18 Nov Bankruptcy “Exemption Planning”: In re Addison Makes It Easier
The U.S. Court of Appeals for the Eighth Circuit ruled in August 2008 that section 522(o) of the bankruptcy code allows pre-bankruptcy “exemption planning” in the manner as was allowed prior to the enactment of section 522(o). This decision, In re Addison, 540 F.3d 805 (8th Cir. 2008), addressed, among other things, the effect of section 522(o), which was added to the bankruptcy code by the 2005 Bankruptcy Reform Act.
Section 522(o) directs the bankruptcy court to reduce the amount of a debtor’s homestead exemption by the amount of any non-exempt property the debtor has transferred to such homestead (usually by paying down a home mortgage, or purchasing a new homestead), if the transfer was done with the intent hinder, delay or defraud creditors, and if the transfer occurred in the ten years prior to the bankruptcy.
Before the Addison ruling, it was feared that bankruptcy courts would rely upon the new section 522(o) to forbid the long-standing practice of exemption planning. Worse, debtors would be denied a discharge under section 727 if section 522(o) was successfully invoked. Addison makes clear that in at least one federal appeals court circuit, homestead exemption planning is alive and well, without fear of the application of either section 522(o) or section 727, except in unusual cases.
In Addison, the debtor had transferred $8,000 toward creating IRA accounts for himself and his wife, three months before filing his chapter 7 bankruptcy. The debtor also transferred $11,500 to pay down his home mortgage, on the same day he filed bankruptcy. The source of these funds was a non-exempt brokerage account containing $45,476. He claimed the IRA accounts and the increased home equity as exempt.
The appeals court in Addison held that there was no evidence the debtor had acted with intent to hinder, delay or defraud his creditors, except for the bare fact that he had increased the amount of his exempt property, and decreased the amount of his non-exempt property.
The court held that the case law existing prior to the enactment of section 522(o) remained good law, and that the meaning of the phrase “hinder, delay or defraud” would be determined under the reasoning of that case law. Because there was no evidence the debtor had attempted to defraud his creditors by means of the tranfers, the court held that the debtor was entitled to claim the IRA and homestead exemptions as he proposed, and that section 727 did not apply to prevent a discharge of his debts.
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