§ 48.1 — Available and Important in Chapter 13 Cases
Revised: June 24, 2004
Exemptions are available in Chapter 13 cases,1 and exemption claims may determine important issues. Prefiling exemption planning is a responsibility of debtors’ counsel in Chapter 13 cases.2 Debtors should carefully claim exemptions in Schedule C to Official Bankruptcy Form 6.3 The exemptions claimed will be used to determine the hypothetical liquidation value of the estate for purposes of the best-interests-of-creditors test for confirmation in 11 U.S.C. § 1325(a)(4).4 Some courts have drawn a connection between exemptions and income for purposes of eligibility under § 109(e) and for purposes of the projected disposable income test at confirmation under § 1325(b).5 Exemptions may affect the extent of secured claims and thus the design of the plan and the amount of payments required of the debtor.6 Exemptions may determine the availability of avoidance actions by the debtor.7
Chapter 13 debtors should pay attention to exemptions at the beginning of the case because that exemption list may affect the rights of the debtor and creditors if the plan is modified after confirmation under § 1329.8 Complicated exemptions questions arise at conversion from Chapter 13 to Chapter 7; debtors are best positioned to realize favorable exemptions at conversion if exemptions were carefully constructed in the original Chapter 13 case.9 Unexpected developments during the Chapter 13 case—for example, the death of a debtor—are best managed if exemptions were maximized at the beginning of the case.10
Although it has been said that exemptions in a Chapter 13 case are “informational” and thus somehow of less importance,11 this view is myopic and an invitation to professional negligence by debtor’s counsel. Claiming exemptions to which the debtor is not entitled is likely to draw an objection from the trustee because exemptions affect many of the calculations the trustee must make to determine whether the plan is ready for confirmation. Failing to claim exemptions accurately may force the debtor to pay more through the plan or may render the plan unconfirmable altogether.
There are a great many reported Chapter 13 decisions addressing the availability and extent of exemptions. These decisions demonstrate that debtors, creditors and trustees often use Chapter 13 as a platform for litigating exemption questions. Because most states have opted out of the federal exemptions, many of the reported Chapter 13 cases addressing exemption questions are peculiar to state exemption law. The reported Chapter 13 decisions addressing exemption questions are collected in Appendix L, organized by circuit and by states within each circuit.
1 In re Hall, 118 B.R. 671 (Bankr. S.D. Ind. 1990) (Chapter 13 debtor can claim exemptions. However, IRS claim is secured to the extent of the value of property subject to its lien notwithstanding the debtor’s claim of exemption in that property.); In re Smith, 117 B.R. 326 (Bankr. S.D. Ohio 1990) (Chapter 13 has same exemptions available to any debtor in bankruptcy and the same limitations apply.).
2 See § 25.3 [ Exemption Planning ] § 27.3 Exemption Planning.
3 See § 35.4 [ Schedule C—Exemptions ] § 36.10 Schedule C—Exemptions.
4 See § 161.1 [ Exemption Issues ] § 90.2 Exemption Issues. See, e.g., Solomon v. Cosby (In re Solomon), 67 F.3d 1128 (4th Cir. 1995) ($1.4 million in three individual retirement accounts is property of the Chapter 13 estate but is exempt under Maryland law and thus not included in the best-interests-of-creditors test at confirmation.); In re Black, 280 B.R. 258 (Bankr. D. Colo. 2002) (For purposes of the best-interests-of-creditors test, a self-employed building contractor can exempt a pickup truck as a tool of the trade under Colorado law.); In re James, 260 B.R. 368 (Bankr. E.D.N.C. 2001) (The debtors’ exemption in stock is limited to the $3,500 value stated in the schedules, and the $700,000 the debtors received when the company went public during the Chapter 13 case is included in the best-interests-of-creditors test for confirmation under § 1325(a)(4).); In re Ruggles, 210 B.R. 57 (Bankr. D. Vt. 1997) (For purposes of the best-interests-of-creditors test, homestead exemption in both sides of a duplex is beyond attack because of Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992).); In re Smith, 200 B.R. 213 (Bankr. E.D. Mo. 1996) (Separate Chapter 13 cases by spouses each technically satisfy the best-interests-of-creditors test in § 1325(a)(4) because in hypothetical Chapter 7 cases, § 522(b)(2)(B) would exempt from the Chapter 7 trustee’s administration the equity in a residence.); In re Allard, 196 B.R. 402 (Bankr. N.D. Ill. 1996) (Property held in tenancy by the entirety is not included in the best-interests-of-creditors calculation because it is exempt.); In re Semrau, 187 B.R. 96 (Bankr. W.D.N.Y. 1995) (Because a snowmobile is not a “motor vehicle” under New York law, the debtors cannot exempt snowmobiles, and their value is included for purposes of the best-interests-of-creditors test.); In re Davis, 167 B.R. 104 (Bankr. S.D. Ohio 1994) (Chapter 13 debtor can claim an exemption under Ohio law in child support arrearages, and the assertion and calculation of this exemption are important to determine whether the debtor’s plan satisfies the best-interests-of-creditors test at confirmation under § 1325(a)(4).); In re Walker, 153 B.R. 565 (Bankr. D. Or. 1993) (Statement of exemptions is required in Chapter 13 case to enable the court to determine hypothetically what the dividend to creditors would be in a Chapter 7 case for purposes of the test in § 1325(a)(4).); In re Alderman, 150 B.R. 246 (Bankr. D. Mont. 1993) (Debtors claim exemptions in Chapter 13 cases to allow the court to apply the best-interests-of-creditors test at confirmation under § 1325(a)(4).); In re McBroom, 51 B.R. 953 (Bankr. W.D. Va. 1985); Slykerman v. Associates Fin. Servs., 29 B.R. 82 (Bankr. E.D. Mich. 1983). But see Berry v. Pattison, 30 B.R. 36 (Bankr. E.D. Mich. 1983).
5 See §§ 8.1 [ What Is Regular Income? ] § 11.1 What Is Regular Income? and 164.1 [ Projected (Disposable) Income ] § 91.2 Projected (Disposable) Income. See, e.g., In re Florida, 268 B.R. 875, 880 (Bankr. M.D. Fla. 2001) (“A majority of courts have held § 522(c) does not render income from exempt property immune from treatment as disposable income.” Eight thousand dollar exemption in life insurance does not defeat trustee’s motion to modify confirmed plan to pay unsecured creditors in full from $100,000 paid to surviving debtor upon the postconfirmation death of her spouse.); In re Hunton, 253 B.R. 580, 582 (Bankr. N.D. Ga. 2000) (Applying Gamble v. Brown (In re Gamble), 168 F.2d 442 (11th Cir. 1999), proceeds of personal injury lawsuit that were disclosed and claimed exempt without objection are not projected disposable income because “‘[o]nce the property is removed from the estate [through exemption], the debtor may use it for his own.’”); In re Ferretti, 203 B.R. 796, 800 (Bankr. S.D. Fla. 1996) (At modification after confirmation, the disposable income test does not capture $22,876.47 settlement of a prepetition automobile accident because the debtor claimed the proceeds exempt and no party objected under Taylor and Bankruptcy Rule 4003(b).).
6 See § 106.1 [ Is Claim Secured, and By What? ] § 76.2 Is Claim Secured, and By What?. See, e.g., In re Pace, 257 B.R. 918 (Bankr. W.D. Mo. 2000) (IRS cannot have a secured claim under § 506(a) because its setoff right is trumped by the debtors’ exemption claims under § 522(c).).
8 See § 254.1 [ Application of Tests for Confirmation ] § 126.2 Application of Tests for Confirmation. See, e.g., In re Florida, 268 B.R. 875 (Bankr. M.D. Fla. 2001) (Eight thousand dollar exemption in life insurance does not defeat trustee’s motion to modify confirmed plan to pay unsecured creditors in full from $100,000 paid to surviving debtor upon the postconfirmation death of her spouse.); In re Tolliver, 257 B.R. 98 (Bankr. M.D. Fla. 2000) (Chapter 13 trustee can modify confirmed plan to capture workers’ compensation proceeds when debtor failed to schedule or exempt the workers’ compensation action and settlement proceeds were received after confirmation.); In re Ferretti, 203 B.R. 796 (Bankr. S.D. Fla. 1996) (At modification after confirmation, the disposable income test does not capture $22,876.47 settlement of a prepetition automobile accident because the debtor claimed the proceeds exempt in the original schedules and no party objected under Taylor and Bankruptcy Rule 4003(b).); In re Kerr, 199 B.R. 370 (Bankr. N.D. Ill. 1996) (On trustee’s motion to modify after confirmation, proceeds from sale of homestead are not projected disposable income because debtor exempted equity and § 522(c) prohibits reaching that exempt income through § 1325(b).); In re Baker, 194 B.R. 881 (Bankr. S.D. Cal. 1996) (Proceeds of life insurance on codebtor who passed away after confirmation are an exempt asset that need not be paid to creditors to satisfy disposable income test at modification after confirmation; however, interest earned on proceeds is a stream of payments that can be reached by creditors in a Chapter 13 case.); 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.); In re Boothe, 167 B.R. 943 (Bankr. D. Colo. 1994) (At modification of a plan after confirmation under § 1329, debtors cannot claim an exemption in the excess of insurance proceeds over the balance due a claim holder secured by the (destroyed) collateral because at the petition the allowed secured claim and the value of the collateral were coextensive and there was no equity to support an exemption. That the debtors paid part of the secured claim pursuant to the confirmed plan does not create a new exemption in insurance proceeds in excess of the balance of that claim.); In re Walker, 153 B.R. 565 (Bankr. D. Or. 1993) (For purposes of the best-interests-of-creditors test under § 1325(a)(4) at modification after confirmation, the fact that the debtor failed to claim an exemption in real property at confirmation of the original plan is not fatal to the debtor’s argument that a homestead exemption fully exhausts appreciation in the value of real property that occurred between the petition and the motion to modify.).
9 See §§ 317.1 [ Exemptions at Conversion ] § 144.1 Exemptions at Conversion and 318.1 [ Lien Avoidance at Conversion ] § 144.2 Lien Avoidance at Conversion. See, e.g., Lowe v. Sandoval (In re Sandoval), 103 F.3d 20 (5th Cir. 1997) (At conversion from Chapter 13 to Chapter 7, exemption claims are determined as of the date of the original Chapter 13 petition.); 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 in the Chapter 7 case.); Calder v. Job (In re Calder), 973 F.2d 862 (10th Cir. 1992) (Upon conversion from Chapter 7 to Chapter 13, court has discretion to permit the debtor to amend exemption schedules; however, bad faith by the debtor or prejudice to creditors will preclude amendment.); Alderman v. Martinson (In re Alderman), 195 B.R. 106 (B.A.P. 9th Cir. 1996) (Date of conversion from Chapter 13 controls the exemptions available in Chapter 7 case.); In re Patterson, 190 B.R. 84 (S.D. Tex. 1995) (Applying Armstrong v. Lindberg (In re Lindberg), 735 F.2d 1087 (8th Cir. 1984), debtor can claim new exemptions as of the date of conversion from Chapter 13 to Chapter 7.); In re Toronto, 165 B.R. 746 (Bankr. D. Conn. 1994) (Upon conversion from Chapter 13 to Chapter 7, amendments to state exemption law that became effective during the Chapter 13 case are not available to the debtor.).
10 See, e.g., Bernstein v. Pavich (In re Pavich), 191 B.R. 838 (Bankr. E.D. Cal. 1996) (Deceased Chapter 13 debtor is entitled to homestead exemption in the proceeds of sale of house. Debtor’s residence was sold in 1992, and the balance after payment of senior liens was held by the Chapter 13 trustee. The debtor died in 1994. Homestead exemption survived debtor’s death because exemptions are determined at the petition. Nonfiling spouse was entitled to one-half of the proceeds. The other half was the debtor’s exempt property but was subject to an IRS lien.).
11 See Grenco Real Estate Inv. Trust v. Morris, 48 B.R. 313 (W.D. Va. 1985); In re Florida, 268 B.R. 875, 880 (Bankr. M.D. Fla. 2001) (“[E]xemptions take on a diminished importance in Chapter 13 bankruptcy” because “[a] majority of courts have held § 522(c) does not render income from exempt property immune from treatment as disposable income.”); In re Booth, 259 B.R. 413, 416 (Bankr. M.D. Fla. 2001) (“‘[A]s a general proposition, the debtor’s right to exemptions claimed is academic in a Chapter 13 case, and the standing trustees in Chapter 13 cases seldom, if ever, pay any attention to claim[s] of exemptions set forth in a debtor’s schedules.’”); In re Tolliver, 257 B.R. 98, 100 (Bankr. M.D. Fla. 2000) (“[B]ecause the fresh start in Chapter 13 is protected by a debtor’s ability to retain nondisposable income rather than exempt assets, the importance of exemptions is diminished.”); In re Davis, 167 B.R. 104 (Bankr. S.D. Ohio 1994) (Exemptions in Chapter 13 cases are “evaluated somewhat more informally” than in a Chapter 7 case.); In re Walker, 153 B.R. 565 (Bankr. D. Or. 1993) (A Chapter 13 debtor’s list of exempt property is “merely informative.”); In re Alderman, 150 B.R. 246 (Bankr. D. Mont. 1993) (In Chapter 13 cases, exemptions are informational only.). Contra In re Rogers, 278 B.R. 201, 204 (Bankr. D. Nev. 2002) (Argument that exemptions are not important in Chapter 13 cases fails to convince bankruptcy court to start a new 30-day period for objection at conversion. “The review of a Chapter 13 debtor’s exemptions is neither academic nor speculative. Exemptions are important from the outset of a Chapter 13 case and a creditor or trustee has every incentive to examine them.”).