Under normal circumstances, a debtor claiming and exemption is limited by the statutory dollar amount that their jurisdiction imposes on the type of asset they are seeking to protect. For instance, North Carolina law allows a married couple filing a joint case to protect up to $37,000 of equity in their home. A couple who files for chapter 7 protection with home equity that exceeds this amount will stand the risk of having the bankruptcy trustee liquidate the home to satisfy creditors claims. Is it possible to exempt more equity in a home or car than technically allowed by your states exemption regime?
A 2007 decision by the Sixth Circuit seems to indicate that the answer is yes under certain circumstances. In re Anderson, 377 B.R. 865 (BAP 6th Cir. 2007) involved a debtor who held a one half interest in a Cabin. The debtors’ Schedule C listed their interest the Cabin as having a market value of $15,000, and an exemption value of $15,000. The bankruptcy trustee did not object to the debtors’ claimed exemption of their interest in the Cabin within 30 days of the 341 meeting as required by Fed. Rule of Bankruptcy Procedure 4003(b), therefore the claimed exemption stood. One year into the case, the trustee filed an adversary proceeding against the co-owners of the Cabin, seeking authority to sell the property as the market value actually exceeded the amount claimed exempt on Schedule C. The issue in Anderson became whether the Cabin was part of the bankruptcy estate as it had been claimed as exempt with no objection filed by the trustee. Because the debtors’ Schedule C listed $15,000 as both the market value and the exemption value of the Cabin, the bankruptcy court held that the entire Cabin was exempt and was therefore not part of the bankruptcy estate. The trustee had no claim to the Cabin regardless of its actual market value and regardless of the applicable exemption regime. Of course, the trustee appealed. The issue on appeal became whether listing identical market value and exempt value on Schedule C operated to exempt the entire Cabin. The Sixth Circuit BAP summarized the parties’ arguments in Anderson as follows:
‘[T]he Defendants argue, and the bankruptcy court agreed, that when a debtor schedules an exemption with identical market and exemption values, as in this case, the debtor is clearly indicating the intention to exempt the property in full, regardless of its actual value. In contrast, the Trustee contends that the debtor’s mere listing of identical market and exemption values is insufficient to manifest the required intent. According to the Trustee, listing identical values simply indicates that the debtor desires to exempt an interest in property up to the specific dollar amount shown. Therefore, maintains the Trustee, if a debtor wants to exempt a piece of property in its entirety, he or she must list its market value as unknown and its exempted value as 100%, or make some similar notation evidencing such an intent.’
The Court in Anderson upholds the use of what is known as an ‘in-kind’ exemption, allowing a debtor to claim an entire asset as exempt without regard to its value. The decision effectively places the burden on the trustee to object to the claimed exemption or forever exclude valuable assets from the estate. Courts that have upheld the use and validity of in-kind exemptions argue that when the market value and exempt value of the property is listed as identical, the debtor is manifesting an intent to exempt the property completely.
The ‘super’ Schedule C puts the trustee on notice of what the debtor intends to do and absent a timely objecttion, that intent should control. As Lisa Gretchko points out in an article for the American Bankruptcy Institute Journal, the Anderson BAP noted that there is a split of authority among the bankruptcy courts. Some bankruptcy courts hold that when a debtor states a valid statutory basis for the exemption and claims a specific dollar amount within the statutory limit for the exemption, then neither the trustee nor any creditor is required to object to the claimed exemption: and the debtor is bound by the amount claimed as exempt, and cannot then claim that the entire asset is somehow exempt. See, e.g., In re Heflin, 215 B.R. 530, 533-534 (Bankr. W.D. Mich. 1997). The lesson for consumer bankruptcy attorneys is clear: the use of an in-kind exemption election can be a legitimate way of protecting your clients property. Under the reasoning set forth in the Anderson decision, there is nothing wrong with placing your trustee on notice that a client is seeking to exempt an entire asset from the estate. The client should be aware that a timely filed objection to exemption elections will likely rain on your parade leaving the asset unprotected and adding risk to the filing. Anderson deals with a situation in which no objection to exemptions was filed.