Exemptions in bankruptcy

Upon the filing of a voluntary Chapter 7 bankruptcy petition title to all property owned by the debtor, both legal and equitable, become property of the bankruptcy estate; title passes to the Trustee by operation of law.1

Debtors in all jurisdictions are entitled to certain exemptions; exempt property does not become property of the estate.2 New York has opted out of the Federal Exemptions, pursuant to 11 U.S.C. Section 522(b)(1), and therefore it is the state exemptions that apply.

Debtors filing chapter 7 petitions in New York are entitled to exempt certain property from their bankruptcy estate. The exempt property does not become property of the estate upon filing, and if taken into the estate should promptly be returned to the debtor.

Exemptions can be found in a number of New York statutes, primarily Civil Practice Law and Rules, Personal Property Law and Debtor and Creditor Law.

Exemptions are claimed in Schedule C of the debtor’s petition. Although Schedule C can be amended by the debtor at any time,3 once the Trustee has begun administering an asset for which no exemption has been claimed the Trustee may object to the exemption or request other relief, such as fees and costs involved in connection with the administration of the asset before the exemption was claimed. It is not the Trustee’s responsibility to advise debtors that certain exemptions are available, and Trustees do not file amendments to Schedule C on behalf of debtors. Even if no exemption is claimed, a Trustee may decide not to administer an asset the Trustee knows could be claimed as exempt; that is within the Trustee’s discretion and will depend on the asset and other issues in the case.

Although not obliged to point out unclaimed exemptions, a Trustee will usually take some action to object to an improperly claimed exemption. In lieu of filing an objection, Trustees can request that Schedule C be amended prior to the first meeting of creditors, or make the request at the first meeting. If a Trustee does not timely object to an improper exemption,4 the Court may allow the exemption as claimed and the Trustee may face criticism and possible surcharge if a creditor or other party in interest shows that the Trustee failed to administer property of the bankruptcy estate. Thus, if a debtor improperly claims a $5,000 exemption for a vehicle (a debtor is entitled to a $2,400 motor vehicle exemption pursuant to Debtor and Creditor Law Section 282) and the Trustee does not timely object, the exemption may stand. More problematic is when a debtor Schedules property with an “unknown” value and then claims an exemption of “100%” or “all.” In that case if it later turns out that the asset has significant value exceeding the proper exemption the Trustee will be bound and the asset treated as exempt.

Even seasoned bankruptcy practitioners often misunderstand the applicable exemptions or push the envelopment with novel ideas. Many of these issues are resolved by the Trustee and debtor’s counsel, but some make their way to court intervention. Here are a few exemption issues that have come up that merit attention:
Debtor spreading the $2,400 car exemption to more than one car. The exemption is limited to one vehicle.
Husband and wife debtors claiming $4,800 vehicle exemption when only one debtor is in title. Here debtors’ counsel took position that as married couple they had equitable interests in each other’s property.
Homeowner’s exemption of $50,000 per debtor – husband and wife own residence and the property value exceeds the liens on the property but less than the $50,000 either one of them could claim.5 Husband claims $50,000 exemption and wife claims cash exemption of $2,500.6 The Trustee took the position that the debtor can claim an exemption only to the extent of his interest in the property. Therefore as equal 50% owners of the property the Husband could claim only $25,000 as exempt, leaving the other $25,000 as property of the estate to be administered. The wife then had to amend schedule C to claim her homestead exemption and give up the cash exemption; the cash became property of the estate.
Debtor claims child tax credit which was included in her federal income tax refund was in fact “trust money” belonging to or to be used for the benefit of the child, and therefore was not property of the estate. The Court upheld the Trustee’s objection to that position and ordered the debtor to turn over the child tax credit with the balance of her non exempt tax refund.7
Debtor is entitled to a $50,000 homestead exemption, not a $2,400 vehicle exemption, for a mobile home.
Joint debtors each claim a $7,500 personal injury exemption; the wife’s claim in the personal injury action is for loss of consortium. The Trustee took the position that only the debtor injured in the accident is entitled to claim the exemption. The debtors amended their schedules to remove the wife’s claimed exemption.

The general rule is that the exemption statutes should be liberally construed in favor of the debtor.8 Notwithstanding that, Trustees have a duty to review debtors’ claimed exemptions and object to them when appropriate.

Kenneth Kirschenbaum is a panel 7 United States Bankruptcy Trustee in the Eastern District of New York and the managing partner of Kirschenbaum & Kirschenbaum, P.C. Stacy Spector, Esq. is administrative bankruptcy counsel at Kirschenbaum & Kirschenbaum, P.C., 200 Garden City Plaza, Suite 500, Garden City, New York.

1. 11 U.S.C. Section 541.
2. 11 U.S.C. Section 522.
3. Bankruptcy Rule 1009(a)
4. A party in interest may file objections to the list of property claimed as exempt within thirty (30) days after the conclusion of the meeting of creditors or the filing of any amendment unless further time is granted by the Court. Bankruptcy Rule 4003(b). In Taylor v. Freeland and Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280(1992).
5. CPLR Section 5206(a).
6. CPLR Section 283.
7. In re Parisi, No. 10-70021 (Bankr.)
8. In re Modansky, 159 B.R. 139, 142 (Bankr.S.D.N.Y.1993). Pursuant to Bankruptcy Rule 4003(c) the objecting party would have the burden of proving that the exemption was not properly claimed. Absent a showing of bad faith or prejudice to a party in interest, an allowable exemption should be permitted In re Corbi, 149 B.R. 325 (Bankr. E.D.N.Y. 1993); sighting In re Magallanes, 96 B.R. 253, 255-56 (9th Cir.BAP 1988); In re Williamson, 804 F.2d 1355, 1358 (5th Cir.1986); In re Doan, 672 F.2d 831 833 (11th Cir.1982); In re Drake, 39 B.R. 75, 76 (Bankr. E.D.N.Y.1984).