Exemption in Proceeds of Sale of Exempt Property Upheld

18 Apr Exemption in Proceeds of Sale of Exempt Property Upheld

The United States Court of Appeals for the First Circuit recently held In re Cunningham, 513 F.3d 318 (1st Cir. 2008) that the proceeds of a sale of exempt property retained exempt status.

A creditor in the bankruptcy case had obtained a ruling that its debt was nondischargeable under 11 U.S.C. 523(a)(4) (fraud in a fiduciary capacity) and 11 U.S.C. 523(a)(6) (willful and malicious injury). However, the debtor had properly claimed a homestead exemption. When the debtor attempted to sell his home, the creditor sought to reach the proceeds, arguing that the exemption would cease when the homestead was converted to cash.

The First Circuit disagreed and affirmed the lower courts preserving the exemption even over the cash proceeds of the sale. The Court cited 11 U.S.C. 522(c) which states that “[P]roperty exempted under this section is not liable during or after the case for any debt of the debtor that arose … before the commencement of the case, except [for certain debts, such as tax and child support
obligations].” Highlighting the “after the case” language and the noting limited exceptions, the Court extended the protection of the exemption to the proceeds of the sale of the home.

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