Cite as: Keith M. Lundin, Lundin On Chapter 13, § 48.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
In addition to the new domicile rule for identifying the state law that controls exemptions,1 BAPCPA enacted many new exemptions and amended several existing exemptions to put new limitations on when and to what extent some exemptions are available to individual debtors. Here are the highlights.
1. New § 541 exclusions. Detailed above,2 BAPCPA amended § 541 to exclude from property of the Chapter 13 estate3 education individual retirement accounts,4 funds invested in a tuition credit or qualified state tuition program5 and any amount withheld from a debtor’s wages or received by an employer for contribution to an employee benefit plan, deferred compensation plan, tax deferred annuity or health insurance plan.6 Although not technically exemptions, these new exclusions from property of the estate have the effect of putting the described property beyond the reach of creditors and the trustee in a Chapter 13 case. The technical conditions on these new exclusions from the Chapter 13 estate are detailed elsewhere.7
2. Retirement accounts. BAPCPA dramatically increased the exemption available to all debtors in funds or accounts that are exempt from taxation under the many sections of the Internal Revenue Code cited in new § 522(b)(3)(C).8 This new exemption in retirement funds and accounts is available to all Chapter 13 debtors without regard to domicile or state law and is mirrored in a new federal exemption.9 The new exemption is not limited in amount except as provided in new § 522(n).10 The new exemption is generously defined to include retirement funds that have not received a favorable tax determination from the IRS, and rollover distributions are included.11
In new § 522(n), BAPCPA allows an exemption in an individual retirement account described in § 408 or 408A of the Internal Revenue Code not to exceed one million dollars, except that amount “may be increased if the interests of justice so require.”12 The unlimited new exemption for retirement funds and accounts in § 522(b)(3)(C) overlaps the limitation in § 522(n) with respect to individual retirement accounts. The million dollar “cap” on the exemption of IRAs is calculated “without regard to amounts attributable to rollover contributions.”13 The “interests of justice” that would require an exemption in an IRA in excess of a million dollars are anybody’s guess.
3. DSO and tax limitation. Section 522(c) has always provided that exempt property is not liable “during or after the case” for any debt that arose before the bankruptcy petition with listed exceptions. Before BAPCPA, one of the listed exceptions was “a debt of a kind specified in section 523(a)(1) or 523(a)(5) of this title.”14 This exception was rewritten by BAPCPA to read: “a debt of a kind specified in paragraph (1) or (5) of section 523(a) (in which case, notwithstanding any provision of applicable nonbankruptcy law to the contrary, such property shall be liable for a debt of a kind specified in section 523(a)(5)).”15
Two major changes are embedded in the odd parenthetical just quoted. First, the cross-reference to § 523(a)(5) captures the enlarged definition of domestic support obligation (DSO) enacted by BAPCPA.16 That new definition includes alimony, maintenance or support that accrues before or after the Chapter 13 petition.
The second change is the parenthetical invalidation of all “nonbankruptcy law to the contrary.” The redrafted section seems to say that property exempted during a Chapter 13 case remains liable for any DSO without regard to any contrary provision of nonbankruptcy law.
What does new § 522(c) do to state law limitations on the collection of alimony, maintenance or support from a Chapter 13 debtor’s exempt property? Property of the estate in a Chapter 13 case includes all of a debtor’s postpetition earnings.17 State laws typically permit child support creditors to garnish wages, sometimes to a greater extent than other creditors can garnish wages. Does the parenthetical in new § 522(c)(1) invalidate state law limitations on the exemption of wages in Chapter 13 cases? Does this new section trump all state laws with respect to a debtor’s homestead exemption and the collection of a domestic support obligation? New § 522(c) was probably intended to overrule appellate authority that the former version of § 522(c)(1) did not preempt contrary state law.18
4. Fraudulent asset conversions within 10 years. In new § 522(o), BAPCPA limits the value available for homestead exemption to the extent the debtor disposed of property in the 10 years before the petition with intent to hinder, delay or defraud a creditor. This new provision was effective on April 20, 2005. The target here was state court decisions interpreting state law to permit a debtor to convert nonexempt assets into an exempt homestead even with actual intent to hinder, delay or defraud creditors.19 Applying § 522(o), one bankruptcy court limited a Chapter 13 debtor’s homestead exemption when the debtor sold a trailer and truck on the eve of bankruptcy and used the proceeds to create a homestead exemption with actual intent to hinder, delay or defraud creditors.20
One consequence of this new limitation on exemptions is that all Chapter 13 debtors may have to reveal in the schedules or statement all asset transfers in the 10 years before the petition.21 This limitation on homestead exemption applies only in a bankruptcy case and could deter some individuals from filing Chapter 13 when the debtor’s homestead exemption would be more robust outside of bankruptcy. The exemption limitation is an incentive to file an involuntary Chapter 7 case.
5. $125,000 homestead limitation. Also effective on April 20, 2005, BAPCPA added a new § 522(p), which limits to $125,000 the debtor’s interest in property acquired within 1,215 days of the petition that may be claimed as a homestead exemption.22 The $125,000 limitation does not apply to any interest the debtor transferred from a principal residence acquired before the 1,215-day period. It has been held that § 522(p) does not limit the state law homestead exemption rights of a Chapter 13 debtor’s nonfiling spouse.23
Perhaps the first reported decision interpreting a provision of BAPCPA, In re McNabb24 read new § 522(p) to apply only in a state that permits a debtor “to elect” state exemptions. Under Judge Haines’s careful analysis in McNabb, any state that has opted out of the federal exemptions and that requires debtors to use state exemptions would not implicate the new $125,000 limitation on homestead exemptions in § 522(p).25
6. Bad acts limitation. A debtor electing state exemptions is further limited by new § 522(q) to a $125,000 homestead exemption if the debtor has been convicted of a felony, owes a debt for violation of the securities laws, owes RICO penalties or caused serious physical injury or death by criminal act, intentional tort or willful or reckless misconduct in the five years before the petition.26 This limitation became effective on April 20, 2005, but does not apply to the extent an interest in property is “reasonably necessary” for the support of the debtor or a dependent. This new limitation on homestead exemptions has a strange effect in Chapter 13 cases because no discharge can be entered until the bankruptcy court finds that there is “no reasonable cause to believe” that new § 522(q)(1) is applicable to the debtor.27
It deserves repeating that many of the new limitations on exemptions enacted by BAPCPA only apply in states with homestead exemptions in excess of $125,000. Because of the new domicile rules,28 debtors’ counsel in all parts of the country are more likely to encounter homestead exemptions in excess of $125,000.
1 See § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
2 See § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
3 11 U.S.C. § 1306, discussed in §§ 45.1 [ What Is Property of the Chapter 13 Estate? ] § 46.1 What Is Property of the Chapter 13 Estate? and 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
4 See 11 U.S.C. § 541(b)(5), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
5 11 U.S.C. § 541(b)(6), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
6 11 U.S.C. § 541(b)(7), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
7 See § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
8 11 U.S.C. § 522(b)(3)(C) states an exemption in “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.”
9 See 11 U.S.C. § 522(d)(12).
10 11 U.S.C. § 522(n) states:
For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified [sic] employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under sections 402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.
11 See 11 U.S.C. § 522(b)(4).
12 11 U.S.C. § 522(n).
13 11 U.S.C. § 522(n).
14 11 U.S.C. § 522(c)(1) (before amendment by BAPCPA).
15 11 U.S.C. § 522(c)(1).
16 See 11 U.S.C. § 101(14A), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3 Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21 Domestic Support Obligations after BAPCPA.
17 See 11 U.S.C. § 1306(a)(2), discussed in § 46.1 [ Postpetition Earnings ] § 46.3 Postpetition Earnings.
18 See, e.g., Davis v. Davis (In re Davis), 170 F.3d 475 (5th Cir. 1999) (en banc).
19 See, e.g., Havoco of Am., Ltd. v. Hill, 790 So. 2d 1018 (Fla.), op. after certified question answered, 255 F.3d 1321 (11th Cir. 2001).
20 In re Maronde, 332 B.R. 593 (Bankr. D. Minn. 2005).
21 Question 10b in Official Form 7 gets part-way there. See § 383.1 [ Statement of Financial Affairs after BAPCPA ] § 36.23 Statement of Financial Affairs after BAPCPA.
22 See, e.g., In re Zecher, No. 06-12151 WCH, 2006 WL 3519316 (Bankr. D. Mass. Dec. 6, 2006) (Chapter 13 debtor who transferred homestead to and from a trust during 1,215 days before petition is limited by § 522(p) to homestead exemption of $125,000.).
23 In re Walsh, 359 B.R. 389 (Bankr. D. Mass. 2007) (Although $125,000 homestead cap in § 522(p) applies because debtor acquired ownership interest in homestead 371 days before petition, nonfiling spouse is not subject to § 522(p) and can claim $500,000 homestead exemption under Massachusetts law for purposes of § 1325(a)(4) best-interest-of-creditors-test calculation.).
24 326 B.R. 785 (Bankr. D. Ariz. 2005).
25 In re McNabb, 326 B.R. 785, 789, 790 (Bankr. D. Ariz. 2005) (The cap on a debtor’s homestead exemption imposed by § 522(p) applies only as a result of “electing” to exempt property under state or local law; because state law does not permit that election, cap does not apply. “[T]he $125,000 cap applies only ‘as a result of electing under subsection (b)(3)(A) to exempt property under State or local law.’ Code § 522(b)(1) allows debtors to elect to exempt property listed in either paragraph 2 or, in the alternative, paragraph 3.” Originally, the Code contemplated the debtors would be able to elect either local or Bankruptcy Code exemptions. Congress gave to states the power to “opt out” of the Bankruptcy Code exemptions. Arizona, being an opt-out state, does not give the debtor the right to “elect” state exemptions. Arizona’s exemptions are the only ones available to a debtor. “It really is not for this Court to speculate on Congress’s purposes when the language is clear and unambiguous. . . . Here there is no ambiguity or absurdity in result. The language is unambiguous in stating that the cap is imposed only ‘as a result’ of an election, so if there is no election there can be no cap. And the result can hardly be deemed absurd, when it is consistent with 163 years of bankruptcy law.” Congress had the ability to draft language which limited all state exemptions referring to the language of § 522(o), but it created a blanket reduction in a homestead, irrespective of the method by which the homestead was derived. “If Congress had similarly intended the $125,000 cap found in § 522(p) to apply across the board, it would presumably have used the identical language.”). But see In re Landahl, 338 B.R. 920, 923 (Bankr. M.D. Fla. 2006) (“This Court finds compelling, and hereby follows, the reasoning of [In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005), In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005), In re Kane, 336 B.R. 477 (Bankr. D. Nev. 2006)]. . . . Section 522(p) links ‘electing’ only to the state law exemption scheme, not to the choice between the Federal Exemptions and state law exemptions. . . . The ‘result of electing’ phrase does not, by its terms, compel the conclusion that Section 522(p) is inoperative in Florida and other opt-out states.”).
26 See 11 U.S.C. § 522(q)(1)(A), (B).
27 See 11 U.S.C. § 1328(h), discussed in § 547.1 [ Delay of Discharge: § 522(q)(1) and Pending Proceedings ] § 156.6 Delay of Discharge: § 522(q)(1) and Pending Proceedings.
28 See 11 U.S.C. § 522(b)(3)(A), discussed in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.