28 Feb How Should I List My Bankruptcy Exemptions in Light of the Supreme Court Case of Schwab v. Reilly?
The recent Supreme Court decision of Schwab v. Reilly dealt with a rather technical question of just what are debtors protecting when they claim an exemption in their bankruptcy? The Court said that a debtor must indicate that they are claiming an exemption for the full value of the item not just a portion of it. In Schwab, the debtor listed office equipment with a value of $10,718.00 and exempted the equipment for $10,718.00, which was not the total amount that could have been exempted. The trustee in the case claimed that the value of the equipment was much higher and that the debtor was only entitled to an exemption up to the amount claimed, which was $10,718.00. Therefore, he argued that the equipment could be liquidated and only $10,718.00 would have to be given to the debtor with the balance going to the debtorâ€™s creditors on a pro rata basis. The Court sided with the trustee.
Often bankruptcy exemptions have a ceiling as to how much can be claimed exempt. For example, in New York a debtor can now exempt a vehicle up to $4000.00. Here, Schwab does not really pose a problem, as a debtor can simply claim the full exemption of $4000.00, even if the vehicle is only worth $1000.00. In that case, if the trustee claims the value of the vehicle is really $3000.00, it would still be 100% exempt. But, there are exemptions that do not have a ceiling, and this is where Schwab has more of an impact.
For instance, in New York, most retirement accounts are exempt and there is no limit as to the amount that can be claimed exempt. If you have $50,000.00 in your 401(k), then you can exempt $50,000.00. However, what happens if you list your 401(k) with a balance of $40,000.00 and you claim an exemption of $40,000.00, but in reality the balance was actually $45,000.00? Under Schwab, the trustee would arguably have the ability to go after that $5000.00 that was not exempted. As a result, the better practice would be to claim the exemption as 100% of the balance/value rather than, or in addition to, listing a monetary amount.
In New York debtors now have a choice to claim either the federal exemptions or the New York exemptions. Under the federal exemptions a debtor has a wildcard exemption, which can be used to exempt any property the debtor chooses. The wildcard exemption has two facets to it. First, every debtor is entitled to a wildcard exemption of $1150.00. Second, a debtor can add any unused portion of their homestead exemption, up to $10,825.00 to their wildcard exemption of $1150.00. So, if you do not own your own home, then you have a wildcard exemption of $11,975.00. However, an issue arises under Schwab if you do own your own home, because even if you do not have equity in your home above the federal homestead exemption ($21,625.00), you will have to place a monetary limit on your exemption to identify how much of the unused portion you can claim as a wildcard. An example will shed light on the issue.
Assume that you own a home worth $100,000, and that there is a mortgage on the property of $95,000. Here, you would need to claim $5000.00 of the homestead exemption to protect your home. Therefore, you would be entitled to take the full amount of the unused portion of the homestead wildcard exemption of $10,825.00. We know that under Schwab if the trustee argues that the home is worth $115,000.00, we may have a problem. This begs the question, how can you claim the full amount of the homestead exemptionâ€”though you may not need itâ€”and still get the benefit of using any unused portion as a wildcard exemption. The answer appears to be that you should claim an exemption as to 100% of the value of the home, but treat the amount actually used as that portion needed to protect the equity that is listed on your bankruptcy petition.
In essence, there is no full proof way to get around this rather technical problem. The best approach is to insulate your assets to the best of your abilities and let the trustee possibly object based on excessive exemptions. The underlying reason for the posited approach is that the debtor is not foreclosed from making an argument and you will give yourself an opportunity to fight it out at a later date.
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