§ 90.3 — Exclusions and Exemptions after BAPCPA
Revised: July 13, 2007
The best-interests-of-creditors test in § 1325(a)(4)1 was not amended by BAPCPA, but new exclusions from property of the estate and new exemption rules will affect the § 1325(a)(4) calculation.
Detailed elsewhere,2 BAPCPA added to § 541 significant new exclusions from property of the bankruptcy estate—several with respect to pension and profit-sharing interests. For example, funds in an education individual retirement account are not property of the estate after BAPCPA.3 Similarly, funds used to purchase a tuition credit or contributed to a state tuition program are excluded from the bankruptcy estate.4 Amounts withheld or received by an employer as contributions to an employee benefit plan, a deferred compensation plan, a tax-deferred annuity or a health insurance plan are excluded from the bankruptcy estate by BAPCPA.5 Because these interests in property are excluded from property of the bankruptcy estate, the value of these interests is not included in the hypothetical liquidation analysis required by the best-interests-of-creditors test in § 1325(a)(4).6 Some Chapter 13 estates will be smaller because of these new exclusions, and the minimum amount that unsecured creditors must receive to confirm a Chapter 13 plan under § 1325(a)(4) will be lower in those cases.
The exemptions available to individual debtors were also changed by BAPCPA in ways that will affect the best-interests-of-creditors test in Chapter 13 cases. The new domicile rules in § 522(b)(3) will require some debtors to claim exemptions under the laws of a state in which they no longer reside.7 Depending on the “extraterritorial effect” of exemptions under that other state’s law, some debtors will get more generous exemptions than before BAPCPA, others will fare more poorly.
For example, a Chapter 13 debtor with a homestead in the state of current residence could forfeit any right to a homestead exemption if the new domicile rules point to a different state that either has no homestead exemption or does not allow extraterritorial effect for its homestead exemption. The opposite could also be true—the homestead exemption in that other state may be larger and could actually increase the debtor’s homestead exemption over what would otherwise be available under the law of the state of current residence. Whichever effect applies, the value of non-exempt homestead property is affected in a way that either increases or decreases the minimum amount that must be paid to unsecured creditors to satisfy § 1325(a)(4) at confirmation of a Chapter 13 plan.
There is also the possibility that the new domicile rules in BAPCPA will render the debtor ineligible for “any”8 exemption, in which case, the debtor may be able to claim federal exemptions in § 522(d). The federal exemptions are more generous than some state exemptions and less generous than others. Either way, the availability of federal exemptions will change the value of the Chapter 13 estate for best-interests-of-creditors-test purposes.
In a few Chapter 13 cases, the new caps on state homestead exemptions in § 522(p) and (q) may increase the value of the estate in the § 1325(a)(4) calculation.9 These new caps are only relevant in states with homestead exemptions that could exceed $125,000, and the new caps will affect the § 1325(a)(4) calculation only in the unusual case when the debtor has an exemptible homestead that exceeds that amount.
In re Walsh10 illustrates the intricacies of new § 522(p) in a Chapter 13 case. Massachusetts recently increased its homestead exemption to $500,000. Walsh is a one-spouse case, and the filing spouse proposed a 1 percent plan. The debtor and nonfiling spouse had equity of $271,440 in their homestead, and the debtor acquired ownership in the homestead 371 days before the Chapter 13 petition. The new $125,000 homestead exemption cap in § 522(p) applied to the debtor, but the bankruptcy court concluded that, in a hypothetical Chapter 7 case, the nonfiling spouse could claim the entire $500,000 Massachusetts homestead exemption, saving the 1 percent plan from the best-interests-of-creditors test:
[T]he Plan reflects compliance with Section 1325(a)(4): in the Debtor’s Chapter 7 case, general creditors would not receive the benefit of the equity above the amount of the cap, and therefore they would receive no distribution; under the Plan, general creditors will receive a one percent distribution. The best interests test is thus met. If the Debtor were the homestead declarant and the sole owner and the sole occupant of the Residence, then the applicability of the cap would (at least arguably) be clear: in that case, the only person protected by the homestead estate would be the debtor herself, who, in seeking the benefits of bankruptcy, would voluntarily subject herself to the limitations on such benefits, including the cap on a state law homestead exemption claim. Here, however, it is the non-debtor husband who can invoke the full Massachusetts homestead protections for his benefit and that of his family without regard to his wife’s bankruptcy and, because he is not the debtor, without being subject to any limitations that would otherwise be applicable were he in bankruptcy. He can (and presumably would) assert his state law homestead exemption protection unlimited by the federal bankruptcy law $125,000 cap notwithstanding his debtor spouse’s Chapter 7 case.11
BAPCPA added a new subsection (n) to § 522 describing an exemption for assets in individual retirement accounts described in § 408 or § 408A of the Internal Revenue Code. This new exemption protects an IRA and earnings on an IRA up to $1 million in a bankruptcy case for an individual debtor, except that amount “may be increased if the interests of justice so require.”12 Chapter 13 debtors with money in an IRA can exempt those funds after BAPCPA and reduce the value of the Chapter 13 estate for § 1325(a)(4) purposes.
And then there is new § 522(o), which reduces some exemptions to the extent the debtor’s interest in the exempt property is attributable to a disposition within 10 years of the petition “with the intent to hinder, delay or defraud a creditor.”13 In In re Maronde,14 the bankruptcy court found that the debtor sold a trailer and truck on the eve of the Chapter 13 filing and used the proceeds to increase a homestead exemption by $18,750.46. Because the plan proposed payments to unsecured creditors of only $16,420, the plan failed the best-interests-of-creditors test after application of the new homestead exemption limitation in § 522(o).
BAPCPA creates the possibility that debtors can act or fail to act during a bankruptcy case in ways that will affect the best-interests-of-creditors test. One of the stranger new provisions of the Bankruptcy Code brought to us by BAPCPA is this hanging run-on sentence at the end of § 521(a)(6):
If the debtor fails to so act within the 45-day period referred to in paragraph (6), the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor which is affected, such property shall no longer be property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law, unless the court determines on the motion of the trustee filed before the expiration of such 45-day period, and after notice and a hearing, that such property is of consequential value or benefit to the estate, orders appropriate adequate protection of the creditor’s interest, and orders the debtor to deliver any collateral in the debtor’s possession to the trustee; and . . . 15
The “paragraph (6)” cross-referenced in the first sentence above is, awkwardly, § 521(a)(6)—the subsection to which the run-on sentence appends. Somewhat simplified, § 521(a)(6) requires a Chapter 7 debtor to reaffirm or redeem debts secured by personal property within 45 days of the first meeting of creditors.16 The hanging sentence says that some personal property leaves the Chapter 7 estate altogether if the debtor fails to timely act during the Chapter 7 case (and the Chapter 7 trustee does not intervene).
It is generally held that the § 1325(a)(4) hypothetical liquidation calculation takes place as of the effective date of the Chapter 13 plan.17 In cases converted from Chapter 7 to Chapter 13, this can be weeks or months after the filing of the Chapter 7 case. If the Chapter 7 converts to Chapter 13 after the hanging sentence has been triggered, personal property may have exited the estate and any value for unsecured creditors is lost for § 1325(a)(4) purposes at confirmation of a plan.
The net result of these new exclusions from the estate and exemptions is that some Chapter 13 estates will have less value and the hypothetical liquidation analysis in § 1325(a)(4) will require smaller dividends to unsecured creditors. As illustrated in Maronde, there will be a few Chapter 13 cases in which the hypothetical liquidation value of the estate will be increased by new limitations on exemptions in § 522(p), (q) and (o).
1 11 U.S.C. § 1325(a)(4), discussed in § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
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 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.
4 See 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.
5 See 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.
6 See 11 U.S.C. § 1325(a)(4), discussed in § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
7 See 11 U.S.C. § 522(b)(3), discussed in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
8 “Any” is the magic word in the hanging sentence BAPCPA added at the end of 11 U.S.C. § 522(b)(3). See discussion in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
9 See 11 U.S.C. § 522(p) and (q), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
10 359 B.R. 389 (Bankr. D. Mass. 2007).
11 359 B.R. at 394.
12 11 U.S.C. § 522(n), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
13 11 U.S.C. § 522(o), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
14 332 B.R. 593 (Bankr. D. Minn. 2005).
15 11 U.S.C. § 521(a)(6).
16 Put aside, for purposes of this book, the timing conflict between new 11 U.S.C. § 521(a)(6) and (a)(2), as amended by BAPCPA. One more good reason to file a Chapter 13 case in the first instance—avoiding Chapter 7 altogether.
17 See §§ 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation and 326.1 [ Effects of Conversion from Chapter 7 to Chapter 13 ] § 148.3 Effects of Conversion from Chapter 7 to Chapter 13.