How to Settle an Objection to Exemptions the Easy Way

23 May How to Settle an Objection to Exemptions the Easy Way

Uh oh — just as you and your lawyer feared, the chapter 7 trustee has filed an objection to one of the exemptions you claimed on your Schedule C. Although you have a defensive strategy planned, which includes filing a good response and bringing the matter before the bankruptcy judge if necessary, there is uncertainty about the result, and a lot of money could be at stake. If you go to hearing and lose, it’s all or nothing. Maybe it’s time to think about settlement.

However, rather than having your lawyer phone the trustee and abjectly offering to surrender, consider a different approach: continue the hearing indefinitely while the trustee asks the court clerk to notice creditors that they must file proofs of claim. When this is done, creditors are formally notified of the court’s deadline for filing proofs of claim. Once this relatively short deadline passes, creditors are legally barred from filing a claim to share in any distribution of assets. This results in all the parties being made aware of how much is required to pay creditors’ claims.

Incredible as it may sound, it is typical for creditors to fall asleep once they receive the intial court notice of your bankruptcy filing. Subsequent notices, such as a notice to file claims, will invariably be ignored by up to one-half of the creditors. This means that the chapter 7 trustee may be able to pay creditors’ claims in full, or in large part, with much less money than was originally expected. Now an offer from your lawyer to settle the trustee’s objection to your exemptions may be made with much less money from you, while still paying a large pro-rata portion of the filed claims.

For example, let’s say you listed $100,000 in unsecured debts, and the trustee objected to your exemption of an annuity worth $50,000. If only $40,000 worth of unsecured claims are filed while the objection is still pending, the trustee may be more willing to entertain an offer of settlement from you of, say, $20,000. The strategy of noticing creditors to file claims while exemption litigation is still pending reduces the stakes for both the debtor and the trustee, and it should be employed whenever possible.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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