09 Dec Bankruptcy Exemption Planning After Addison
Maximizing your homestead with unprotected assets before filing bankruptcy received another boost in the Eighth Circuit in 2008.
The Bankruptcy Appellate Panel handed down its first decision applying the circuit court’s Addison doctrine, previously discussed by my friend, Minnesota bankruptcy attorney Craig Andresen. The decision will be helpful in “fleshing out” the range of pre-bankruptcy exemption planning options open to people facing bankruptcy.
In the Wilmoth case, the debtors had liquidated $300,000 of depreciating earth-moving equipment on the eve of probable repossession. Upon their bankruptcy lawyer’s advice, after paying the liens on the equipment, they had primarily used the proceeds — $140,000 — to pay down a mortgage on their homestead and prepay approximately 10 months of mortgage payments in order to get them through a period of dislocation (after closing a business). This would normally seem like a reasonable transaction except there was pending at this time an unpaid $864,000 judgment.
When the debtors filed Chapter 7 bankruptcy in Arkansas, they elected to claim a state law homestead exemption which, in some cases, protects all the equity in the debtor’s home. The bankruptcy trustee objected to the homestead exemption and argued that the increase in equity was done with the intent to hinder, delay or defraud creditors and the homestead should be disallowed to the extent of the increase, under Sec. 522(o).
Both courts sided with the individuals. The BAP reasoned that although there were “badges of fraud” in the transaction, the debtors had acted to make substantial repayment to creditors (e.g. $160,000 of equipment liens were fully paid), they had retained value in their estate (albeit in exempt form), they had carefully disclosed everything they had done, the payments made sense as an effort to preserve the homestead going forward, and they acted according to their bankruptcy lawyer’s advice. The BAP concluded that there was no extrinsic evidence of fraud and therefore Addison did not provide for the reduction of the exemption provided by Arkansas.
The BAP’s understanding of Addison is useful. The panel concluded that Congress did not change the law by adding BAPCPA’s Sec. 522(o) in the 8th Circuit, but merely extended the “look-back” period. In other words, because 8th Circuit precedent already provided for the reduction or denial of exemptions, as well as denial of discharge, for some debtors who converted non-exempt to exempt assets, 522(o) was a codification of our position for other sections of the country that had not gone this far. And it created a bright-line of 10-years for the court to look back for such potentially-voidable transfers. But, absent extrinsic evidence of fraud, the new 522(o) did not bar honest debtors from converting unprotected assets into protected ones.
Addison and Wilmoth are helpful guidance to practitioners in the Eighth Circuit. The decisions give debtors some confidence that they can maximize their exemptions and therefore maximize the opportunity to actually enjoy a fresh start.
The case is Clark v. Wilmoth (In re Wilmoth).
Photo credit: Stefanie Brimacomb
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