§ 90.2     Exemption Issues
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 90.2, at ¶ ____, LundinOnChapter13.com (last visited __________).

One reason exemptions are important in Chapter 13 cases is that exemptions reduce the hypothetical liquidation value of the estate for purposes of the best-interests-of-creditors test in § 1325(a)(4).


Debtors in Chapter 13 cases are entitled to claim exemptions,1 and exempt property is excluded before calculating the hypothetical liquidation value of the estate under § 1325(a)(4). As explained by one court, exempt property is not included in the value that would be liquidated for the benefit of creditors in a Chapter 7 case; on the other hand, any proposal by a Chapter 13 debtor to make personal use of assets that are not exempt will fail the best-interests-of-creditors test because the value of all nonexempt assets increases the amount that must be paid to satisfy § 1325(a)(4).2


Exempt property can be an opportunity for the debtor with a best-interests-of-creditors-test problem. Occasionally, Chapter 13 debtors have substantial assets that are exempt—for example, retirement accounts or the equity in a homestead. When there is nonexempt property in the estate that would be liquidated by a Chapter 7 trustee, the debtor has the option to voluntarily contribute exempt assets to make distributions to creditors sufficient to balance the assets that would be liquidated in a Chapter 7 case. The debtor in In re Lapin3 satisfied the best-interests-of-creditors test notwithstanding that substantial assets would be available for liquidation in a Chapter 7 case by committing more than $1 million of exempt assets to funding the plan.


Debtors should pay careful attention to the exemptions claimed in Schedule C to Official Bankruptcy Form 64 because this schedule will be used to determine the hypothetical liquidation value of the estate for purposes of the best-interests-of-creditors test in § 1325(a)(4). The Supreme Court has focused bankruptcy practitioners on the importance of Schedule C and on the importance of timely objections to exemptions.


In Taylor v. Freeland & Kronz,5 the Supreme Court held in a Chapter 7 case that Bankruptcy Rule 4003(b) insulates exemptions from objections after 30 days after the meeting of creditors even if the exemptions are unfounded in fact or applicable law.6 Taylor impacts the best-interests-of-creditors test in Chapter 13 cases. Bankruptcy Rule 4003(b) applies with equal force in a Chapter 13 case. If the debtor claims exemptions and no one objects within the 30 days described in Bankruptcy Rule 4003(b), the exemptions are allowed and cannot be collaterally attacked, for example, through an objection to confirmation on best-interests-of-creditors test grounds under § 1325(a)(4).


Taylor has been applied by several courts to preclude a best-interests-of-creditors test objection to confirmation when the underlying argument is that an exemption is not valid.7 For example, in In re Alderman,8 the Chapter 13 debtor claimed a homestead exemption in property that was owned by a partnership. No objection was filed within the 30-day period in Bankruptcy Rule 4003(b). The trustee and a creditor objected to confirmation, arguing that no homestead exemption was available in property owned by a partnership, and thus the debtor’s partnership interest should be included in the hypothetical liquidation value of the estate for best-interests-of-creditors test purposes. The court disagreed:

Under the clear language of [Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992),] the Trustee and SBA may not now contest the exemption at confirmation more than two months after the deadline, regardless of whether or not the Debtors had a colorable statutory basis for claiming the homestead exemption on their Schedules. This Court would add that the rule applies regardless of whether or not the exemption is informational only, because under § 103(a) of the Code, Chapter 5 applies to a case filed under Chapter 13 and Rule 4003 incorporates Rule 1007, which applies to all Chapter cases. . . . The Debtors’ unencumbered share in the partnership property is exempt to the amount allowed by law, and therefore not available for distribution to the unsecured creditors under the “best interests of the creditors test.”9

The message of Alderman and similar cases is twofold: Chapter 13 debtors should carefully and aggressively claim exemptions in Schedule C to Official Bankruptcy Form 6 because Bankruptcy Rule 4003(b) will protect those exemptions from challenge after 30 days, and those exemptions can then be relied upon for best-interests-of-creditors test purposes at confirmation. Creditors and the Chapter 13 trustee must diligently police exemptions within 30 days after the meeting of creditors else those exemptions will be beyond attack at confirmation under § 1325(a)(4).10 A successful objection to exemptions is the predicate to a best-interests-of-creditors-test objection to confirmation;11 but the reverse is not always true—a best-interests-of-creditors-test objection to confirmation will be lost if it is based on an objection to exemptions that becomes untimely when raised at confirmation.


Complicated and technical exemption questions get litigated in Chapter 13 cases because the outcome of an exemption question may determine whether the plan satisfies § 1325(a)(4). For example, in In re Kelley,12 the debtor claimed an exemption in an ERISA-qualified pension plan. The payment to unsecured claim holders proposed by the plan exceeded the liquidation value of what was left in the debtor’s estate if the pension plan was not included, but was less than liquidation value if the pension plan was part of the estate. The bankruptcy court determined that the pension plan was not available for exemption; thus, the plan failed the best-interests-of-creditors test in § 1325(a)(4).13 In contrast, the debtor’s interest in a state-mandated retirement system that was protected from execution, garnishment or attachment under state law was held to be fully exempt property and was not considered in calculating the liquidation value of the estate for purposes of § 1325(a)(4).14 The U.S. Court of Appeals for the Eighth Circuit confirmed a Chapter 13 plan notwithstanding the failure of the trial court to consider whether a retirement fund was subject to exemption, because the amount proposed to be distributed through the plan exceeded the liquidation dividend that would result even if the retirement fund was liquidated under § 1325(a)(4).15 The U.S. Court of Appeals for the Fourth Circuit held that $1.4 million in individual retirement accounts was exempt property under Maryland law and not included in the best-interests-of-creditors test at confirmation.16 Because workers’ compensation proceeds are exempt property under Missouri law, the best-interests-of-creditors test does not value the proceeds at confirmation of a Chapter 13 plan.17


Anyone who doubts the importance of exemptions and of careful exemption planning in Chapter 13 cases should read In re James.18 In James, the debtors claimed a $3,500 exemption in the stock of a start-up company and valued that stock at $3,500 in the schedules. After the petition but before confirmation, the company went public and the debtors sold their stock for nearly $700,000. The plan did not pay unsecured claim holders in full and the trustee (understandably) objected to confirmation. The bankruptcy court determined that the debtors’ exemption was limited to the $3,500 claimed in the schedules. “The nonexempt portion of the proceeds from the sale of [the] stock is sufficient to pay the unsecured creditors in full. As a result, the liquidation test of § 1325(a)(4) is not met by the plan as proffered.”19


Both the availability and the amount of a homestead exemption can make the difference whether the Chapter 13 plan satisfies § 1325(a)(4). When the debtor claimed but was not eligible for a homestead exemption, the plan failed the best-interests-of-creditors test because it did not pay unsecured claim holders what they would receive upon liquidation of the real property in a Chapter 7 case.20 A Chapter 13 plan failed the best-interests-of-creditors test when the debtors asserted a homestead exemption of $54,545, but Nebraska law allowed a homestead exemption of only $10,000.21 Similarly, in In re Foulk,22 the plan failed the best-interests-of-creditors test because the debtors claimed a homestead exemption in twice the amount permitted by state law.23 A 3 percent plan fails the best-interests-of-creditors test when allowance of an $8,000 homestead exemption would still produce a 48.9 percent distribution to unsecured creditors net of the exemption.24 The policy of liberally interpreting homestead exemption statutes has benefitted Chapter 13 debtors in several reported § 1325(a)(4) decisions.25


State exemption law is relevant to the best-interests-of-creditors test in jurisdictions that have opted out of the federal exemptions. For example, because Oregon law did not permit exemption of termination payments under an insurance agency contract, the termination payments would be available for distribution in a Chapter 7 case, and the proposed plan failed the best-interests-of-creditors test.26 Because Ohio law permits an exemption in child support arrearages to the extent reasonably necessary for support, one court permitted a Chapter 13 debtor to exempt child support arrearages from the best-interests-of-creditors test calculation.27 In Colorado, a pickup truck28 is a tool of the trade for a self-employed building contractor and can be exempted for purposes of the best-interests-of-creditors test.29 That a snowmobile is not a motor vehicle for purposes of New York exemption law precluded confirmation of a plan that did not account for the value of a debtor’s snowmobiles in payments to unsecured claim holders.30 Because an annuity contract in settlement of an industrial accident was exempt property under Florida law, the proceeds payable to the debtor each month were not included in the § 1325(a)(4) calculation.31


If the trustee in a hypothetical Chapter 7 case could use an avoiding power to trump the debtor’s exemption claim, then the property recovered would be liquidated for the benefit of all creditors and must be included in the best-interests-of-creditors test calculus.32 For example, in In re Brennan,33 in consolidated cases, the Chapter 13 trustee and the debtors avoided unperfected liens in household goods and in motor vehicles under § 544.34 The trustee claimed in all cases that avoidance of liens increased the amounts that would be available for distribution in a hypothetical Chapter 7 case and thus, the debtors had to pay more to satisfy the best-interests-of-creditors test through their plans. The debtors defended that they were entitled to exemptions in the avoided transfers that exhausted the value of the recovered property for purposes of § 1325(a)(4). The bankruptcy court analyzed and explained the interaction among the best-interests-of-creditors test, the avoidance powers of the trustee and of debtors and the exemptions available in avoided transfers:

In the first set of cases, . . . the trustee avoided the creditors’ liens under § 544(a)(1) and recovered the previously encumbered property for the estate pursuant to § 550. . . . [Section] 522(g)(2) allows a debtor to exempt property recovered by the trustee under § 550 if the lien avoided is a nonpossessory, nonpurchase money security interest in personal property that could have been avoided by the debtor under § 522(f)(1)(B)—whether or not the lien was voluntarily granted. The property at issue . . . personal property constituting “household goods”—is included in the property described in § 522(f)(1)(B). Thus, this property could be exempted by the debtors following the trustee’s recovery in a hypothetical Chapter 7 case. . . . For this reason, the debtors’ Chapter 13 plan payments need not be increased following the trustee’s avoidance of liens in order to comply with the “best interests of creditors” test of § 1325(a)(4). . . . In the next two cases, . . . the debtors rather than the trustee filed actions to avoid the creditors’ liens . . . . [A] debtor may assert the trustee’s avoiding powers, including § 544(a)(1), in order to preserve exemptions, although the debtor’s avoiding capacity is limited to liens that were not voluntarily granted by the debtor. . . . In [the next two cases], it could not be determined whether the liens were voluntarily imposed or, indeed, whether any liens existed at all, as the creditors failed to respond to the debtors’ complaints or to assert any defenses such as the debtors’ standing under § 522(h). The creditors’ defaults in each case resulted in the Court entering judgment avoiding their liens. Once the liens were avoided under § 522(h), the debtors became entitled to exempt the property so recovered pursuant to § 522(i) . . . . [I]f the trustee rather than the debtors had avoided these liens, the debtors could have exempted the recovered property to the extent it was personal property subject to a lien avoidable by the debtor under § 522(f)(1)(B). The property at issue . . . constitutes ‘household goods’ of the debtors that could have been exempted if the trustee had avoided the subject liens. In a hypothetical Chapter 7 case, therefore, the debtors would have been entitled to exempt this property under § 522(i)(1) following avoidance by the debtors under § 522(h). . . . Accordingly, the debtors’ Chapter 13 plan payments need not be increased . . . . In the final case . . . the lien avoidance action was filed by the trustee . . . . However, in this case, unlike [the other cases], the property recovered by the trustee—a motor vehicle—does not come within the property referred to in § 522(g)(2), which allows for exemption by the debtor even when a lien has been voluntarily granted. Motor vehicles are not included in the list of property on which the debtors could have avoided a nonpossessory, nonpurchase money security interest . . . . [A]ccordingly, the debtors . . . would not be entitled to the benefit of exemptions in their motor vehicle following the trustee’s avoidance of liens. . . . The debtors, moreover, may not claim the benefit of exemptions in this property under § 522(g)(1) if the lien constituted a voluntary transfer of the property. It is evident from the retail installment contract on this vehicle, which was signed by the debtors, that the subject lien was voluntarily granted . . . . For this reason, the debtors in a Chapter 7 case could not have invoked § 522(g)(1) to claim exemptions in the motor vehicle following the trustee’s recovery . . . . [T]hey are required, under the “best interests of creditors” test, to pay into their plan for the benefit of unsecured creditors an amount of money equal to the value of the vehicle as of the effective date of the plan.35

State law with respect to tenancy by the entireties may also affect whether the plan satisfies the test in § 1325(a)(4). It is generally the rule that property owned as a tenancy by the entirety is exempt to claims against only one spouse. Thus, in a hypothetical liquidation of the bankruptcy estates of spouses who own property as tenants by the entirety, the entitlement of creditors holding claims against only one spouse may be different from the entitlement of creditors with claims jointly against both spouses. In one Chapter 13 case, this difference enabled the debtors to satisfy the best-interests-of-creditors test in an interesting way.


In In re Chandler,36 husband-wife debtors separately classified creditors with claims against only one or the other spouse. With respect to those creditors, the plan proposed a dividend of 9.6 percent; with respect to creditors with claims against both spouses, the plan proposed payment in full. The disfavored class argued that the best-interests-of-creditors test prohibited this arrangement. Looking to North Carolina law, the court concluded that § 1325(a)(4) does not require joint debtors to pay creditors with claims against only one spouse the same amount as creditors with claims against both spouses, because the debtors may claim tenancy-by-the-entirety property exempt with respect to claims against only one spouse.37


The interplay of exemption law, tenancies by the entireties and the best-interests-of-creditors test in § 1325(a)(4) is not well developed.38 Chandler suggests an opportunity for husband-wife debtors who have acquired property as tenants by the entirety but who have separately incurred debts. Imagine that one spouse was engaged in business and incurred substantial debts for which the other spouse is not personally liable. If the equity in the joint debtors’ homestead would not be available to the business creditors under state law because owned by the entireties, the mathematics of the Chapter 13 plan would be more favorable to the debtors.


1  See § 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1  Available and Important in Chapter 13 Cases.


2  See In re Turpen, 218 B.R. 908, 915 (Bankr. N.D. Iowa 1998) (Plan that proposes to pay unsecured creditors from the liquidation of nonexempt assets fails best-interests-of-creditors test if the $3,000-per-month deficit in budget is being financed by selling nonexempt assets. “If debtors finance their deficit now or in the future by selling assets, confirmation issues are implicated. If the debtors are financing or plan to finance the deficit through the sale of non-exempt assets, the plan would violate the ‘best interest test.’ The plan cannot be confirmed unless creditors holding allowed unsecured claim receive under the plan what they would receive under a Chapter 7 liquidation . . . . Any personal use by debtors of the proceeds of liquidation of non-exempt assets violates this test.”).


3  302 B.R. 184 (Bankr. S.D. Tex. 2003).


4  See §§ 35.4 [ Schedule C—Exemptions ] § 36.10  Schedule C—Exemptions and 49.2 [ Timing and Procedure ] § 48.4  Timing and Procedure.


5  503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992).


6  See discussion of Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992), in § 49.2 [ Timing and Procedure ] § 48.4  Timing and Procedure.


7  See In re Ruggles, 210 B.R. 57, 59–60 (Bankr. D. Vt. 1997) (After 30 days expire in Bankruptcy Rule 4003(b), hypothetical liquidation analysis cannot reconsider exemptions because of Taylor. Debtor claimed $50,000 homestead exemption in a duplex. “[A]fter the expiration of the thirty-day period, a party cannot contest the claimed exemption ‘whether or not [the debtor] had a colorable statutory basis for claiming it.’ See [Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992),] . . . . Therefore, we are without authority to re-create the estate of a debtor and ponder over what a hypothetical liquidation ‘should’ bring. . . . [I]f this case were to convert to one under Chapter 7, a trustee would not be given a second chance to object to Debtor’s claim of exemptions. Debtor’s estate was fixed at the time of the expiration of the thirty-day objection period of Rule 4003(b). Accordingly, we hold that when undertaking a liquidation analysis to determine what is in the best interests of the estate’s creditors, property which was exempted from the estate without objection may not be considered.”); In re Davis, 167 B.R. 104, 107 (Bankr. S.D. Ohio 1994) (For purposes of the best-interests-of-creditors test, a Chapter 13 debtor can claim an exemption under Ohio law in child support arrearages to the extent that such arrearages are reasonably necessary for support. Although exemption claims in Chapter 13 cases are appropriately evaluated somewhat more informally than in a Chapter 7 case, “creditors or the Trustee must object to confirmation and raise the exemption issue formally in order to call into question satisfaction of the best interest of creditors test as part of the confirmation process. If no such timely objection is filed, the exemption will stand, as asserted by the debtor, for the limited purpose of the ‘best interest of creditors’ test required for confirmation by 11 U.S.C. § 1325(a)(4). Cf. Taylor v. Freeland & Kronz, [503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)].”); In re Alderman, 150 B.R. 246 (Bankr. D. Mont. 1993) (Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992), applies in Chapter 13 cases and prohibits challenging a Chapter 13 debtor’s homestead exemption claim by objection to confirmation under § 1325(a)(4) when the objection to confirmation comes after expiration of the 30-day period under Bankruptcy Rule 4003(b).).


8  150 B.R. 246 (Bankr. D. Mont. 1993).


9  150 B.R. at 250.


10  But see In re Walker, 153 B.R. 565, 569 n.2 (Bankr. D. Or. 1993) (“If the trustee or the unsecured creditor believes that the plan does not satisfy the test of § 1325(a)(4), the appropriate procedure is not to object to the claim of exemptions, but to object to confirmation on the ground that the plan does not meet this test. Included in such an objection could be a contention that the property shown as exempt . . . would not in fact be exempt in a Chapter 7 case.”).


11  See, e.g., In re Barnes, 275 B.R. 889, 900–01 (Bankr. E.D. Cal. 2002) (“Because the court has sustained the objections to the claims of exemption of the mobile home and the annuity, and because the court has concluded that the debtors’ interest in the trusts can be reached by the bankruptcy estate, an amount equivalent to the equity in the mobile home . . . the annuity . . . and the promissory note . . . must be paid to creditors. . . . The present value of $63,862.05 must be paid through any chapter 13 plan. . . . [T]he plan could pay an estimated dividend to unsecured creditors of $13,712.00 over 60 months. . . . [T]his is not the present value of $63,862.05, as required by section 1325(a)(4).”).


12  31 B.R. 786 (Bankr. N.D. Ohio 1983).


13  See also In re Hartman, 115 B.R. 171 (Bankr. W.D. Ark. 1990) (The debtor’s option to receive a lump-sum distribution from ERISA-qualified retirement plan by terminating his employment prior to retirement age is inconsistent with a spendthrift trust; thus, the anti-alienation provisions of the retirement plan are not enforceable in bankruptcy. The debtor’s vested interest in the retirement plan is property of the Chapter 13 estate and must be included in the best-interests-of-creditors test calculation.).


14  In re Burgette, 114 B.R. 188 (Bankr. W.D. Mo. 1990). Accord In re Satterwhite, 271 B.R. 378, 382 (Bankr. W.D. Mo. 2002) (Plan satisfies best-interests-of-creditors test because debtor’s right to a portion of former spouse’s military pension under Uniform Services Former Spouse’s Protection Act is a “proprietary, inalienable interest” excluded from the Chapter 13 estate by Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992); in the alternative, because “pension payments only have value when they become due and payable each month . . . the right to those payments is not an asset of a debtor’s bankruptcy estate until such time as the payments are due or received. As such, Ms. Satterwhite is not required to pay the present value of her future right to receive these pension benefits to her unsecured creditors.”).


15  Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987).


16  Solomon v. Cosby (In re Solomon), 67 F.3d 1128, 1132–33 (4th Cir. 1995) (“Here the debtor’s IRAs would be ‘exempt’ assets and thus unavailable to creditors in a Chapter 7 liquidation. . . . Because the IRAs would be unavailable to creditors in a Chapter 7 proceeding by virtue of the state law exemption, creditors would receive nothing from those accounts if Solomon’s non-exempt assets were to be liquidated. Thus, preserving the IRAs from the claims of Solomon’s creditors in this Chapter 13 proceeding is both logically sound and in keeping with the Code.”).


17  In re Jackson, 173 B.R. 168 (Bankr. E.D. Mo. 1994) (On a postconfirmation motion to modify the plan, because workers’ compensation proceeds are exempt property under state law, the best-interests-of-creditors test does not require an increase in the minimum amount that must be paid to creditors.).


18  260 B.R. 368 (Bankr. E.D.N.C. 2001).


19  260 B.R. at 375.


20  In re Rodriguez, 38 B.R. 297 (Bankr. D. Colo. 1984).


21  In re Coonrod, 135 B.R. 375 (Bankr. D. Neb. 1991).


22  134 B.R. 929 (Bankr. D. Neb. 1991).


23  See also In re Pinkston, 134 B.R. 932 (Bankr. D. Neb. 1991) (Plan fails best-interests-of-creditors test because debtors have claimed homestead exemption in excess of that permitted by Nebraska law. Debtor’s home is valued at $50,000 and is subject to a $12,000 mortgage. Of the $38,000 in equity, $10,000 may be claimed as exempt, leaving $28,000 for distribution to unsecured claim holders in a hypothetical Chapter 7 case. The debtor’s plan will produce a dividend of $3,230.).


24  In re Smith, 254 B.R. 751 (Bankr. W.D. Mo. 2000).


25  See, e.g., Grenco Real Estate Inv. Trust v. Morris, 48 B.R. 313 (W.D. Va. 1985) (Debtor need not comply with Virginia law by filing a homestead deed in order to claim a homestead exemption for purposes of the best-interests calculation.); In re Grant, 76 B.R. 169 (Bankr. D. Or. 1987) (Court refuses to marshal debtor’s assets in a way that would defeat debtor’s homestead exemption. Debtor is permitted to satisfy § 1325(a)(4) by marshaling assets in favor of priority claims and preserving homestead exemption.).


26  In re Selby, 76 B.R. 170 (Bankr. D. Or. 1987).


27  In re Davis, 167 B.R. 104 (Bankr. S.D. Ohio 1994).


28  “Pickup truck” is redundant some places, but not in Tennessee. Apologies if it is in Colorado.


29  In re Black, 280 B.R. 258 (Bankr. D. Colo. 2002).


30  In re Semrau, 187 B.R. 96 (Bankr. W.D.N.Y. 1995). Accord In re Sherman, 237 B.R. 551 (Bankr. N.D.N.Y. 1999) (After sustaining trustee’s objections to exemptions in cash, hobby equipment and jewelry under New York law, plan fails best-interests-of-creditors test because 10% distribution is less than unsecured claim holders would receive in a Chapter 7 case.).


31  In re Bennett, 217 B.R. 654 (Bankr. M.D. Fla. 1998).


32  In re Digaudio, 127 B.R. 713 (Bankr. D. Mass. 1991).


33  208 B.R. 448 (Bankr. S.D. Ill. 1997).


34  See §§ 53.1 [ Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances ] § 50.3  Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances and 60.1 [ Avoidance and Recovery Powers ] § 53.12  Avoidance and Recovery Powers.


35  208 B.R. at 453–54.


36  148 B.R. 13 (Bankr. E.D.N.C. 1992).


37  148 B.R. 13 (Bankr. E.D.N.C. 1992). Accord In re Smith, 200 B.R. 213, 216–17 (Bankr. E.D. Mo. 1996) (In spouses’ separate Chapter 13 cases, equity in entireties property would not be reachable under Missouri law by creditors of only one spouse; thus, best interests of creditors is technically satisfied in each. “Literal application of this Missouri nonbankruptcy law under § 522(b)(2)(B) exempts from a Chapter 7 trustee’s administration the non-exempt entirety equity in Debtors’ principal residence from their respective bankruptcy estates to the extent only one spouse is liable on a debt. . . . [T]he Debtors have $33,003 in non-exempt equity in their principal residence held by tenancy-in [sic] the entirety. Once the aggregate amount of joint debt ($8,829) is subtracted from this equity, $24,174 remains. A hypothetical Chapter 7 Trustee would allocate one half of this sum, or $12,087 to each spouse or to each spouse’s estate. . . . [T]his amount would be exempt from administration from each individual Debtor’s hypothetical estate pursuant to § 522(b)(2)(B). Husband has separate unsecured debts of $15,170 and Wife has separate unsecured debts of $19,895. Chapter 7 creditors could not reach any of the entirety equity to the extent only one spouse is liable on the debt. Accordingly, by proposing to pay their personal unsecured debts 33% and 35% respectively, each plan technically satisfies § 1325(a)(4).” Confirmation denied for lack of good faith in the filing of separate Chapter 13 cases by spouses as a strategy to avoid paying debt.); In re Allard, 196 B.R. 402, 415–16 (Bankr. N.D. Ill.) (Distinguishing In re Digaudio, 127 B.R. 713 (Bankr. D. Mass. 1991), property held in tenancy by the entirety is not included in the best-interests-of- creditors calculation because it is exempt. Illinois law “does not contemplate forced sale because of a judgment against only one tenant. . . . Therefore, the better view is that the value of the entirety property is not considered in the best interests test.”), aff’d, 202 B.R. 938 (N.D. Ill. 1996).


38  See Van Der Heide v. LaBarge (In re Van Der Heide), 219 B.R. 830, 832–33 (B.A.P. 8th Cir. 1998) (Interpreting Garner v. Strauss (In re Garner), 952 F.2d 232 (8th Cir. 1991), because entireties property is not exempt from attachment by joint creditors, in a hypothetical liquidation, the Chapter 7 trustee would sell both the debtor’s and nonfiling spouse’s interests under § 363(h), and 100% of the proceeds would be distributed to the estate—an amount in excess of that proposed to be paid to unsecured claim holders under the plan. “Van Der Heide’s residence is property of the estate. . . . In Missouri, creditors may reach entireties property only if the obligations have been jointly incurred. . . . Since the parties stipulate that Van Der Heide’s debts were jointly incurred with his wife, the property is not exempt from attachment by joint creditors. . . . Since the property in question is homestead property incapable of partition, a Chapter 7 trustee would be entitled to sell both the debtor’s and his wife’s interest in the property. . . . Missouri courts have routinely concluded that each tenant by the entirety owns an indivisible interest in the whole estate. . . . As such, one hundred percent of the property is property of the estate, and the trustee is entitled to distribute all of the proceeds to joint creditors.”), rev’d, 164 F.3d 1183, 1183–86 (8th Cir. 1999) (“[W]e conclude that the rule announced in Garner dictates that only one-half of the hypothetical sale proceeds, less exemptions, are subject to the bankruptcy estate. . . . Under a straightforward application of Garner, the bankruptcy court should confirm Van Der Heide’s Chapter 13 plan because it offers the creditors more than they would receive under the hypothetical Chapter 7 liquidation. Here, however, Garner analysis leads to an impermissible result. . . . Accordingly, we hold that, if Van Der Heide invokes Garner in determining whether the bankruptcy court should confirm his Chapter 13 plan, he is only entitled to claim one-half of the total homestead exemption authorized under state law. The result we reach today provides $4,000 for creditors that they would not have otherwise received under a blind application of Garner.”).