding under Section 522(f) may be brought by reopening the case after the discharge is granted and the case is closed. The local rule time limitations may be ignored. Local districts may impose a time limit to file a motion for lien avoidance motions. The court in its discretion may refuse to reopen the case. One case has held that a lien may not be avoided under Section 522(f) after the case is closed due to the limitations of Section 550(e)(2) (concerning avoidance of transfers under 544, 545, 547, 548, 549, 553, and 714); however, this case does not appear to be correct. A debtor may not resort to Section 522(f) to avoid judicial liens on homestead sold before the commencement of the bankruptcy or sold after the case is commenced but before the motion to avoid the lien is filed.
The majority view (consistent with Section 522 as amended) is that the procedure can be used even if the exemption of the debtor under state law extends to equity (e.g., $10,000 maximum in Colorado) in the property where there is no equity in the case at hand.
If the debtor is a tenant by the entireties, one-half of the equity in the property will be allocated to her or him to determine whether the judgment lien can attach to excess equity or whether, in the alternative, the lien can be avoided.
The scheduling of property as exempt without timely objection is only determinative of the issue of whether the property remains in the estate: it is not a binding determination of the homestead claim in connection with a motion to avoid a judicial lien as interfering with the homestead rights either under Section 522(f) or as ineffective under any state law exemption from attachment of judicial liens. It also is not determinative as to whether a mortgage (which would be invalid against exempt property) is invalid because of claimed homestead rights.
Company Policy: Do not rely on the scheduling of property as exempt (without objection) as determinative of whether a judgment lien attaches to the land.
Company Policy: Because a dismissal under section 349 reinstates any judicial lien avoided under section 522(f), do not rely upon a lien avoidance order unless the discharge has been granted in Chapter 7, 12, or 13, or unless the plan has been completed in a Chapter 11 or unless the order recites that, in accordance with state law, the lien never attached to the property.
For purposes of Section 522(f) avoidance, judicial liens obtained pursuant to agreement of the parties are not avoidable judicial liens: The Courts distinguish consensual ("security interest") liens which are non-avoidable, and involuntary judgment liens which are avoidable under Section 522(f).
A mechanic's lien created by state law is a statutory lien, not a judicial lien, and is not avoidable under Section 522(f).
According to one view, a divorce decree creating an equitable lien for the purchase price to be paid to one spouse or other court order creating an equitable lien (such as one creating a constructive trust) and later reflected by a judgment lien for such amount is not a judicial lien avoidable under Section 522(f).
A statutory federal tax lien is not a judicial lien avoidable under Section 522(f).
According to one view, a judgment lien cannot be avoided under Section 522(f) if the debt is not dischargeable. A debtor may not avoid a judicial lien that secures a debt to a spouse, former spouse or child for alimony, maintenance, or support unless the debt is assigned to another entity. Property exempted under state law pursuant to Section 522 is subject to nondischargable debts for alimony, maintenance, or child support, nondischargable debts for fraud and willful injury to federal depository institutions, a regulatory agency acting as conservator, receiver, or liquidating agent, notwithstanding contrary state law on execution.