§ 27.3 — Exemption Planning
Revised: March 30, 2009
Exemptions are available and important in Chapter 13 cases.1 The extent of exempt property determines the availability of lien avoidance under § 522(f).2 Exemptions affect the liquidation value of the estate and the best-interests-of-creditors calculation at confirmation under § 1325(a)(4).3 Some exemption planning is possible in Chapter 13 and is part of counsel’s role in advising the debtor. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)4 complicated the exemption process in many ways—closing some routes to exemption planning while opening others.
The conversion of nonexempt property into exempt property is appropriate in a Chapter 13 case subject to the general limitation that creation of exempt property cannot be in fraud of creditors.5 In 2005, BAPCPA amended § 522 of the Code to significantly limit the conversion of nonexempt assets into exempt homestead during the 1,215 days and, under some circumstances, during the 10 years before the petition.6
To maximize exemptions in the Chapter 13 case, counsel should review the assets available to the debtor and make appropriate changes in those assets before filing. Insurance policies and pensions are special areas in which prefiling planning may be necessary to put the debtor’s interests in a form that is exempt.7
Even more importantly, after BAPCPA, counsel has to perform a careful audit of the debtor’s domicile and transactions in potentially exempt property before filing the petition. To determine which state exemptions apply, counsel must analyze the debtor’s domicile during the 730 days and 910 days preceding the petition.8 Delaying or accelerating the filing of the Chapter 13 petition to affect the state of domicile for exemption purposes can be the most powerful exemption-planning device available to the debtor.9 Delaying a filing to get on the other side of 1,215 days after the transfer or acquisition that increased exempt property can be a very profitable choice for the debtor and a huge hedge against malpractice for debtor’s counsel.10
The avoidance of liens that impair exemptions under 11 U.S.C. § 522(f) is available in Chapter 13 cases11 and should be considered by counsel as an aspect of exemption planning. To determine the amount of secured and unsecured debt in anticipation of drafting a Chapter 13 plan, debtor’s counsel must consider that avoided liens need not be treated as secured claims.
Some states require a debtor to record or otherwise designate an exempt homestead. In a state that requires recording of a written declaration of homestead, the Chapter 13 debtor who owns a home should complete all steps necessary to be entitled to a homestead exemption before filing the Chapter 13 case. Debtors who fail to perfect a homestead under applicable state law have ended up litigating their exemptions in the Chapter 13 case.12
The timing of filing the petition may affect the exemptions available to a Chapter 13 debtor because of changes in state law. It is generally held that exemptions are determined in a Chapter 13 case based on the law in effect on the date of filing the petition.13 In states that have opted out of the federal exemptions, the exemptions available to a Chapter 13 debtor change as state legislatures change nonbankruptcy exemption law. Debtor’s counsel must be aware of changes in state exemption law and in particular focus on the effective date for any changes enacted by a state.
Also, the timing of the filing with respect to creditor collection actions may change the exemptions available to a Chapter 13 debtor. For example, for many years in the Sixth Circuit it was the rule under RTC v. Moreland (In re Moreland)14 and Ford Motor Credit Corp. v. Dixon (In re Dixon)15 that a Chapter 13 debtor could not claim an exemption under Ohio law to defeat a judgment lien creditor except when the debtor’s property was actually subject to judicial sale, foreclosure, garnishment, or other execution at the filing of the Chapter 13 case. As explained by the Sixth Circuit, “when a judicial sale is pending, the debtor can properly avail himself of the Ohio homestead exemption and seek to avoid a judicial lien that impairs that exemption. . . . Moreland [was] not . . . entitled to her claimed homestead exemption as there was no judicial sale or involuntary execution pending.”16 In a jurisdiction applying Moreland,17 debtors were better off if they could delay filing until a judgment creditor commenced foreclosure, garnishment, or execution, thus positioning the debtor to claim an exemption (and sometimes void the lien) in the Chapter 13 case.18
1 See §§ 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases and 405.1 [ In General ] § 48.2 BAPCPA and Exemptions–408.1 [ Timing and Procedure Considerations ] § 48.5 Timing and Procedure Considerations Added by BAPCPA.
2 See §§ 51.1 [ Limitations on Lien Avoidance ] § 49.3 Limitations on Lien Avoidance and 409.1 [ Section 522(f) after BAPCPA: Household Goods Corrupted ] § 49.4 Section 522(f) after BAPCPA: Household Goods Corrupted.
4 Pub. L. No. 109-8, 119 Stat. 23 (2005).
5 See, e.g., In re Sholdan, 217 F.3d 1006 (8th Cir. 2000) (traditional badges of fraud were used to infer fraudulent intent in conversion of nonexempt asset to exempt); In re Lowery, 262 B.R. 875 (Bankr. M.D. Fla. 2001); In re Summers, 85 B.R. 121 (Bankr. D. Or. 1988); In re Holt, 84 B.R. 991 (Bankr. W.D. Ark. 1988).
6 See 11 U.S.C. § 522(o), (p) and (q), discussed in §§ 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA and 464.1 [ New Exclusions and Exemptions ] § 90.3 Exclusions and Exemptions after BAPCPA.
7 See, e.g., Caron v. Farmington Nat’l Bank (In re Caron), 82 F.3d 7 (1st Cir. 1996) (Applying New Hampshire law, cash surrender value of life insurance policy is not exempt notwithstanding that both insured and beneficiary are Chapter 13 debtors. Exemption runs in favor of beneficiary (wife), but owner of the policy (husband) is still alive and can change the beneficiary.); Phillips v. Mayer (In re Phillips), 218 B.R. 520 (N.D. Cal. 1998) (Private retirement plan not subject to exemption in Chapter 13 case.).
8 See 11 U.S.C. § 522(b)(3), discussed in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
9 See § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA. See, e.g., Brown v. Sobczak (In re Sobczak), 369 B.R. 512 (B.A.P. 9th Cir. 2007) (Chapter 13 debtor domiciled in Arizona for less than 730 days was not eligible for $150,000 Arizona homestead exemption but instead was pointed to Ohio by § 522(b)(3)(A) and was eligible for $5,000 Ohio exemption; although debtor has standing to seek dismissal under § 1307(c) after conversion from Chapter 7, it was not in best interests of creditors and estate to dismiss when domicile rule in § 522(b)(3)(A) would limit homestead exemption to substantially less than nonbankruptcy law.).
10 See § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA. See, e.g., Khan v. Bankowski (In re Khan), 375 B.R. 5 (B.A.P. 1st Cir. 2007) (Transfer of legal title from trust to debtor within 1,215 days before petition was transfer of interest in real property for purposes of $125,000 homestead exemption limitation in § 522(p).).
11 See §§ 50.1 [ Available in Chapter 13 Cases ] § 49.1 Available in Chapter 13 Cases and 409.1 [ Section 522(f) after BAPCPA: Household Goods Corrupted ] § 49.4 Section 522(f) after BAPCPA: Household Goods Corrupted.
12 See Tarpley v. Housing & Urban Dev. (In re Tarpley), 123 B.R. 741 (Bankr. W.D. Va. 1991) (Distinguishing Grenco Real Estate Inv. Trust v. Morris, 48 B.R. 313 (W.D. Va. 1985), the court concluded that, for purposes of lien avoidance under § 522(f), a Virginia Chapter 13 debtor must perfect a homestead exemption by recording a homestead deed within five days after the date initially set for the § 341 meeting. Because perfection was untimely under Virginia law, these Chapter 13 debtors had no homestead exemption and could not use § 522(f) to avoid a judgment lien.); In re Millsap, 122 B.R. 577 (Bankr. D. Idaho 1991) (Applying 1989 amendments to Idaho exemption law, the court held that Chapter 13 debtor was entitled to homestead exemption in cabin and land that debtor occupied since 1987, notwithstanding that judgment creditor recorded execution on property before debtor recorded written declaration of homestead.). But see Crowell v. Theodore Bender Accounting, Inc. (In re Crowell), 138 F.3d 1031, 1035 (5th Cir. 1998) (“[T]he bankruptcy court is not bound to follow the Texas Property Code procedure for designating the debtor’s homestead from a larger parcel of property in order that the remainder may be liquidated. . . . The Bankruptcy Code, by simply allowing debtors to claim a state-law exemption, should not be understood to force bankruptcy courts to use bankruptcy law procedures and state-law actors to make a determination which the trustee or the bankruptcy court ordinarily would make if the debtor elected the federal exemptions.”); Grenco Real Estate Inv. Trust v. Morris, 48 B.R. 313 (W.D. Va. 1985) (Given that exemptions in a Chapter 13 case are “only informational,” debtor need not comply with Virginia law by filing a homestead deed to be entitled to claim a homestead exemption for purposes of the best-interests-of-creditors test.).
13 See Marcus v. Zeman (In re Marcus), 1 F.3d 1050 (10th Cir. 1993) (At conversion from Chapter 13 to Chapter 7, the law in effect on the date of filing the Chapter 13 case controls the exemptions available to the debtor in the Chapter 7 case because § 522(b)(2)(A) defines exempt property with respect to state or local law applicable “on the date of the filing of the petition.”); In re Weed, 221 B.R. 256 (Bankr. D. Nev. 1998) (On conversion from Chapter 13 to Chapter 7, the state law in effect at the time of the filing of the original Chapter 7 petition controls the exemptions available in the Chapter 13 case.); In re Boothe, 167 B.R. 943 (Bankr. D. Colo. 1994) (Exemptions are determined in Chapter 13 cases as of the date of the petition.); In re Toronto, 165 B.R. 746 (Bankr. D. Conn. 1994) (State law at the petition determines the exemptions available to a Chapter 13 debtor. Amendments of state exemption law after the petition are not available to the debtor even upon conversion to Chapter 7.).
14 21 F.3d 102 (6th Cir. 1994).
15 885 F.2d 327 (6th Cir. 1989).
16 Moreland v. RTC (In re Moreland), 21 F.3d 102, 106–07 (6th Cir. 1994).
17 See, e.g., In re Smith, 117 B.R. 326 (Bankr. S.D. Ohio 1990) (Although Chapter 13 debtor has the same Ohio exemptions available to any other debtor in bankruptcy, Ford Motor Credit Corp. v. Dixon (In re Dixon), 885 F.2d 327 (6th Cir. 1989), prohibits Chapter 13 debtors in Ohio from claiming a homestead exemption ahead of a judgment lien creditor except where the real property has been subjected to actual foreclosure, garnishment, or execution by the creditor.).
18 The Sixth Circuit eventually acknowledged that Moreland v. RTC (In re Moreland), 21 F.3d 102 (6th Cir. 1994) and Ford Motor Credit Corp. v. Dixon (In re Dixon), 885 F.2d 327 (6th Cir. 1989) were overruled by 11 U.S.C. § 522(f)(2), as amended by § 303 of the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (1994). See Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547 (6th Cir. 1998). See also §§ 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases and 50.1 [ Available in Chapter 13 Cases ] § 49.1 Available in Chapter 13 Cases–51.1 [ Limitations on Lien Avoidance ] § 49.3 Limitations on Lien Avoidance.