Most bankruptcy lawyers have a basic understanding of how exemptions work. At a very broad level, an exemption request removes the assets of a consumer debtor (note that commercial debtors do not benefit from exemptions) from the bankruptcy estate and thus serves as a basis for the “fresh start” that bankruptcy is designed to provide.
But I suspect that even seasoned bankruptcy attorneys – myself included – don’t fully understand many of the nuances of the exemptions mechanism, unless they’ve faced application issues. exemptions. A recent case prompted a “return to basics” on the mechanisms of exemptions.
When a debtor files for bankruptcy, all of the debtor’s assets become the property of the bankruptcy estate in accordance with paragraphs 541 (a) (1) and (a) (2). The mass even includes the goods that the debtor intends to claim as exempt under 522. See Taylor v. Freeland & Kronz, 503 US 638 (1992). As explained below, the assets of the debtor can then be withdrawn from the estate via the Â§522 exemption procedure.
Under section 522, a debtor can exempt property by filing a list of assets that the debtor believes are exempt under section 522 (b). At this time, the property is still considered the property of the estate. The property can then only become exempt if the requirements of Â§522 (l) are met. Article 522 (l) states:
[t]The debtor shall file a list of the assets he claims as exempt under paragraph (b) of this article. . . Unless an interested party objects, the property claimed as exempt on this list is exempt.
Therefore, the exempt status of the good is conditioned on the absence of objection from an interested party. While Â§522 (l) conditions exemptions on the absence of objection, the section does not set any time limit for when a party must object. This delay is provided by Fed. R. Bankr. P. 4003 (b), which indicates in the relevant part
An interested party may only file an objection to the list of assets claimed as exempt within 30 days of the conclusion of the meeting of creditors held under Section 341 (a) or within 30 days of the filing of any changes to the list or additional annexes, whichever is later.
Rule 4003 (b) gives the trustee and creditors 30 days from the conclusion of the initial meeting of creditors to object. By negative implication, rule 4003 states that creditors cannot object after 30 days “unless, within that period, additional time is granted by the court”. Therefore, if the opposition period expires without an extension, then the goods claimed as exempt are exempt. Taylor, 503 US at 642.
Once the property has been exempted, the property leaves the estate and devolves on the debtor. See In re Bell, 225 F.3d 203 (2sdCir. 2000).
The issue that brought these issues to light was a simple motion for a stay filed by a mortgagee in an individual bankruptcy case. This case was originally filed as a Chapter 11 case, but was later converted to Chapter 7. After the conversion, the mortgagee filed a stay petition on the grounds that the debtor had failed to make a payment. regular mortgage payments over many months, including the period during which the case was in Chapter 11. Due to ongoing settlement discussions – which have led to numerous extensions – the claim for relief has not been made. heard for several months. As the matter was not resolved, the parties proceeded to a hearing on the motion. After hearing the evidence and arguments, the Court determined that the request for relief was not necessary based on the reasoning of the Court that, since the meeting of creditors had ended more than 30 days before the hearing, the property in question â the debtor’s farm, which had been claimed as exempt â was no longer the property of the estate and, therefore, the stay no longer applied to that property. The court therefore concluded that the request was moot.
The scenario raises a few issues:
- First, was the Court right? More specifically, is it correct that the suspension no longer applies to goods which have been exempted and for which the opposition period for the exemptions has expired?
- In a larger analysis, what effect, if any, does converting a case from one chapter to another have on that analysis?
Applicability of stay to exempt goods
The court’s ruling that the automatic stay no longer applies to exempt property is likely based on 11 USC Â§362 (c) (1), which states that:
The suspension of an act against the property of the succession under paragraph (a) of this article continues until such property is no longer the property of the succession;
As we saw above, once exempt, the assets devolve to the debtor and are therefore no longer the property of the estate. But is that the end of the story. In other words, does the fact that the property is no longer the property of the bankruptcy estate mean that the automatic stay does not apply at all? The above provision only informs us about the stay with regard to the property of the estate. It does not explicitly address the question of the applicability of the automatic stay to assets which are simply the property of the debtor. A negative implication could be invoked, but is this correct?
A closer look at Â§362 (a) reveals a counterpoint. Section 362 (a) is the general provision which imposes the suspension of a wide range of acts against property. In most cases, the wording of the various provisions of section 362 (a) refers to âownership of the estateâ. See 11 USC Â§362 (a) (2), (3), (4). However, Â§362 (a) (5) states that the automatic suspension functions as a suspension for all entities from any act to create, perfect or perform against the “property of the debtor.The question then becomes whether the modified language modifies the above analysis. Simply put, does the automatic stay continue to apply to assets that have been exempt and therefore withdrawn from the bankruptcy estate?
Although no specific reference to Â§362 (a) (5) has been found in the cases relating to a stay motion, at least one case has addressed the issue in the context of relinquishing ownership of the succession. In About Gasprom, 500 BR 598 (9e Cir. 2013), a Ninth Circuit bankruptcy appeal panel considered the effect of a abandonment order on the existence of the automatic stay. He found the following:
As of right, the Abandonment Order of August 1, 2012 ended only one aspect of the stay, the aspect protecting the Service Station as âproperty of the domainâ. When it was abandoned, the service station was no longer the property of the estate; the title of the gas station returned to Gasprom. See Catalano v. Comm’r, 279 F.3d 682, 685 (9th Cir. 2002). Thus, the aspect of the stay protecting real estate is no longer applied. See Â§ 362 (c) (1). But abandonment did not automatically end the aspect of suspension arising from Â§ 362 (a) (5), which protects âthe debtor’s propertyâ. In the absence of a court ruling granting a Section 362 (d) suspension waiver to allow foreclosure, 362 (a) (5) continued to protect the gas station from foreclosure, at least until the bankruptcy court closes the Gasprom bankruptcy case. August 16, 2012. See Â§ 362 (c) (2).
Therefore, the courts do in fact recognize the distinction in the language provided by Â§ 362 (a) (5) dealing with âproperty of the debtorâ as opposed to âproperty of the estateâ. And based on the analysis of Gasprom, we believe that the correct answer is that the assets withdrawn from the bankruptcy estate by application of the exemption regime continue to be protected by the automatic stay under Â§ 362 (a) (5).
Effect of conversion
A conversion of a case – for example, from chapter 13 to 7 or from 11 to 7 – adds a wrinkle to the above analysis. As noted above, the Fed. R. Bankr. P. 4003 (b) provides that interested parties have 30 days from the date of âthe meeting of creditors held under Â§ 341 (a)â. The question arises – which meeting of creditors? If the matter was initiated under Chapter 13 or Chapter 11, then a meeting of creditors was held in conjunction with these initial filings. By the effect of Â§ 348 of the Bankruptcy Code, the passage from one chapter to another constitutes a âreorganization orderâ, which triggers a new meeting of creditors under Â§ 341.
In a case outside the Second Circuit, In re Bell, 225 F.3d 203 (2sd Cir. 2000), the Court concluded that when an asset had been exempted by an individual in his Chapter 11 case – and therefore removed from the estate – a subsequent conversion to Chapter 7 did not return that asset to the estate of so that interested parties could contest an exemption request.
However, in 2010, Bankruptcy Rule 1019 was amended and now provides in the relevant part:
A new time limit for filing an objection to a request for exemptions begins under Rule 4003 (b) after a case has been converted to Chapter 7, unless:
(i) The case was converted to Chapter 7 more than a year after the entry of the first order confirming a plan under Chapter 11, 12 or 13; or
(ii) The case was previously pending in Chapter 7 and the time limit for opposing a claimed exemption had expired in the original Chapter 7 case.
Although not reflected in Bankruptcy Rule 4003 itself, this change implicitly negates the result. Bell. Therefore, while property may have previously been exempted due to the lack of objection to exemptions, the amended rule essentially allows interested parties a “second bite of the apple” to object to exemptions claimed by the debtor. when a case originally filed under another chapter of bankruptcy is converted to Chapter 7.
The request for exemption of an individual debtor is subject to various rules which govern both the time of his request and the time of opposition to that request. The automatic stay as applied to exempt assets, and therefore withdrawn from the bankruptcy case, does not automatically disappear when such assets are exempted. Creditors should be aware of the continued protection provided to the debtor’s assets, just as debtors seeking to continue to protect such assets. Finally, debtors and creditors should be aware of the possibility of reconsidering a request for exemption when converting a case to Chapter 7.