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WHAT ARE EXEMPTIONS OR EXEMPT PROPERTY?

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

State v. Federal Exemptions when just moved to Arizona.

It is important to note that debtors may file a bankruptcy case in a state where they live (must be there 91 days), but cannot use that state’s exemptions. A debtor may file a bankruptcy case where the debtor resides, is domiciled, or has its principal place of business or principal assets. 28 U.S.C. § 1408. But a debtor can claim exemptions only under the law of the debtor’s domiciliary state, unless the law provides otherwise – has not lived in that state for two full years prior to filing the bankruptcy.


Arizona District Court Addresses Eligibility for Exemptions

Posted by NCBRC – June 9, 2021

Mackenzie v. Schreiber (In the Matter of Schreiber), No. 20-1993 (D. Ariz. June 4, 2021) Where the Arizona debtors were subject to Kansas exemption law but could not actually take any exemptions due to residency requirements, they were entitled to use federal exemptions under section 522(d). 

After living in Kansas for fourteen years, the debtors moved to Arizona where, one month later, they filed for chapter 7 bankruptcy. Maintaining that they were not eligible for either Arizona or Kansas exemptions, they claimed federal exemptions under the hanging paragraph of section 522(b)(3)(A) and section 522(d). The trustee objected, arguing that they were eligible for Kansas exemptions and were therefore precluded from taking the federal exemptions. The bankruptcy court overruled the objection, and the trustee appealed to the district court.

The domiciliary requirement set forth in section 522(b)(3)(A) provides that debtors may claim exemptions from any state where they have lived for 730 days preceding the bankruptcy petition, or, in the absence of such place, for the 180 days immediately preceding the 730-day period. The hanging paragraph to that section provides that if debtors are rendered “ineligible for any exemption” due to the residency requirement, they may elect to exempt property under section 522(d).

In this case, the debtors lived in Kansas for the 180 days preceding the 730-day residency period and therefore qualified for Kansas exemptions under section 522(b)(3)(A). However, Kansas imposes its own residency requirements on homestead and personal exemptions and, due to those restrictions, the debtors could not claim any exemptions under Kansas law.

On appeal, the case turned on interpretation of the phrase “ineligible for any exemption.” The trustee argued that so long as the debtors are not affirmatively barred from use of the Kansas exemptions, they are “eligible” and cannot use the federal exemptions. The debtors argued that they must actually possess and be able to exempt property under the laws to be deemed eligible.

The court looked to Black’s Law Dictionary which defines “eligible” as “fit and proper… to receive a benefit.” The court reasoned that debtors “are not ‘fit and proper’ to claim an exemption unless they possess the assets subject to the exemption.” The court further found that the purpose behind the hanging paragraph is to ensure that debtors have access to some exemptions if they cannot use those of the state.

The trustee argued that, under Kansas law, the debtors could exempt their mobile home even though it was located in Arizona. The court disagreed finding that, while Kansas does not explicitly state that homestead property must be located in Kansas, courts have held that the homestead exemption does not have extraterritorial effect. The court rejected the trustee’s argument that the caselaw it relied on was obsolete because it pre-dated BAPCPA. Rather, the court found that there were no post-BAPCPA cases supporting the trustee’s position and therefore its reliance on the pre-BAPCPA cases was appropriate.

Likewise, the court found Kansas’s personal property exemptions had no force outside of Kansas and were therefore unavailable to the debtors. To the extent there were some personal property exemptions that did not have explicit residency requirements, the debtors did not possess the assets. The court found that “[a] debtor’s ability to claim exemptions under Section 522(d) hinges on whether he can actually claim exemptions under state law.”  The court affirmed.


In re Schayes, 483 B.R. 209, 213 (Bankr. D. Ariz. 2012) (“A person can have numerous residences, but at any particular time only one domicile.”); and residence turns on physical presence while domicile hinges largely on intent, see In re Rodenbough, 579 B.R. 545, 549 (Bankr. D. Idaho 2018) (“Of course, a debtor’s residence may be different from his or her domicile because ‘[r]esidence, by contrast, may refer to living in a particular locality without the intent to make it a fixed and permanent home.’”).


In re Larsen  Ninth Cir BAP, (11/3/20) holds that one can reside in state A for 91 days to decades,  but still maintain domicile in state B.  File Bankruptcy in A and must use B’s exemptions.


In re Kauer, 2:20-01106-EPB: (BK Court, 6/29/20). The issue before the Court is whether Debtors may elect the federal exemptions of 11 U.S.C. § 522(d) or whether they are limited solely to exemptions permitted under Idaho law.  Idaho law requires the debtor be a resident of Idaho in order to use Idaho exemptions (lots of discussion about exceptions).  Ultimately,  the court ruled for the Debtors.


In re Cline, BAP No. AX-14-1503-PaJuKi, 2015 WL 3988992 (B.A.P. 9th Cir. Jun. 30, 2015) The B.A.P., consisting of Judges Kirscher, Pappas, and Jury, affirmed the Bankruptcy Court’s ruling that the Missouri exemption statutes applied to Debtors despite the fact that Debtors recently became Arizona residents. Missouri law opts out of the federal exemption scheme and applies to all individuals domiciled in Missouri. Debtors were still considered domiciled in Missouri despite the recent change of residence to Arizona and, thus, were ineligible to claim federal exemptions under 11 U.S.C. § 522(d).


As noted in in In re Williams, 369 B.R. 470 (Bankr. W.D. Ark. 2007), many states’ opt-out provisions apply only to residents of that state and therefore non-resident debtors may use §522(d) exemptions. A state that wants its opt-out provision to apply to non-resident debtors uses language such as the Iowa statute quoted in Williams: “[a] debtor to whom the law of this state applies on the date of filing of a petition in bankruptcy is not entitled to elect to exempt from property of the bankruptcy estate the property that is specified in 11 USC sec. 522(d) (1979).”

Residency is determined by where debtor actually resided for the past two years (and if necessary period before). See In re Rody, 2012 WL 385474 (Bkrtcy.D.Ariz.,2012). Debtors lived in Arizona for purposes of venue, the majority of the 180 days prior to filing, but were not residents of Arizona on the date of filing. Judge Marlar determined that the Arizona exemptions did not apply to non-residence and that the Debtors were entitled to the Federal Exemptions. In the Rody case, the Debtors just moved to Massachusetts which was clearly where they intended to reside, but they had not lived there long enough to claim as their residence for exemption purposes.

Arizona Revised Statutes Section 33-1133 “…in accordance with 11 U.S.C. 522 (b), residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522 (d)..” This clearly limits the opt-out to RESIDENTS of Arizona. Federal exemptions provide exemption status to some valuable things that are not provided for in Arizona: Wildcard, private disability proceeds, $23,000 for personal injury lawsuits, etc. As to personal injury, pecuniary loss, including pain and suffering, is not exempted under the PI exemption, only compensation for personal bodily injury such as loss of consortium, permanent bodily damage.


Sheehan v. Ash, 16-109 (N.D. W.Va. June 27, 2017).  The trustee argued that applying Louisiana exemptions to property in West Virginia was a constitutionally prohibited extraterritorial application of state law by virtue of the Fourteenth Amendment. Judge Keeley rejected the argument, finding that one state cannot impose its laws on another state, but Congress is at liberty to select one state’s laws and make them applicable extraterritorially, as occurs in Section 522(b)(3)(A).

Judge Keeley followed the majority approach, which she called the “state-specific interpretation,” that allows using the former state’s laws in another state if the former state’s law permits. In other words, if the former state’s laws do not prohibit applying exemptions to people or property in another state, then the court “should apply the [former] state’s exemptions to the debtor’s property, wherever located.”

The state-specific approach has the “plainest meaning” and “the most liberal interpretation that feasibly may be applied to Section 522(b)(3)(A),” a statute, Judge Keeley said, that is “a choice of law provision.”

The debtors were entitled to exempt property in West Virginia because Judge Keeley concluded that Louisiana does not prohibit application of its exemptions to people or property out of state.


SOCIAL SECURITY FUNDS:
Carpenter v. Ries (In re Carpenter), 614 F.3d 930 (8th Cir., 2010) or In re Buren, 725 F.2d at 1086 (noting “social security payments only become part of a debtor’s estate if he chooses to include them”). We conclude § 407 must be read as an exclusion provision, which automatically and completely excludes social security proceeds from the bankruptcy estate, and not as an exemption provision which must be claimed by the debtor. See [614 F.3d 937] 42 U.S.C. § 407; 4 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 522.09[10][a] n.76 (16th ed. 2010) (“Congress amended 42 U.S.C. § 407 to clarify that the inalienability of Social Security benefits was not repealed by the Bankruptcy Code, so that such benefits should not even become part of the bankruptcy estate.”).

In re Hildestad, Case No. 0:09-bk-17733-EWH (unpublished opinion: J. Hollowell, Az BK Court).  Debtors deposited lump sum payment of Social Security funds into account, then withdrew it (probably had funds at time chapter 7 is filed.  Trustee wanted  the funds.  Court found: Specifically, social security benefits commingled in an account with nonexempt funds retain their exempt status. citing In re Moore, 21,4 B.R. 628 (Bankr. D. Kan. 1997); NCNB Financial Services, Inc. v. Shumate, 829 F. Supp. 178 (W.D. Va. 1993), aff’d, 45 F.3d 427 (4th Cir. 1994); Hatfield v. Christopher, 841 S.W.2d 761 (Mo. Ct. App. W.D.1992); see also In re Frazier, 11,6 B.R. 675 (Bankr. W.D. Wis. 1990) (social security benefits commingled with other exempt funds remain exempt).

List of applicable states laws and cases regarding use of their exemptions.

If the debtor hasn’t lived in Arizona for the entire 2 years per-petition period, then the rule is to go back 2 years from the expected date of filing. Determine which state the debtor lived in the majority of the 180 days before that 2 year period. If it is also Arizona, then use Arizona exemptions. For example a case to be filed on August 30, 2013. Go back to August 30, 2011. Then if debtor lived in Arizona the majority of the period from Feb. 28, 2011 – August 30, 2011 (or count the exact days because of different days in each of those months), then can still use Arizona exemptions.

11 USC § 522 (a)(3)  Property listed in this paragraph is–

(A)  subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place in which the debtor’s domicile has been located for the 730 days immediately preceding the date of the filing of the petition or if the debtor’s domicile has not been located in a single State for such 730-day period, the place in which the debtor’s domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place;


DOMICILE v RESIDENCE

In most cases, the place of residence does equate to domicile, the latter being the decisive factor to determine the appropriate exemption scheme to utilize under § 522(b)(3)(A), as the user likely has the requisite intent to remain.  See Miss. Bank of Choctas Indians v. Holyfield, 490 U.S. 30, 48 (citing Texas v. Florida, 306 U.S. 398, 424 (“[D]omicile is established by physical present in a place in connection with a certain state of mind concerning one’s intent to remain there.”)  However, “one can reside in one place but be domiciled in another[.]”  Id. (citing District of Columbia v. Murphy, 314 U.S. 441 (1941); Adams v. Smith (In re Jones), 192 Iowa 78, 80 (1921)).  For example, one could physically reside in Maryland for employment or temporary military duty station assignment purposes, but have no intent to remain there on a permanent basis.   In order to determine the proper exemption laws for a debtor consists more than just a time calculation related to their address.  Rather, this critical decision requires request determining the exemption statutes applicable to an individual debtor’s circumstances.  In re Peterson, BK Court, Dis. Maryland, 19-24045 (6/1/22)


“Domicile” is the requirement under section 522(b)(3) regarding exemptions. It is a well established legal principal that every person has domicile, or put another way, “everybody belongs somewhere.” Walters v. Weed, 45 Cal. 3d 1, 752 P.2d 443, 246 Cal. Rptr.5 (California Supreme Court 1988). It is a fundamental principal that a domicile is not lost until a new one is acquired. Id. A new domicile is not established by intent to acquire a new domicile if the person has not yet moved to a place where he intends to remain. Id. “For purposes of §522(b), ‘domicile’ means actual residence coupled with a present intention to stay there.” In re Urban, 375 B.R. 882 (9th Cir. BAP 2007) “For adults, domicile is established by physical presence in a place in connection with a certain state of mind concerning one’s intent to remain there.” Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 109 S.Ct. 1597, 104 L.Ed.2d 29 (1989).


Arizona District Court Addresses Eligibility for Exemptions

Posted by NCBRC – June 9, 2021

Mackenzie v. Schreiber (In the Matter of Schreiber), No. 20-1993 (D. Ariz. June 4, 2021) Where the Arizona debtors were subject to Kansas exemption law but could not actually take any exemptions due to residency requirements, they were entitled to use federal exemptions under section 522(d). 

Update: 9th Cir Court of Appeals, 3/3/22 – upheld all courts’ decisions.

After living in Kansas for fourteen years, the debtors moved to Arizona where, one month later, they filed for chapter 7 bankruptcy. Maintaining that they were not eligible for either Arizona or Kansas exemptions, they claimed federal exemptions under the hanging paragraph of section 522(b)(3)(A) and section 522(d). The trustee objected, arguing that they were eligible for Kansas exemptions and were therefore precluded from taking the federal exemptions. The bankruptcy court overruled the objection, and the trustee appealed to the district court.

The domiciliary requirement set forth in section 522(b)(3)(A) provides that debtors may claim exemptions from any state where they have lived for 730 days preceding the bankruptcy petition, or, in the absence of such place, for the 180 days immediately preceding the 730-day period. The hanging paragraph to that section provides that if debtors are rendered “ineligible for any exemption” due to the residency requirement, they may elect to exempt property under section 522(d).

In this case, the debtors lived in Kansas for the 180 days preceding the 730-day residency period and therefore qualified for Kansas exemptions under section 522(b)(3)(A). However, Kansas imposes its own residency requirements on homestead and personal exemptions and, due to those restrictions, the debtors could not claim any exemptions under Kansas law.

On appeal, the case turned on interpretation of the phrase “ineligible for any exemption.” The trustee argued that so long as the debtors are not affirmatively barred from use of the Kansas exemptions, they are “eligible” and cannot use the federal exemptions. The debtors argued that they must actually possess and be able to exempt property under the laws to be deemed eligible.

The court looked to Black’s Law Dictionary which defines “eligible” as “fit and proper… to receive a benefit.” The court reasoned that debtors “are not ‘fit and proper’ to claim an exemption unless they possess the assets subject to the exemption.” The court further found that the purpose behind the hanging paragraph is to ensure that debtors have access to some exemptions if they cannot use those of the state.

The trustee argued that, under Kansas law, the debtors could exempt their mobile home even though it was located in Arizona. The court disagreed finding that, while Kansas does not explicitly state that homestead property must be located in Kansas, courts have held that the homestead exemption does not have extraterritorial effect. The court rejected the trustee’s argument that the caselaw it relied on was obsolete because it pre-dated BAPCPA. Rather, the court found that there were no post-BAPCPA cases supporting the trustee’s position and therefore its reliance on the pre-BAPCPA cases was appropriate.

Likewise, the court found Kansas’s personal property exemptions had no force outside of Kansas and were therefore unavailable to the debtors. To the extent there were some personal property exemptions that did not have explicit residency requirements, the debtors did not possess the assets. The court found that “[a] debtor’s ability to claim exemptions under Section 522(d) hinges on whether he can actually claim exemptions under state law.”

The court affirmed.

Earned Income or Child Care Tax Credits: The Arizona Bankruptcy Court certified the question: “Whether the passage of Proposition 209 [(“Prop. 209”)] repealed or affected the validity of A.R.S. § 33-1126(A)(11) [(“subsection (A)(11)”)].”

IN RE: ERICA KRYSTAL RIGGINS No. CV-23-0123-CQ (AZ Sup. Ct.), Filed March 7, 2024 The answer – a resounding ‘no’: We hold that the voters did not expressly repeal subsection (A)(11) by passing Prop. 209. Subsection (A)(11) did not exist when Prop. 209 was drafted and circulated; thus, subsection (A)(11) was not presented to the voters for consideration. We further hold that because Prop. 209 does not conflict with subsection (A)(11), it did not implicitly repeal the subsection and we give effect to both legislative enactments. Thus, subsection (A)(11) remains operable. 


CAN THE ARIZONA HOMESTEAD EXEMPTION PROTECT RVs? 

In re Drummond, 23-0009-CQ (Sup. Ct. Ariz. Feb. 23, 2024) The Arizona Bankruptcy Court certified the question to this Court: “Whether a motor home in which a person over 18 years of age resides qualifies as a mobile home for the purpose of claiming an Arizona homestead exemption pursuant to A.R.S. § 33-1101(A)(3).” For the reasons explained below, we hold that a motor home does not qualify for an exemption.

This overruled two bankruptcy judges and a district judge’s decisions to the contrary.  The majority on the Arizona Supreme Court answered a certified question by holding that a self-propelled motor home (a/k/a an RV) is not a “mobile home” and therefore does not qualify for an Arizona homestead exemption.

Go to the menu at the top of each page.  Click on ‘Bankruptcy’, the drop down list will have a link to the Federal Exemptions.

The ‘Snapshot Rule”

In In re Anderson (Klein v. Anderson), 20-60014, (9th Circ, March 1, 2021) Judge Lafferty laid out what is commonly known as the snapshot rule. He cited Section 522(b)(3)(A) for the proposition that “exemptions are to be determined in accordance with the state law applicable on the date of filing,” citing Jacobson.

Although the debtor moved out shortly after filing, Judge Lafferty said: [T]he plain language of Washington’s homestead statute reflects that Debtor was entitled to an automatic homestead exemption on the petition date, so long as she was occupying the Property as her principal residence, regardless of her future plans . . . . In other words, if the owner is occupying the homestead property as of the petition date, the inquiry ordinarily ends there; intent comes into play only if the owner does not occupy the property.

Court Description: The panel affirmed the Bankruptcy Appellate Panel’s judgment affirming the bankruptcy court’s ruling that a debtor was entitled to a homestead exemption under Washington law. The panel adopted in full the BAP’s opinion and attached it as an appendix. The BAP concluded that the debtor, who occupied the homestead on the petition date, was entitled to her homestead exemption despite the fact that she moved out shortly thereafter and neither re-occupied the property nor filed a declaration of non-abandonment within six months of moving out. ** The Honorable William Horsley Orrick, United States District Judge for the Northern District of California, sitting by designation.


Homestead established on Petition Date

In re Anderson, No. 20-60014, BAP No. 19-1224 (Appeal from 9th Cir BAP, 3-1-21) A chapter 7 debtor retains her Washington state homestead exemption even if she moves out of the house after the filing of the bankruptcy case and does not re-occupy or file a declaration of abandonment within six months after vacating the house. Chapter 7 involves a “snapshot” of the debtor’s assets, liabilities, and rights to exemption, on the filing date. The debtor’s subsequent actions generally do not affect that snapshot or the debtor’s rights. Per curiam, the Ninth Circuit panel affirmed, adopted and republished the March 23, 2020, decision of the BAP in case number WW-19-1224-LBG.


In re Hawk, 5th Circuit, 9/5/17 –  “The Snapshot Rule”White v. Stump, a debtor filed for bankruptcy, and his wife later sought a homestead exemption for the land where the debtor and his family resided. 266 U.S. 310, 310–11 (1924). The Supreme Court explained that “the state laws existing when the petition is filed [are] the measure of the right to exemptions.” Id. at 312. Moreover, the date of filing is the point at which “the status and rights of the bankrupt, the creditors and the trustee . . . are fixed.” Id. at 313.

Likewise, if the Hawks held amounts recently distributed from their retirement account when they filed for bankruptcy, those funds would be subject to the applicable sixty-day limitation on the exemption. See TEX. PROP. CODE § 42.0021(c). The Trustee could have objected to the exemption if the liquidated funds were not rolled over into another retirement account within sixty days.1 But the Trustee did not timely object to the claimed exemption, and under Taylor, the Trustee could not contest the exemption’s validity after the time for objecting passed. 503 U.S. at 643–44. The property interest was “withdrawn from the estate” when the exemptions were allowed, Owen, 500 U.S. at 308, and there was no provision under which the Hawks’ subsequently acquired interests in amounts distributed from the IRA could become part of the estate. Accordingly, we hold that the bankruptcy court erred in ordering the Hawks to turn over the liquidated funds to the Trustee.


A DEBTOR’S EXEMPTION RIGHTS ARE FIXED AS OF THE PETITION DATE.

In re Kim, 257 B.R. 680, 687 (9th Cir. BAP 2000); see also Owen v. Owen, 500 U.S. 305, 314 n. 6 (1991) (the proper date for determining whether an exemption exists is the date of fling of the bankruptcy petition).  Additionally, assets exempt on the petition date retain their exempt status regardless of post-petition use or change in character of the funds. Kim,257 B.R. at 689; see also In re Herman,120 B.R. 127, 130 (9th Cir. BAP 1990) (“Absent conversion from one chapter to another, the nature and extent of a debtor’s exemption rights are determined as of the date of the petition . . . Thus, any post-petition disposition of the property or post-petition change in the identity of the property into proceeds has no impact upon the exemption analysis.”); In re Reed,184 B.R. 733, 737 (Bankr. W.D. Tex. 1995) (“The majority of courts . . . hold that a postpetition change in the character of property properly claimed as exempt will not change the status of that property, relying on the principle that once property is exempt, it is exempt forever and nothing occurring postpetition can change that fact.”).


The filing date of a bankruptcy petition determines the law governing exemptions and freezes the value of the exemptions that the debtor may claim

In re Wilson, (9th Cir. Ct of Appeals,  11-27-18) The State of Washington’s homestead exemption statute says “the exemption amount shall not exceed the lesser of (1) the total net value of the [homestead] . . . or (2) $125,000 thousand dollars . . . .”  “Net Value” under Washington law is defined as the home’s equity value (just like AZ).

NOTE: Debtor gave up her discharge because of bad acts so could this have affected the court’s decision??

FINDING: The filing date of a bankruptcy petition determines the law governing exemptions and freezes the value of the exemptions that the debtor may claim. Because Debra Wilson’s amended bankruptcy schedules sought to claim more than Washington law permitted her to claim as of the petition date, we affirm the district court’s decision, limiting her claimed exemption to the amount she was entitled to under Washington law as of the petition date.

In this case, the debtor’s equity value at the time of filing was $3560.  She used that number on Schedule C when filing.  Then after filing, the house appreciated and had increased equity.  The increased equity was still less than $125,000.  Thereafter, debtor amended Schedule C to exempt the house “100% of fair market value, up to any applicable statutory limit” (using Washington State’s homestead exemption).  The intent of the debtor was to allow the exemption to be increased up to $125,000 per the Washington statute to capture the appreciation post-petition.

The court said she could not amend Schedule C to increase the exemption amount after the case was filed.  The court explained that any post-petition appreciation is always for the benefit of the estate, not the debtor.  The Washington homestead statute specified that the exemption is either the lesser of the total equity value or $125,000.  Because exemptions are fixed as of the date of filing, the debtor only gets to exempt what the equity was as of the date of filing.  Any post-petition appreciation is for the benefit of the estate,  not the debtor, even if the appreciation is still below $125,000.

Ariz. Rev. Stat. Ann. § 33-1133(B). “Nothing in this section [the state’s opt-out provision] affects the exemptions provided to residents of this state by the constitution or statutes of this state.”


California Homestead Works in Other States, Too article by Cathy Moran, California bankruptcy attorney.


Do Arizona exemptions have an extraterritorial effect?

730-day rule for the use of exemptions in bankruptcy: First, if there is a state “in which the debtor’s domicile has been located for the 730 days immediately preceding the [anticipated] date of the filing of the petition,” that is the state whose law is applicable. 11 USC § 522(b)(3)(A). (Note that the rule requires the debtor to have been domiciled in that state for every one of those 730 days.) (“Days” means calendar days and the counting begins on the calendar day before the day the petition was filed. In re Dufva, 2008 WL 2065198 (Bankr.W.D.Mo.2008).)”

Arizona exemptions might have an extraterritorial effect,but there are competing opinions and case law is constantly developing. There is an argument that Arizona’s homestead statute is not limited to property located in Arizona, it is limited to the debtor’s “dwelling.” See In re Jarski, 301 B.R. 342, 346 (Bankr. D. Ariz. 2003) (RJH- a debtor may have several residences under A.R.S. 33-1102(a), but only one domicile.). Determining a debtor’s domicile is an issue of fact and requires i) residence and ii) a present intent to remain. See Colliers. Sounds like the debtors reside in Rocky Point and Arizona and maybe intend to make Rocky Point their permanent domicile?  Second, a state’s exemption laws may be used for out of state property to the extent allowed by the state exemption statutes. See In re Fernandez, 2011 WL 3423373 (W.D. Tex. Aug. 5, 2011) (attached, finding that NV exemption statutes allowed a claimed exemption of property located in TX.). AZ’s homestead exemption statute, like the NV statue, is really broad. It would costly to litigate, but for a house that is owned free and clear, it might be worthwhile, and such a claim could give you leverage with the Mexican trustee.


Q: Debtors lived in Utah from 3/19-12/21. Utah is an opt out state and allows non-residents to use their exemptions BUT the homestead exemption is not extraterritorial which would let them use the federal exemptions….but the Debtor’s don’t own a home.

Research: Utah has opted out of the federal exemptions, but the opt-out applies only to its residents and those who have been nonresidents for fewer than 180 days.

Utah residents and non-residents may use the Utah state exemptions. Utah has not limited use of its exemptions to its residents or domiciliaries. Therefore, if it is the applicable state, its exemptions may be used regardless of the debtor’s state of residence on the date of filing bankruptcy. In re Katseanes, 2007 WL 2962637 (Bankr. D. Idaho 2007).

Only debtors who aren’t Utah residents may use the federal exemptions: Utah has opted out of the federal exemptions, but the opt-out applies only to its residents and those who have been nonresidents for fewer than 180 days. “An individual may not exempt from the property of the estate in any bankruptcy proceeding property specified in [section 522(d)] unless the individual is a non-resident of this state and has been for the 180 days preceding the bankruptcy”: Utah Code Ann. § 78B-5-513. Therefore, if Utah is the applicable state, the debtor may use the federal exemptions if the debtor has been a non-resident of Utah for more than 180 days as of the date of filing bankruptcy. Please note that the following case is not relevant to this question because it was decided when a prior version of the Utah opt-out statute was in effect: In re Katseanes, 2007 WL 2962637 (Bankr. D. Idaho 2007). Note that debtors who are not residents of Utah may prefer to use the federal exemptions rather than the Utah state exemptions because Utah’s homestead exemption does not apply to property located outside the state.

Additional research: See NCLC’s Consumer Bankruptcy Law and Practice § 10.2.1.2 (excerpt below).

If the effect of section 522(b)(3)(A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property as specified under section 522(d).38 The debtor is therefore permitted to exempt property under the federal exemption scheme in this situation even if the state of the debtor’s domicile as determined by section 522(b)(3)(A) is an opt-out state. This situation could arise if the exemption law of the state deemed to be the debtor’s domicile requires the debtor to reside within the state to claim exemption rights39 or if the law does not permit an exemption to be claimed on property located outside the state.40

  • 38 11 U.S.C. § 522(b)(3)(A); Zebley v. Karavias (In re Karavias), 438 B.R. 86 (Bankr. W.D. Pa. 2010); In re George, 440 B.R. 164 (Bankr. E.D. Wis. 2010); In re Adams, 375 B.R. 532 (Bankr. W.D. Mo. 2007) (because Florida law was construed to provide exemptions only to residents, debtor could claim federal exemptions); In re West, 352 B.R. 905 (Bankr. M.D. Fla. 2006) (debtors who had moved from Indiana to Florida within 730 days before petition could claim federal exemptions); In re Jewell, 347 B.R. 120 (Bankr. W.D.N.Y. 2006) (debtor who moved from Colorado to New York within 730 days before petition could claim federal exemptions); In re Crandall, 346 B.R. 220 (Bankr. M.D. Fla. 2006) (debtors who had moved from New York to Florida within 730 days before petition could claim federal exemptions).
  • 39 In re Camp, 631 F.3d 757 (5th Cir. 2011) (debtor permitted to claim federal exemptions because Florida opt-out statute applicable only to residents of Florida); In re Willis, 495 B.R. 856 (Bankr. W.D. Wis. 2013) (debtors could claim federal exemptions because Illinois exemptions are limited to Illinois residents); In re Rody, 468 B.R. 384 (Bankr. D. Ariz. 2012) (Arizona opt-out applicable only to Arizona residents); In re Chandler, 362 B.R. 723 (Bankr. N.D. W. Va. 2007) (Georgia opt-out statute is not applicable to non-residents); In re Underwood, 342 B.R. 358 (Bankr. N.D. Fla. 2006) (debtor whose domicile is Colorado for purposes of section 522(b)(3)(A) but who resides in Florida may claim exemptions under section 522(d) because Colorado exemptions apply only to residents).
  • 40 In re Adams, 375 B.R. 532 (Bankr. W.D. Mo. 2007) (Florida’s exemptions are not applicable to property located out of state).

John Bates (Mar 19, 2019 10:41 PM) The saving provision in 11 USC § 522(b) states, “If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).”

There is conflict among the courts in cases in which the debtor is unable to claim some, not all, of the state exemptions. Some courts interpret “any” in the savings clause to mean “all.” So, these courts say, as long as debtor can claim any of the state exemptions, the savings clause is not available. The Idaho bankruptcy court in In re Wilson, 2015 WL 1850919 (D. Idaho 2015), held that “so long as debtors can receive some exemptions under the applicable state law (Colorado), there is no reason for recourse” to the saving clause. Previously that court held In In re Harris, 2010 WL 2595294 (Bankr.D.Idaho 2010): “For this provision to allow a debtor to utilize the federal exemptions, . . . the debtor must be ineligible for all state exemptions . . ..” And in In re Katseanes, 2007 WL 2962637 (Bankr.D.Idaho 2007) the same court held that although the nonresident debtors could not use Utah’s homestead exemption, they could not claim the federal exemptions under the saving provision because “any” in that provision requires that all state exemptions be unavailable before the federal exemptions can be used.

A Pennsylvania bankruptcy court also concluded that “any” in the savings clause means “all.” In re Brooks, 393 B.R. 80 (Bankr.M.D.Pa.2008).(debtor who was not Maryland resident could not use those state exemptions that were limited to residents and could not use the federal exemptions under the saving provision in 11 U.S.C. § 522(b)(3)(C) which applies only when none, not some, of the state exemptions are available to the nonresident debtor).

However, other courts have allowed use of the savings provision when some of the state exemptions are not available. The Florida court in In re Kelsey, 477 B.R. 870 (M.D. Florida, 2012) allowed a debtor to claim the federal homestead exemption in lieu of the Colorado homestead exemption, which was limited to property within the state of Colorado. Similarly, the Oregon court in In re Tate, 2007 WL 81835 (Bankr.D.Or. 2007), allowed debtors to substitute the federal homestead exemption for that of Texas because the latter was not available outside that state. The Kansas court in In re Bingham, 2008 WL 186277 (Bankr. D. Kan. Jan. 18, 2008) stated that if the Texas exemptions applied, debtor could use the federal homestead exemption because that of Texas was not extraterritorial. Also see In re Williams, 369 B.R. 470 (Bankr.W.D.Ark.2007), in which the court apparently interprets “any” as meaning “some,” not “all.”


In re Weaver, 15-00792, Doc. 37, 9/30/15  Judge Wanslee allowed application of the Arizona homestead exemption to property outside of Arizona.


in In re Rody, 468 B.R. 384 (Bankr. D. Ariz. 2012) by judge Marlar:

“As in Cole, Arizona’s opt-out statute is also an “exemption” statute that limits the availability of the state’s exemption scheme to its residents. See also Camp, 631 F.3d at 761; Battle, 366 B.R. at 636–37. Moreover, neither party to this dispute has presented any Arizona authority for the extraterritorial effect of its personal property exemptions. Even assuming that A.R.S. § 33–1125 has extraterritorial effect, the exemption is limited to Arizona residents.

As an illustration, in In re Jarski, 301 B.R. 342 (Bankr.D.Ariz.2003), a debtor resided in a home in Arizona, filed bankruptcy in Arizona, and also owned a residence in California. This being a lien avoidance case, the court did not adjudicate which state’s exemption laws actually applied, but it nonetheless opined that Arizona’s homestead exemption statute “expressly contemplates that a debtor might have more than one residence that could qualify for the exemption because it creates a procedure for the debtor to choose which to claim as exempt.” Id. at 346; A.R.S. § 33–1102(A). The Jarski court also stated that § 522(b)(3)(A) (formerly § 522(b)(2)(A)) “determines whose law governs the exemptions, but not whether the property claimed exempt must exist in that same state.” Id. (emphasis added).

While the logic of Jarski and Arrol could require the Court to review the extraterritorial effect of Arizona’s personal property exemption in the event that Arizona law was “applicable,” 11 U.S.C. § 522(b)(3)(A), here, Arizona law is not applicable. Arizona’s opt-out statute limits the state exemptions to residents of Arizona.

In Re Regevig, 389 B.R. 736 (Bankr. D. Ariz. 2008).  A Judge Haines’ decision holding that the bankruptcy only exemptions in CA Section 703 (the set with the wildcard) violates the Supremacy Clause and is not available for folks filing bankruptcy in Arizona.

There was no circuit (or BAP) level holding in the 9th Cir overruling or explicitly agreeing with Haines’ holding

Under both Federal and Arizona law, exemption statutes are to be liberally construed in favor of a Debtor who claims an exemption. In re Thiem, 443 B.R. 832, 837-38 (Bankr. D. Ariz. 2011) (citing to In re Arrol, 170 F.3d 934, 937 (9th Cir. 1999); Gardenhire v. Glasser, 226 P. 911, 912 (Ariz. 1924); In re Herrscher, 121 B.R. 29, 31 (Bankr. D. Ariz. 1989)). And, in particular, the homestead laws should be interpreted liberally to advance the objectives of the statute, the fundamental purpose of which is to protect the family against the forced sale of the home property from certain creditors. Matcha v. Winn, 131 Ariz. 115, 638 P.2d 1361 (Ariz. App.1981).

real estateDOMICILE v RESIDENCE

In most cases, the place of residence does equate to domicile, the latter being the decisive factor to determine the appropriate exemption scheme to utilize under § 522(b)(3)(A), as the user likely has the requisite intent to remain.  See Miss. Bank of Choctas Indians v. Holyfield, 490 U.S. 30, 48 (citing Texas v. Florida, 306 U.S. 398, 424 (“[D]omicile is established by physical present in a place in connection with a certain state of mind concerning one’s intent to remain there.”)  However, “one can reside in one place but be domiciled in another[.]”  Id. (citing District of Columbia v. Murphy, 314 U.S. 441 (1941); Adams v. Smith (In re Jones), 192 Iowa 78, 80 (1921)).  For example, one could physically reside in Maryland for employment or temporary military duty station assignment purposes, but have no intent to remain there on a permanent basis.   In order to determine the proper exemption laws for a debtor consists more than just a time calculation related to their address.  Rather, this critical decision requires request determining the exemption statutes applicable to an individual debtor’s circumstances.  In re Peterson, BK Court, Dis. Maryland, 19-24045 (6/1/22)


“Domicile” is the requirement under section 522(b)(3) regarding exemptions. It is a well established legal principal that every person has domicile, or put another way, “everybody belongs somewhere.” Walters v. Weed, 45 Cal. 3d 1, 752 P.2d 443, 246 Cal. Rptr.5 (California Supreme Court 1988). It is a fundamental principal that a domicile is not lost until a new one is acquired. Id. A new domicile is not established by intent to acquire a new domicile if the person has not yet moved to a place where he intends to remain. Id. “For purposes of §522(b), ‘domicile’ means actual residence coupled with a present intention to stay there.” In re Urban, 375 B.R. 882 (9th Cir. BAP 2007) “For adults, domicile is established by physical presence in a place in connection with a certain state of mind concerning one’s intent to remain there.” Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 109 S.Ct. 1597, 104 L.Ed.2d 29 (1989).


See the published BAP case In Re Donald, as Judge Klein goes into an extensive analysis of the difference between domicile and residence; and you can be domiciled in one place and reside in another per supreme court authority cited in Donald.


In re Larsen  Ninth Cir BAP, (11/3/20)  Debtors were living in Nevada when they filed for bankruptcy protection and claimed the Nevada homestead exemption for their house located in Washington state. Chapter 7 trustee Christopher Burke (“Trustee”) objected, arguing that the Nevada homestead exemption does not extend to extraterritorial property. He also argued that the Larsens’ Washington property was not their homestead because they had not resided at the property for over six years while Mr. Larsen was stationed elsewhere in military service. The bankruptcy court overruled the objection, finding that the Larsens intended to return to their home in Washington and holding that they should not be denied a homestead exemption merely because the family was away due to Mr. Larsen’s military service.

The BAP said that residence and domicile are “not necessarily the same: a person can reside in a place that is not the person’s domicile.” Why? Because domicile means actual residence coupled with a present intention to stay there, the BAP said, citing authority.

The BAP explained that debtors can file petitions in states whose exemptions they are not entitled to claim. Why? Because a debtor can file where the debtor resides, is domiciled, or has a principal place of business under 28 U.S.C. § 1408. “But,” the BAP said, “a debtor can claim exemptions only under the law of the debtor’s domiciliary state.”

We hold that the Trustee argued for the correct result, although not for correct reasons. The Larsens were not entitled to any Nevada exemptions because they were domiciled in Washington. Accordingly, we VACATE and REMAND.


In re Shiu Jeng Ku v Russell Brown, 9th Cir BAP 6/21/17) Debtor Shiu Jeng Ku appeals an order sustaining the trustee’s objection and denying Debtor’s claimed exemptions under Arizona law.2 The bankruptcy court determined that Debtor was ineligible to claim Arizona exemptions because she was not domiciled in Arizona for the required 730 days immediately preceding her bankruptcy filing in accordance with § 522(b)(3)(A).3 Because the bankruptcy court lacked a proper evidentiary record to determine that Debtor was not domiciled in Arizona, we VACATE and REMAND.

It appears here that the bankruptcy court assumed Debtor had relinquished her Arizona domicile when she moved to Florida and had not maintained a residence in Arizona; it focused only on whether Debtor had reestablished Arizona as her domicile when she returned. To that extent, it erred. Instead, the court should have first determined whether Debtor had relinquished her Arizona domicile and changed her domicile to Florida. It may have done so implicitly, but such inquiry is “essentially factual,” and the record lacked any “evidence” for the court to make a factual determination of domicile. The parties presented no actual evidence — not even a declaration — and the bankruptcy court made its decision based on the arguments and statements of “fact” in the pleadings. The court even stated that it was not considering Debtor’s intent for its ruling, which would have necessitated an evidentiary hearing. The court made no findings to support a determination that Debtor had changed her domicile to Florida, other than the lack of an Arizona residence, which is insufficient.
We could perhaps avoid remand and affirm the bankruptcy court’s ruling that Debtor changed her domicile to Florida, absent that express finding, if the record were complete. See Jess v. Carey (In re Jess), 169 F.3d 1204, 1208-09 (9th Cir. 1999)

In determining a person’s domicile, the court can consider a number of factors (no single factor controlling), including: current residence, voting registration and voting practices, location of personal and real property, location of brokerage and bank accounts, location of spouse and family, membership in unions and other organizations, place of employment or business, driver’s license and automobile registration, and payment of taxes. Lew, 797 F.2d at 750.

In re Perez, 302 B.R. 661, 663 (J. Haines, Bankr. D. Ariz. 2003) holding that a debtor may claim that property is exempt from community debts under Arizona law by asserting not only his own, but also his spouse’s exemptions because such spouse acts for the benefit of the community and thus Arizona law allows one spouse to claim the other’s exemptions on her behalf.  Arizona law imposes a presumption that debts incurred by one spouse are for the benefit of the community. Johnson v. Johnson, 131 Ariz. 38, 44, 638 P.2d 705, 711 (1981)

In Morris the Trustee’s argument that Husband is receiving an improper windfall because he is effectively exempting both the Honda and the Jeep fails. Because the Jeep is not community property, it does not become property of Debtor’s estate under 11 U.S.C. § 541(a)(2)(A), but that does not mean that Husband may claim the Jeep as exempt in or out of bankruptcy. Debtor’s claim of exemption on behalf of Husband is binding on him. In re Homan, 112 B.R. 356 (9th Cir. BAP 1989). As a result, Husband cannot claim an exemption in the Jeep because his exemption has already been used. While it is possible that Husband might attempt to claim the Jeep as exempt in some future bankruptcy, the Trustee’s objection cannot be sustained based on speculation that something improper may occur in the future. See Perez, 302 B.R. at 664-65 (“The Court is confident that Bankruptcy Rule 2011 will preclude attorneys from seeking to claim a double set of exemptions where it might be possible to do so, and in any event that alert trustees can adequately respond to such abuses should they occur.”)

see also In re: Rizalina A. Morris, Chapter 7 Debtor. United States Bankruptcy Court, D. Arizona March 20, 2013 (Hollowell).

But, see: In re Fox, NV-11-1009-JoJuH, (9th Cir. BAP – cert to Nevada Supreme Ct) July 2, 2013.  A debtor cannot assert exemptions on behalf of a non-filing spouse.

In re: RIZAL JUCO GUEVARRA 9th Cir BAP March 25, 2022 Facts: The bankruptcy court held that debtor Rizal Guevarra was equitably estopped from amending his exemption. Guevarra appeals this decision. The bankruptcy court found that Guevarra induced the chapter 7 trustee to sell his joint interest in real property by denying any interest and by failing to exempt the real property in his original schedules. The court based its decision on an unduly narrow understanding of Guevarra’s position. The record demonstrates that the trustee was fully apprised of the facts concerning Guevarra’s ownership and his argument that he held his interest in a resulting trust for his nephew. As such, the trustee cannot prove all the elements of equitable estoppel. Therefore, we REVERSE.  Ruling : Debtor may amend his schedules to claim an exemption in sale proceeds of real property after the interest was sold by the bankruptcy trustee, under circumstances where the Debtor did not conceal facts. The bankruptcy court’s order sustaining the trustee’s objection to the amended claim of exemption based on the application of equitable estoppel was reversed.

Debtors in bankruptcy have a general right to amend their schedules, including their exemptions, at any time before the case is closed. Rule 1009(a). Bankruptcy courts have no equitable authority under federal law to restrict this right based on a perception of bad faith or prejudice to creditors. Gray v. Warfield (In re Gray), 523 B.R. 170, 173-75 (9th Cir. BAP 2014) (citing Law, 134 S. Ct. at. 1196-97). On the other hand, such equitable power might be derived from state law if state law provides an equitable basis for disallowing the amended exemption. Id. at 175 (citing Law, 134 S. Ct. at 1196-97). Here, the bankruptcy court applied California equitable estoppel law to disallow Guevarra’s amended wild card exemption. Guevarra challenges this application.


Aldana v. Stadmueller, 2018 Bankr. LEXIS 3676(9th Cir. BAP 11/20/2018)  Debtor failed to disclose his interest in a 2012 Chevrolet Malibu that he had purchased from a used car dealer  two months prior to filing his chapter 7.  When the trustee learned that the dealer’s security interest in the vehicle was perfected post-petition, he filed an adversary proceeding against the dealer to avoid the post-petition transfer.  Upon achieving judgment, the trustee then moved against the debtor for turnover of the vehicle.  At this point, debtor realizing that he neglected to claim the car exempt, amended his Schedules to do so.  The trustee then moved to disallow the exemption asserted in the vehicle, and in addition to have sanctions imposed against debtor’s attorney for frivolously asserting the debtor’s right to claim the exemption.  Debtor’s counsel argued that Law v. Siegel, 571 U.S. 415(2014) permitted him to claim an exemption at any time.  The bankruptcy court  ruled for the trustee and imposed sanctions against the attorney; and in a published decision, the BAP not only affirmed, but stated that further sanctions were warranted against debtor’s counsel for the filing of a frivolous appeal.

The BAP stated that it was hornbook law that, pursuant to 522(g), an exemption cannot be claimed as to property, either voluntarily transferred by the debtor or concealed by him, that is recovered by the trustee.  Here, perfection of the security interest amounted to a voluntary transfer of property under 101(54)(D), and recovery of the transfer was accomplished by Section 550.  Law stands for the general proposition that a court cannot deny an exemption that is otherwise allowed by statute.  Here, the relevant statute was 522(g) that disallowed the exemption.


In re Dawson, 16-04923 (Bankr. W.D. Mich. Dec. 7, 2018)  The trustee uncovered the potential malpractice claim against the debtor’s counsel at the Section 341 meeting (counsel failed to file bankruptcy before the expiration of the 90 days after garnishment). Subsequently, the trustee filed a negligence suit against the debtor’s counsel. The debtor then amended his schedules to claim an exemption covering the negligence suit.

Trustee . . . is building a case against Ms. Chadwick for legal malpractice due to her alleged failure to file the Debtors’ petition in time to preserve a possible preference recovery (and exemption rights) under 11 U.S.C. §§ 522(g) and 547. The Trustee’s theory, evidently, is that if counsel had filed the Debtors’ bankruptcy petition two days earlier, the Debtors could have exempted approximately $6,047.00 on account of a preference recovery that might have been wrested from their judgment creditor, Portage Federal Credit Union.

The trustee objected to the exemption claim but lost when Judge Dales handed down his decision on December 7, 2018.  “Notwithstanding sections 550 and 551 of this title,” Section 522(g) provides that “the debtor may exempt . . . property that a trustee recovers under Section  . . . 550 . . . , to the extent that the debtor could have exempted such property . . . if such property had not been transferred, if — (1)(a) such transfer was not a voluntary transfer . . . by the debtor; and (B) the debtor did not conceal such property . . . .”


Gray v. Warfield (In re Gray) BAP No. AZ-13-1502-JuKiD (9th Cir, 10 Dec 2014) Chapter 7 debtors1 Ian and Cynthia Gray appeal from the bankruptcy court’s order sustaining the chapter 7 trustee’s objection to an amended exemption on the grounds of bad faith. Because the Supreme Court in Law v. Siegel, 134 S. Ct. 1188 (2014), determined that bankruptcy courts have no discretion either to disallow amended exemptions or to deny leave to amend exemptions based on equitable grounds not specified in the Bankruptcy Code, we VACATE and REMAND.


Debtor can amend his Schedules at any time UNLESS another party has suffered prejudice in relying upon the previously filed Schedules. See, e.g., In re Howe, 2009 Bankr. LEXIS 2831 (Bkrtcy. N.D.N.Y. 2009): Debtors may, under F.R.B.P. 1009(a), amend their bankruptcy schedules, including Schedule C, at anytime before their case is closed. Case law supports a debtor’s right to freely amend their exemptions. See Cinelli, 2006 Bankr. LEXIS 3432, 2006 WL 3545444, at *3; In re Fournier, 169 B.R. 282, 283 (Bankr. D. Conn. 1994). Nevertheless, contrary [*10] to the Debtors’ assertion, the right to amend is not equivalent to the right to the exemption. In re Blaise, 116 B.R. 398, 399 (Bankr. D. Vt. 1990). While a debtor may have the right to freely amend Schedule C, this does not equate to a substantive right to the exemption.

Schwab v. Reilly, No. 08–538 U.S. Supreme Court, June 17, 2010  In a Chapter 7 bankruptcy trustee’s appeal from the Third Circuit’s affirmance of the bankruptcy court’s order denying the trustee permission to auction certain equipment so that the debtor could receive the money she claimed exempt and the estate could distribute the remaining value to creditors, the order is reversed where, because debtor gave “the value of [her] claimed exemption[s]” on Schedule C dollar amounts within the range the Code allows for what it defines as the “property claimed as exempt,” the trustee was not required to object to the exemptions in order to preserve the estate’s right to retain any value in the equipment beyond the value of the exempt interest. Read more… Therefore, debtors wishing “to exempt property in its entirety. ..[should] write ‘full fair market value (FMV)’ or ‘100% of FMV’ in Schedule C’s value-of-claimed-exemption column.”

In Schwab, the Supreme Court modified Taylor, holding that Rule 4003′ s 30day time limit applies to objections based on three, and only three elements of a claimed Schedule C exemption: (1) the description of the exempted property; (2) the Code provisions governing the claimed exemptions; and (3) the amount listed in the column titled â value of claimed exemption. Schwab, 130 S.Ct. at 2663. When the objection is based on other elements, the debtor’s market value estimation and the estate’s right to retain any value in the property beyond the value of the exempted interest, the 30day time limit does not apply. See id. at 2665, n. 15. According to the Supreme Court in Schwab, a trustee or other interested party has no obligation to object to an exemption claim unless the basis for that claim is found on the face of Schedule C. See id. at 2665.

1215 DAY LIMIT ON ACQUIRING HOMESTEAD:

11 U.S.C. § 522(p) is applicable even though Nevada does not allow the choice of federal exemptions. Because the debtors acquired their homes within the 1215 days before the filing they are limited to the $125,000 homestead set forth in that § notwithstanding the fact that the Nevada homestead is higher.


Banner Bank v. Johns (In re Johns) 9th Cir. BAP No. ID-14-1049-KiDJu BAP concluded that the second dwelling on Parcel II (contiguous with Parcel I containing Debtor’s residence) does not defeat the Johns’ right to include it as part of their homestead, the Bank’s argument collapses as to Parcel III. In other words, because Parcel II is preserved as part of the homestead, it is irrelevant that Parcel III is not itself contiguous to Parcel I because Parcel III is contiguous to Parcel II, which is contiguous to Parcel I.
VI. CONCLUSION For the reasons set forth above, the Bank did not carry its burden to prove the Johns’ claimed homestead exemption was improper. Therefore, we AFFIRM the bankruptcy court’s order overruling the Bank’s objection to the Johns’ claim of homestead exemption, thereby recognizing Parcels I, II and III as exempt under Idaho Code § 55-1003.


Secured Debt and Settlement Between Trustee and Secured Creditor

In re Roach, Cc-18-1144-KuTaF (9th Cir. BAP 1/29/19 These appeals are about Ms. Roach’s homestead exemption in proceeds received by the bankruptcy estate after the sale of her Property. In California, the homestead exemption may exceed home equity on the petition date. Wilson v. Rigby (In re Wilson), 909 F.3d 306, 310 (9th Cir. 2018). The allowed amount of the debtor’s homestead is determined when the subject property is sold rather than being fixed as of the date the debtor files bankruptcy. Robertson v. Alsberg (In re Alsberg), 161 B.R. 680, 684 (9th Cir. BAP 1993), aff’d 68 F.3d 312 (9th Cir. 1995). …  Because Omaha Bank assigned the money portion of its lien to the bankruptcy estate, the bankruptcy court properly determined that under the terms of the compromise, Ms. Roach was not entitled to claim a homestead exemption in the sale proceeds attributed to the transferred lien. 


Homestead Post-Petition Sale Proceeds Retain Exempt Status in Chapter 7

Proceeds from the post-petition sale of the chapter 7 debtor’s homestead did not become part of the bankruptcy estate even though the debtor did not reinvest them in another homestead. Lowe v. DeBerry (In re DeBerry), No. 17-50315 (5th Cir. March 7, 2018).

When Curtis DeBerry filed for chapter 7 bankruptcy he exempted his homestead without objection by the trustee. Post-petition he sold the residence and transferred some of the proceeds to his wife and used the rest to pay unrelated criminal attorney fees. The trustee filed an adversary complaint arguing that, because Mr. DeBerry did not reinvest the proceeds in another homestead within six months as required by Texas proceeds law, the proceeds were not exempt. The bankruptcy court found in favor of Mr. DeBerry and the district court reversed.

On appeal, Mr. DeBerry relied on Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017) The Fifth Circuit held that in chapter 7, an allowed, unconditional, exemption is removed from the bankruptcy estate and the property cannot be distributed to creditors even if the exemption loses its exempt status post-petition under the state proceeds rule. Like the IRA proceeds rule applicable in Hawk, the state homestead proceeds rule, TEX. PROP. CODE § 41.001(c), provides that “proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.”

The circuit court found that the purpose behind the homestead proceeds rule is to allow the homeowner time to reinvest the proceeds in a new homestead without fear of attachment by creditors. In the bankruptcy context, the proceeds rule protects the debtor who no longer owns the homestead at the time of filing, by preventing the proceeds from the sale of homestead within six months of filing from entering the bankruptcy estate. In this case, however, it was not the debtor seeking the protection of the rule, but the trustee seeking to use the rule to bring the proceeds into the estate.

As it did in Hawk, the court relied on the snapshot rule to fix the debtor’s exemption at the time of the petition. To find otherwise, the court cautioned, would leave the issue of exemptions open through the entire course of the bankruptcy, the length of which would be at least partially controlled by the trustee, since a debtor could sell his homestead at any time. The court distinguished In re Zibman, 268 F.3d 298, 301 (5th Cir. 2001), where it held that a homestead exemption for proceeds of a homestead sold before the bankruptcy petition is merely conditional upon reinvestment in a new homestead. In contrast, Mr. DeBerry owned the homestead when he filed for bankruptcy and, therefore, his exemption was unconditional. The court also distinguished In re Frost, 744 F.3d 384, 389 (5th Cir. 2014), where it found that the proceeds from the post-petition sale of the chapter 13 debtor’s homestead were not exempt unless reinvested according to the Texas proceeds rule. The fact that Frost was a chapter 13 case was dispositive because, under section 1306(a)(1), property acquired post-petition is added to the bankruptcy estate. There is no comparable post-petition asset capture provision in chapter 7.

Based on its reasoning in Hawk, the Fifth Circuit reversed the district court and reinstated the order of the bankruptcy court.


Post-Petition Appreciation in Value

Wilson v. Rigby, 17-35716 (9th Cir. Nov. 27, 2018) Appreciation in a Home Is Exempt in California, But Not in Washington, Circuit Says

The panel affirmed the district court’s decision affirming the bankruptcy court’s refusal to permit a Chapter 7 debtor to amend a bankruptcy schedule to reflect a post-petition increase in the value of property that was the subject of a homestead exemption under Washington law. The panel held that the debtor’s claimed exemption was limited to the amount to which she was entitled under Washington law as of the petition date because, whether claiming federal or state law exemptions, the value of the exemption is fixed by reference to the date of the filing of the bankruptcy petition.


Statutory Limitation on Use of Sale Proceeds from Homestead to Purchase New Homestead:

In re Wells (McCallister v Dustin Jade Wells) 9th Cir Court Appeals, 12/3/21 – 20-35984 – Idaho has one year requirement to reinvest homestead sale proceeds in new homestead.  Debtor failed to purchase new homestead within year.  Trustee moved to seize sale proceeds  When Debtor sold the homestead and failed to reinvest the proceeds within the period allowed by statute, “the proceeds, stripped of their exempt status, transformed into nonexempt property, i.e., property of the bankruptcy estate, by operation of law. At that point, there was no need for the trustee to pursue an objection to the claimed exemption because no such exemption existed.” Id.; see also Schwab v. Reilly, 560 U.S. 770, 788–91 (2010) (holding that the trustee need not object within the time specified by Bankruptcy Rule 4003 when the trustee seeks an order reclaiming value that has always belonged to the bankruptcy estate).  Trustee won, affirmed. ((Case is good review of existing case law).


In re Gebhart, United States Ninth Circuit, 09/14/2010 In consolidated Chapter 7 bankruptcy petitions in which the value of debtors’ homes increased so that they had equity in excess of the homestead exemptions, the bankruptcy court’s order approving the appointment of a real estate broker to sell the home for the benefit of the estate is affirmed where the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor’s residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire asset from the estate.

Case summary


In re Awayda, This matter is before the Court following a hearing on an Objection to Claim of Exemptions and a Motion for Turnover Order filed by Kristin Wilson, Chapter 7 trustee (“Trustee”). The Trustee challenges the Debtor’s claimed exemption in proceeds from the sale of her homestead on the basis that the exemption could expire at a later date. Because the exemption was validly claimed as of the petition date, however, the Debtor is unconditionally entitled to the exemption regardless of any potential postpetition developments. The Trustee’s requested relief will therefore be denied.


HOMESTEAD FOR PROPERTY OUTSIDE ARIZONA

In re Weaver, 15-00792, Doc. 37, 9/30/15  Judge Wanslee allowed application of the Arizona homestead exemption to property outside of Arizona.


In re Smith3:10-bk-19970-MCW Motion for Turnover 08/26/14 Entered 08/26/14 (But order is from Collins) the Court finds that the Proceeds from the sale of the Debtors’ exempt Arizona homestead remain exempt to the extent that the Proceeds were utilized to find and acquire their new home in Utah, to prepare it for occupancy, and to relocate there. However, $22,538.78 of the Arizona homestead sale proceeds were not so utilized by the Debtors within Arizona’s 18-month reinvestment period. This sum must be turned over to the Trustee by the Debtors.

In re Smith __ B.R __ (9th Cir. BAP 2006) HELD: FAILURE TO REINVEST HOMESTEAD PROCEEDS LEAVES FUNDS NON-EXEMPT
Exemptions are generally determined as of the petition date. However, where an applicable state law requires compliance with a pre-condition to maintain exempt status. The debtors’ failure to reinvest homestead proceeds within the State law statutory time frame (which expired postpetition) extinguished the exemption even though no timely exemption exemption was filed. The funds thus became subject to turnover.


In re Jacobson, No. 10-60040 (US 9th Cir, 04/23/2012), In bankruptcy proceedings in which the trustee filed a complaint claiming that certain money and property belonged to the bankruptcy estate, the bankruptcy appellate panel’s rejection of all claims is: 1) reversed in part, where proceeds from the sale of a homestead lost their exempt status under California law; and 2) affirmed in part, where a) rental property and its income was solely owned by the debtor’s husband, b) the trustee lacked standing to claim that the husband’s inheritance, which was used to purchase the rental property, belonged to the bankruptcy estate from earlier bankruptcy proceedings, and c) judicial and collateral estoppel did not require turnover of the rental property.


In re: Greene, No. 07-16067 (US 9th Circuit Court of Appeals, October 5, 2009)
In debtor’s appeal from the district court’s order affirming a bankruptcy court’s decision limiting the debtor’s homestead exemption in his bankruptcy petition to $125,000 pursuant to 11 U.S.C. section 522(p), the order is affirmed in part where no pre-petition appreciation of the property at issue occurred. However, the order is reversed in part where “any amount of interest that was acquired,” as used in section 522(p)(1), meant the acquisition of ownership of real property and the monetary cap in section 522(p) did not apply to property to which a debtor acquired title more than 1215 days before she or he filed a bankruptcy petition.


In re Landahl, __ B.R. __, 2006 WL 506034 (Bankr. M.D. Fla. 3/2/06) HELD, HOMESTEAD CAP APPLIES IN ALL STATES Another Florida bankruptcy judge, this time in Tampa, has given broad application to the new BAPCPA provision capping the exemption for homesteads acquired less than 1,215 days before bankruptcy. Judge May joined several other judges who have held that the BAPCPA amendment limiting the homestead exemption to $125,000 applies in all states and not only those which give their residents a choice between the federal and state exemption schemes.


In re Virissimo, 332 B.R. 201 (Bkrtcy.Nev. 2006) LINDA B. RIEGLE, Bankruptcy Judge. HOMESTEAD CAP APPLIES IN ALL STATES (IN THIS CASE NEVADA) § 522(p)

In re Virissimo and In re Heisel, (BK Ct District of NV) 10/31/05 – 11 U.S.C. § 522(p) is applicable even though Nevada does not allow the choice of federal exemptions. Because the debtors acquired their homes within the 1215 days before the filing they are limited to the $125,000 homestead set forth in that § notwithstanding the fact that the Nevada homestead is higher.


In re McNabb (D.Az 6/23/05 – J. Haines) re: homestead exemption – AZ is an opt out state, therefore $125,000 cap provided in Section 522(p) does not apply.


In re Summers, 344 B.R. 108 (Bkrtcy.D.Ariz. 2006) CAP ON HOMESTEAD EXEMPTION IMPOSED BY BAPCPA APPLIES TO OPT-OUT STATES TOTAL OF CAP ON HOMESTEAD EXEMPTION PLUS “SAFE HARBOR” EQUITY CANNOT EXCEED THE TOTAL HOMESTEAD EXEMPTION ALLOWED UNDER ARIZONA LAW Where debtors acquired home within 1,215 days of filing the petition, but some of the proceeds for purchase came from sale of previous homestead acquired before 1,215 days, debtors argued that the “safe harbor” provision of § 522(p)(2)(B) provided that the $125,000 cap does not apply any of the equity in their home. The court disagreed, saying the Code puts a cap of $125,000 in equity on the home purchased within 1,215 days, including the equity which came from the sale of a home purchased beyond the 1,215-day period, but the combined exemption could not exceed the $150,000 homestead exemption provided under Arizona law. Distinguished result in Wayrynen due to unlimited Florida homestead exemption.


In re Sainlar, 344 B.R. 669 (Bkrtcy.M.D.Fla. 2006) HELD: BAPCPA CAP ON HOME EQUITY DOES NOT APPLY TO EQUITY ACQUIRED BY NATURAL INCREASE DUE TO MARKET § 522(d), 522(p)
In a case in which the residence was purchased more than 1,215 days prior to filing bankruptcy, and accordingly, the $125,000 cap on equity purchased within 1,215 days did not apply, as prescribed under BAPCPA [Code section 522(p)], the court held that the cap did not apply to substantial equity arising within 1,215 days due to appreciation not caused by the debtor’s “purchased” or “acquired” equity during that time period.[ed. note: in this case The National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amicus brief in support of the debtor’s position]


In re Laconte, 342 B.R. 809 (Bkrtcy.D.Mont. 2005) (Dec. 8). HELD: UNDER BAPCPA DEBTOR’S CONVERSION OF NON-EXEMPT PROPERTY TO OSTENSIBLY EXEMPT HOMESTEAD EQUITY WAS FRAUDULENT.
The debtor filed bankruptcy on April 21, 2005 . . . just one day after the effective date of that portion of BAPCPA dealing with homestead exemptions.
Acting pursuant to a bankruptcy attorney’s advice, debtor then sold several non-exempt motor vehicles and an interest in a non-exempt farm and used the cash proceeds to pay down some of the debt on the home, thus increasing the amount of equity claimed exempt.
The court held ” … Debtors’ sale of nonexempt assets and application of the proceeds to the principal balance of their home mortgage was a violation of 11 U.S.C. § 522(o).
Section 522(o) provides that the homestead exemption “. . . shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt …”
The court discussed the meaning of the phrase “hinder, delay, or defraud” within the context of § 522(o).

In re Irwin, 293 B.R. 28 (Bkrtcy.D. Ariz. 2003) – a judge Haines decision – held that the term “mobile home” as used in the statute is broad enough to include a motor home in which the debtors actually reside.

Under both Federal and Arizona law, exemption statutes are to be liberally construed in favor of a Debtor who claims an exemption. In re Thiem, 443 B.R. 832, 837-38 (Bankr. D. Ariz. 2011) (citing to In re Arrol, 170 F.3d 934, 937 (9th Cir. 1999); Gardenhire v. Glasser, 226 P. 911, 912 (Ariz. 1924); In re Herrscher, 121 B.R. 29, 31 (Bankr. D. Ariz. 1989)). And, in particular, the homestead laws should be interpreted liberally to advance the objectives of the statute, the fundamental purpose of which is to protect the family against the forced sale of the home property from certain creditors. Matcha v. Winn, 131 Ariz. 115, 638 P.2d 1361 (Ariz. App.1981).

_________________________________________________

SUGGESTED ARGUMENT:

The Arizona Supreme Court has stated that “the fundamental purpose of the homestead law is to protect the family against the forced sale of home property from certain creditors, and, to further this purpose, the homestead laws should be interpreted liberally to advance the objectives of the statutes.” Matcha v. Winn, 131 Ariz. 115, 117, 638 P.2d 1361, 1362 (1981) (emphasis added). Moreover, the objecting parties bear the burden of proof, and the ultimate burden of persuasion, regarding the validity of a debtor’s exemption claim. Fed. R. Bankr. P. 4003(c); Hopkins v. Cerchione (In re Cerchione), 414 B.R. 540, 548 (9th Cir. BAP 2009); Kelley v. Locke (In re Kelley), 300 B.R. 11, 16–17 (9th Cir. BAP 2003).

The validity of the Debtor’s claimed homestead exemption in the Motorhome is a well-settled issue of law. In fact, there is case law supporting a homestead exemption in a motorhome in both the bankruptcy court and Arizona Court of Appeals. In a 2003 bankruptcy ruling, Judge Haines concluded that a motor home qualifies for the homestead exemption under Ariz. Rev. Stat. § 33-1101(A)(3). In re Irwin, 293 B.R. 28, 29 (Bankr. D. Ariz. 2003). More recently, the Arizona Court of Appeals also acknowledged that a motorhome may qualify for the homestead exemption under Arizona law. Chas Roberts AirConditioning, Inc. v. Pekrul, No. 1 CA-CV 10-0593, 2012 Ariz. App. Unpub. LEXIS 547, at *1 (Ct. App. May 3, 2012).

In Chas Roberts Air Conditioning, Inc. v. Pekrul, for example, the Arizona Court of Appeals accepted the proposition that a debtor could claim a homestead exemption in motorhome. The court determined that the only issue was whether the debtors actually resided in the motorhome because “[A.R.S. §] 33-1101 plainly states that a person is only entitled to a homestead exemption in a motor home ‘in which the person resides.’” Id. at 4–5. The court noted that the debtors claimed they had moved into the motorhome after transferring title to their house to an insider, but it agreed with the trial court’s determination that the transfer was a sham and that the debtors continued living in the house after the transfer. Id. at *2. As a result, the court of appeals affirmed the trial court’s finding that the debtors “did not reside in the motorhome and were thus ineligible for the homestead exemption.” Id. at *8. (footnote 1)

The Trustee’s primary argument against the Debtor’s claimed homestead exemption is that Judge Haines’ was wrong in In re Irwin because he “simply went too far.” This argument is not compelling given the liberal construction of Arizona’s homestead exemption in favor of debtors. Moreover, the Trustee’s argument fails to acknowledge similar cases by Arizona courts, such as Chas Roberts Air Conditioning, Inc. v. Pekrul and Morrisey v. Ferguson. Furthermore, the Trustee’s citation to Powell v. Washburn, 211 Ariz. 553, 559, 125 P.3d 373, 379 (2006) is not relevant in this instance and simply has no bearing on the Debtor’s claimed exemption. The court in Powell v. Washburn was interpreting the CC&R’s of a community, not a statute (and definitely not Arizona’s homestead statute). Similarly, the Court need not worry about the Trustee’s hypothetical regarding a claimed homestead exemption in a sports car because that is not what is happening here. Like many other people who live in RVs and motorhomes, the Debtor actually resides in the motorhome and can reasonably demonstrate this.

Footnote: 1 The Arizona Court of Appeals cited another appellate case, Morrisey v. Ferguson, 156 Ariz. 536, 536-37, 753 P.2d 1192, 1192-93 (App. 1988), where the court found that an individual who filed a homestead declaration on his mobile home while in prison did not “reside” in the mobile home for purposes of a prior version of A.R.S. § 33-1101(A)(4) and, therefore, did not comply with the requirements of the statute.

In Re Gilman, (9th Cir.  4/13/18) April 13, 2018. In a bankruptcy matter, the Ninth Circuit held that the bankruptcy court did not abuse its discretion in granting debtor’s motion for relief from judgment on the ground of excusable neglect, even though debtor did not initially oppose creditors’ objection to the homestead exemption. But the Circuit remanded because the bankruptcy court concluded that the debtor established his claim to a homestead exemption under California law without a determination as to whether debtor intended to continue to reside in the property.

In re Rachel Earl  16-16428 (9th Cir, Ct of Appeals, 11/27/17)  Rachel Earl, an Arizona resident, owned two property: one she lived in and one she rented out.  Unfortunately the home she lived in was foreclosed BEFORE her chapter 13 case was filed; as a result she did not have title to the home when the bankruptcy was filed.  Eventually the court decided that since she did not own the property she could not use bankruptcy to undo the foreclosure (trustee’s sale).  Then Ms. Earl elected to convert her case to a chapter 7 and claim the rental property as her homestead.  The court ruled that she could not homestead the  “rental property” because she was not living in the rental property when her bankruptcy was filed.  As a result she lost both homes.

Note – some say this opinion in the face of SiegelGebhardt, and dozens of others at all court levels.  Bankruptcy Rule 1009(a) gave her the right to amend her schedules and claim an exemption. Arizona law allows claiming a homestead exemption at any time prior to a sale of the property.  Many of us disagree feeling like the court follows the law.

The bankruptcy judge’s decision was upheld in district court; the Ninth Circuit reached the same result.

The Snapshot Rule Prevails: Date of Filing Petition Fixes Exemptions

homesteadThe Ninth Circuit’s opinion is based primarily on the ‘snapshot rule’ stemming from White v. Stump, 266 U.S. 310, 313 (1924), where the Supreme Court held in 1924 that bankruptcy exemptions are fixed at the time of filing. Refining the rule, the high court held in 1943 that the “bankrupt’s right to a homestead exemption becomes fixed at the date of the filing of a petition in bankruptcy and cannot thereafter be enlarged or altered by anything the bankrupt may do.” Myers v. Matley, 318 U.S. 622, 628 (1943).

The snapshot rule was designed to protect debtors, not hurt them. As shown by recent appeals court authority, the snapshot is designed to give finality to exemptions on the filing date so a debtor can liquidate exempt property after filing in chapter 7 without losing the exemption. For example, the Fifth Circuit ruled in Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. Sept. 5, 2017), that exempt property on the filing date does not lose its exempt status even if it is converted to nonexempt property after the filing of a chapter 7 petition. In other words, the snapshot rule is a shield for the debtor, not a sword in the hands of a trustee.  Bill Rochele, ABI

homestead

Practice tip: Move into the rental house, then: (1) dismiss the 13 and then file a chapter 7 after waiting 180 days, or (2) file a chapter 7 and then dismiss the Chapter 13 (assuming your jurisdiction allows).  Make sure the debtors’ intent is to live in the house.


Secured Debt and Settlement Between Trustee and Secured Creditor

In re Roach, Cc-18-1144-KuTaF (9th Cir. BAP 1/29/19 These appeals are about Ms. Roach’s homestead exemption in proceeds received by the bankruptcy estate after the sale of her Property. In California, the homestead exemption may exceed home equity on the petition date. Wilson v. Rigby (In re Wilson), 909 F.3d 306, 310 (9th Cir. 2018). The allowed amount of the debtor’s homestead is determined when the subject property is sold rather than being fixed as of the date the debtor files bankruptcy. Robertson v. Alsberg (In re Alsberg), 161 B.R. 680, 684 (9th Cir. BAP 1993), aff’d 68 F.3d 312 (9th Cir. 1995). …  Because Omaha Bank assigned the money portion of its lien to the bankruptcy estate, the bankruptcy court properly determined that under the terms of the compromise, Ms. Roach was not entitled to claim a homestead exemption in the sale proceeds attributed to the transferred lien.

Relying on the analysis of the court in In re Allman, 286 B.R. 402 (Bankr. D. Ariz. 2002), the Court has previously determined that Arizona law does not preclude a homestead claim in multiple adjoining parcels. In Allman, the court cited to Wuicich v. Solomon-Wickersham Co., 18 Ariz. 164, 166, 157 P. 972 (1916) for the proposition that two adjacent parcels can satisfy the requirement of one compact body for homestead purposes. Allman, 286 B.R. at 405. Ultimately, the court determined that Arizona courts would allow a homestead on contiguous parcels of land, whether purchased at the same time or not, unless there is evidence that a sub-divided portion of the entire parcel is not being used for residential purposes. Allman, 286 at 407; see also Banner Bank v. Johns (In re Johns), 2014 WL 6892744, at *5-7 (BAP 9th
Cir. 2014) (interpreting Idaho law and finding a homestead exists in multiple parcels on which more than one dwelling exists).

In some states, like Arizona, Vermont and Ohio, property cannot be a homestead if ownership is through a limited liability corporation, or LLC. In other states, like Nevada, property owned through an LLC can be a homestead, according to Bankruptcy Judge Colleen A. Brown of Burlington, Vt.

In re Hewitt, 16-11240 (Bankr. D. Vt. Nov. 8, 2017)  A man attempted unsuccessfully to strip a judicial lien from his home under Section 522(f). The debtor failed because the home was not his “homestead” at the time the lien attached, Judge Brown said in her Nov. 8 opinion.

The man and a woman purchased a home in their own names. Later, they transferred title to an LLC of which they were the sole owners and members. It was undisputed that the man had always lived in the home and paid all expenses and taxes. Title was in the LLC when a judgment lien attached to the home.

Under Vermont law, Judge Brown said that an LLC gives a member the right to share in profits and receive distributions. However, she said that “when an LLC owns property, its members do not own that property in their individual capacity.”  Therefore, Judge Brown said, “even if [the debtor] was the sole member of [the LLC], that would not entitle him to an ownership interest in the Property during the time the LLC held title to the Property, equitable or otherwise.” She also said that Vermont has “narrowly” construed “the right to a homestead interest based upon equitable title.”

Presumably, there would be no reason a prospective debtor could not transfer property from an LLC to himself or herself before filing, unless the LLC had creditors who might claim that the transfer was a fraudulent transfer. If it were a fraudulent transfer with “actual intent,” the debtor could lose his or her discharge by trying to resurrect a homestead exemption.

We hold that a trustee MAY NOT use 11 U.S.C. §§ 724(a) and 551 to avoid and preserve a tax penalty lien on a debtor’s exempt property for the benefit of the bankruptcy estate. Reversing lower court

In re Tillman (Warfield vs IRS and Tillman), 3:19-bk-01074  11/18/22 the 9th Cir Court of Appeals Reversed the District Court.  Finding: the posed question was “may a trustee use 11 U.S.C. §§ 724(a) and 551 to avoid and preserve a tax penalty lien on a debtor’s exempt property for the benefit of the bankruptcy estate? We hold that a trustee may not. Therefore, we reverse the decision of the District Court affirming the Bankruptcy Court.

District Court’s decision “On June 19, 2020, this Court heard oral argument on this matter. Having heard the parties’ arguments and having reviewed their briefs, this Court now holds there exists no genuine issue of material fact and the Trustee may avoid the Tax Lien for the benefit of the estate pursuant to § 551. The Debtor is only entitled to claim as exempt value over and above the voluntary 1st lien and the involuntary IRS lien against her residence. After avoidance of its Tax Lien, the IRS holds an unsecured (but possibly nondischargeable) claim against the Debtor in the amount of the avoided Tax Lien. The Debtor may not employ §522(g) because the Debtor may not exempt that portion of the value of the Property occupied by the Tax Lien, whether that Tax Lien is held by the IRS or is avoided and then held by the Trustee for the benefit of this bankruptcy estate. Trustee’s Motion for Summary Judgment is hereby granted.

Argued to the court of Appeals – 7/5/22: https://youtu.be/4U9y_A8rtlA


Trustee Avoids IRS tax lien – preserved for the benefit of the estate

Hutchinson v. Internal Revenue Service, 19-60065 (US Ct Appeals 9th Cir, 10/19/21)  The IRS recorded liens for unpaid taxes, interest, and penalties against the debtors’ residence. After debtors filed for bankruptcy, the IRS filed a proof of claim. The portion of the claim that was secured by liens on the residence and attributable only to penalties was $162,000. The debtors filed an adversary proceeding, asserting that the IRS’s claim for penalties was subject to avoidance by the trustee and that because the trustee had not attempted to avoid this claim, debtors could do so under 11 U.S.C. 522(h). The trustee cross-claimed to avoid the liens and alleged their value should be recovered for the benefit of the bankruptcy estate. The bankruptcy court dismissed the adversary complaint. The trustee and the IRS agreed that the penalty portions of the liens were avoided under 11 U.S.C. 724(a). The Bankruptcy Appellate Panel and Ninth Circuit affirmed. Section 522(h) did not authorize the debtors to avoid the liens that secured the penalties claim to the extent of their $100,000 California law homestead exemption. Section 522(c)(2)(B), denies debtors the right to remove tax liens from their otherwise exempt property. Under 11 U.S.C. 551, a transfer that is avoided by the trustee under 724(a) is preserved for the benefit of the estate; this aspect of 551 is not overridden by 522(i)(2), which provides that property may be preserved for the benefit of the debtor to the extent of a homestead exemption.


Two chapter 7 cases.  Debtors’ homes encumbered by first and IRS lien = no equity for Debtors.  Debtors claim homestead exemption.  Trustee enters into “carve out” with IRS so trustee can sell debtors’ residences.  Debtors convert to 13 and chapter 7 trustee and attorney claim administrative expenses.

Bankruptcy court finds “The Trustee’s efforts to sell the Homes were unsupported by any provision of the Code and they were clearly inconsistent with one of the primary purposes of the Code—providing debtors with a fresh start through proper exemptions.

With those exemptions in place, the Trustee’s efforts to negotiate the Carve-Outs with the IRS and sell the Homes were not reasonably likely to yield proceeds to distribute to unsecured creditors. Without a benefit to unsecured creditors, administration of the Homes was neither necessary nor reasonably likely to benefit the Debtors’ estates. Accordingly, none of the Trustee’s services for which he seeks compensation are allowable under § 330(a). The Court will deny the Trustee’s fee applications in their entirety.” (Christensen & Bird, Bankruptcy No. 15-29773, Bankruptcy court, District of Utah 12/14/16)

Rule 4003(b) provides that “a party in interest may file an objection to the property claims as exempt within thirty (30) days after the meeting of creditors held under § 341(a) is concluded or within thirty (30) days after any amendment to the list or supplemental schedules is filed, whichever is later.” FED.R.BANKR P. 4003(b) (2021)


Do Amendments Reopen the Time to Object to Claims of Exemption Not Affected by the Amendment?

(32022 excerpt from ABI materials – intended for educational purposes only) A debtor generally may amend her list of property claimed as exempt at any time before the case is closed. F ED . R. B ANKR . P. 1009(a) (2021). But does amendment reopen the time for the trustee, creditors, and parties in interest to object to claims of exemption not affected by the amendment? Courts are split.

Relying on the plain language of Rule 4003(b), some courts have held the objection need not be limited to the amended claims of exemption. See In re Woerner, 483 B.R. 106 (Bankr. W.D. Tex. 2012), In re Larson, Bankruptcy No. 12-30913, 2013 WL 4525214 (Bankr. D. N.D. Aug. 27, 2013). Rule 4003(b) provides that “a party in interest may file an objection to the property claims as exempt within thirty (30) days after the meeting of creditors held under § 341(a) is concluded or within thirty (30) days after any amendment to the list or supplemental schedules is filed, whichever is later.” F ED. R. BANKR . P. 4003(b) (2021).

That said, most of the courts to consider the issue have “concluded that the filing of an amendment does not reopen the time to object to original exemptions not affected by the amendment.” In re Larson, 2013 WL 4525214, at *4 (citing In re Grueneich, 400 B.R. 680, 684 (B.A.P. 8th Cir. 2009); Bernard v. Coyne (In re Bernard), 40 F.3d 1028, 1032 (9th Cir. 1994), cert. denied, 514 U.S. 1065 (1995); In re Kazi, 985 F.2d 318, 323 (7th Cir. 1993); In re Payton, 73 B.R. 31, 33 (Bankr. W.D. Tex. 1987); In re Gullickson, 39 B.R. 922, 923 (Bankr. W.D. Wis. 1984), and 9 C OLLIER ON BANKRUPTCY ¶ 4003.03(1)(a) (16th ed. 2013)). These courts generally emphasize the finality of the previously claimed exemption. See, e.g. In re Kazi, 985 F.2d at 323 (“if exemptions previously claimed have become final by the lack of a successful objection prior to the amendment, the objection may go only to those exemptions affected by
the amendment”)


In no timely objection – 100% of FMV, including postpetition appreciation, belongs to debtor

Masingale v Munding, 9th Cir BAP, 11/2/22)  As a matter of first impression, we hold that the Masingales’ claim of an exemption equal to “100% of FMV” includes postpetition appreciation and becomes incontestable if there is no timely objection. The snapshot rule is one of the limits on a debtor’s entitlement to exemptions. Taylor holds that, if no one objects, the debtor can get the benefit of exemptions to which the debtor is not entitled. In other words, in order to get the benefit of the snapshot rule, a trustee or party in interest must object to an exemption claim that contradicts that rule. at 23


In re Adam Lee, (ADAM LEE v.DANE S. FIELD, Chapter 7 Trustee) No. 15-17451 (United States Court of Appeals, Ninth Circuit 5/7/18)

Before filing a petition in bankruptcy, Adam Lee transferred his interests in two properties into a tenancy-by the-entirety estate, and subsequently claimed an exemption for those interests under 11 U.S.C. § 522(b)(3). The trustee successfully brought an adversary proceeding to set aside Lee’s transfers of those interests. When the trustee sought a turnover order to compel Lee to relinquish possession of the properties, Lee resisted. He argued that the trustee had failed to make a timely objection to the exemptions under Rule 4003 of the Federal Rules of Bankruptcy Procedure, and therefore Lee’s exemptions were valid notwithstanding the court’s avoidance of the transfer. The bankruptcy court disagreed. It granted the turnover order, thus denying the claimed exemptions. We hold that the trustee’s adversary complaint contesting the basis for Lee’s exemptions qualified as an objection to those exemptions under Rule 4003. We therefore affirm.

No new period to objection is the case was converted to chapter 7 more than one year after the entry of the first order confirming a plan under chapter 11, 12, or 13.  Plus use of “100% of FMV”

Bankruptcy Rule 1910 – conversion of 11, 12, 13 to 7:

(2) New Filing Periods.

(A) A new time period for filing a motion under §707(b) or (c), a claim, a complaint objecting to discharge, or a complaint to obtain a determination of dischargeability of any debt shall commence under Rules 101730024004, or 4007, but a new time period shall not commence if a chapter 7 case had been converted to a chapter 11, 12, or 13 case and thereafter reconverted to a chapter 7 case and the time for filing a motion under §707(b) or (c), a claim, a complaint objecting to discharge, or a complaint to obtain a determination of the dischargeability of any debt, or any extension thereof, expired in the original chapter 7 case.

(B) A new time period for filing an objection to a claim of exemptions shall commence under Rule 4003(b) after conversion of a case to chapter 7 unless:

(i) the case was converted to chapter 7 more than one year after the entry of the first order confirming a plan under chapter 11, 12, or 13; or

(ii) the case was previously pending in chapter 7 and the time to object to a claimed exemption had expired in the original chapter 7 case.

Masingale v Munding, 9th Cir BAP, 11/2/22)  As a matter of first impression, we hold that the Masingales’ claim of an exemption equal to “100% of FMV” includes postpetition appreciation and becomes incontestable if there is no timely objection. The snapshot rule is one of the limits on a debtor’s entitlement to exemptions. Taylor holds that, if no one objects, the debtor can get the benefit of exemptions to which the debtor is not entitled. In other words, in order to get the benefit of the snapshot rule, a trustee or party in interest must object to an exemption claim that contradicts that rule. at 23

Law v. Siegel, No. 12-5196 United States Supreme Court, 03/04/2014 The Bankruptcy Court exceeded the limits of its authority when it ordered that the $75,000 protected by the debtor’s homestead exemption be made available to pay the bankruptcy trustee’s attorney’s fees, which were incurred by the trustee in overcoming the debtor’s fraudulent misrepresentations.

In Re: Bradley Orton, No. 11-4157 United States Third Circuit, 07/20/2012 In bankruptcy proceedings filed under Chapter 7, decisions of the bankruptcy and district courts that the trustee of the estate, and not the debtor, is entitled to any post-petition appreciation in value of the estate’s assets that surpasses the dollar amount exempted pursuant to the wildcard exemption in 11 U.S.C. section 522(d)(5), are affirmed where: 1) the straightforward application of the teachings and instructions of Schwab v. Reilly, 130 S. Ct. 2652 (2010), means that the debtor properly exempted one dollar’s worth of his oil and gas lease and no more; and 2) when a debtor retains only an interest in an asset, rather than the asset itself, the debtor is limited to the value of the exemption and the estate is entitled to any appreciation in the asset’s value beyond the amount exempted.


Chapter 13 appreciation in real property value (after confirmation of plan) belongs to Debtor.

In re Black, BAP NV 18-1352-FBH, BK 2:14-bk-12402-ABL (11/21/19) Debtor Richard L. Black obtained confirmation of a chapter 13 plan that required him to pay $45,000 to his creditors when he sold or refinanced his rental property. About three years later, he sold the property for $107,000. He proposed to pay $45,000 to his creditors and to retain the excess sale proceeds for himself. Chapter 13 trustee Kathleen A. Leavitt (“Trustee”) moved to modify Mr. Black’s confirmed plan to require him to pay the excess sale proceeds to his unsecured creditors. The bankruptcy court approved the modified plan.
Mr. Black appeals, arguing that he was not required to commit the excess proceeds to his plan payments. He also argues that the Trustee’s motion was untimely and that the modified plan did not meet the statutory requirements for plan confirmation.
We hold that the Trustee’s modified plan was timely and complied with the applicable statutes. But we agree with Mr. Black that he was entitled to retain the excess sale proceeds. Accordingly, we REVERSE.

In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property. Cf. Schwaber v. Reed (In re Reed), 940 F.2d 1317, 1323 (9th Cir. 1991) (“No doubt Debtor’s argument that appreciation enured to him would have merit if his entire interest in the residence had been set aside or abandoned to him; it was not.”

In re: Addison, No. 07-2064, 07-2727 (U.S. 8th Circuit Court of Appeals, August 07, 2008)
In a bankruptcy case, rulings against debtor and denial of discharge are affirmed in part and reversed in part where: 1) the bankruptcy court clearly erred in finding that debtor converted nonexempt property into his homestead with the intent to hinder, delay, or defraud a creditor; 2) it erred similarly in finding debtor transferred nonexempt funds into a Roth IRA with such intent; 3) the resultant denial of discharge required reversal; and 4) two 26 U.S.C. section 529 tuition savings accounts opened for the benefit of his children were nonexempt property of his bankruptcy estate.

ARS 33-1126(a) protects up to $300 (for each debtor) in one bank account on the day of filings have not yet been physically paid out of their bank account prior to the filing of the bankruptcy – these funds are property of the estate and the Trustee will demand surrender of the funds. The Debtor must reimburse the Trustee for the funds that were in the account on the date of filing, minus their exemption of $300. In re Sawyer, Judge Curley 3/06 (9th Circuit).

In re Palidora 310 B.R. 164, *167 (Bkrtcy.D.Ariz.,2004) This is a footnote. RJH holds that wages in a bank account are not exempt. Note the (A)(4) language “to be paid” as opposed to (A)(3) “monies received or payable to”. This might mean that disability in a bank in a bank is not exempt and See The Arizona Court of Appeals, however, has held that “the earnings protection of [A.R.S.] §§ 33–1131 and 12–1598.10 does not extend to monies disbursed to the debtor’s bank account.” Frazer, Ryan, Goldberg Keyt & Lawless v. Smith, 184 Ariz. 181, 186, 907 P.2d 1384, 1389 (App. Div. 1 1995).

Why aren’t wages protected once deposited into a bank account?

Ryan v. Smith, 184 Ariz. 181 (App.1995), 907 P.2d 1384, “In summary, the earnings protection of §§ 33-1131 and 12-1598.10 does not extend to monies disbursed to the debtor’s bank account. We acknowledge that the earnings exemption is thus diluted, at least for debtors who deposit their earnings in bank accounts. But as we have said on other occasions, “An upholding is not an endorsement.” McPeak v. Industrial Comm’n, 154 Ariz. 232, 235, 741 P.2d 699, 702 (App. 1987). Those who believe that the earnings exemption should endure beyond disbursement to the employee must direct their remedial efforts to the legislature, not the courts. The trial court correctly granted Frazer judgment on its writ of garnishment.”

Proceeds in a Bank Account

Social Security Benefits – 42 U.S.C. § 407; Bank of Philpot v. Essex City Welfare, 93 S.Ct 590 (1973).   Includes a lump sum payment even if co-mingled.  In re Hildestad, 2010 WL 320362 (Bankr. AZ 2010) (not reported).

Workmen’s Compensation. Yes.  Vukovich v. Ossic, 50 Ariz. 194, 70 P.2d 324 (Ariz. 1937).

Wages.  No.  Frazer, Ryan, Goldberg, Keyt and Lawless v. Smith, 184 Ariz. 181, 907 P.2d 1384 (Ariz.App. 1995).

State Retirement Funds.  No.  Forys v. Forys, 2010 WL 199695 (Ariz. App. 2010) (not reported).  Also cites cases for retirement funds and the like from other jurisdictions.


ARS 14-6211. Ownership of accounts


Theory of oral trust in Arizona: such as making your debtor a fiduciary & custodian of trustor’s funds not intended as a give.  In Arizona oral trusts are supported by law and case law.  Statute of frauds doesn’t apply to trusts of personal property (as long as not testamentary)  Cashion v. Bank of America, 30 Ariz. 172 (1926);

A.R.S. 14-10407. Evidence of oral trust


New rule governing garnishment: 31 C.F.R. Part 212: (Author’s note – the following may not apply in bankruptcy because this is a financial institution issue, not directed at creditors or bankruptcy law or Code – including a trustee’s right to go after non-exempt property and case law interpreting whether it is non-exempt).

Summary: new Treasury rule now requires financial institutions to determine whether there are direct deposit federal benefits in an account that is being garnished. If so, the institution is required to protect two months of benefit payments so that they remain available to the account holder. Consumers with protected federal benefits will no longer have to object to the garnishment or actively seek the release of these funds. Rather, the rule places the burden on the institution to determine, in the first instance, whether the federal funds are exempt from garnishment.

Effective May 1, 2011, financial institutions have been handed yet another regulatory burden regarding the processing of garnishment orders. The Department of the Treasury has issued interim final rules to restrict the garnishment of various federal benefit payments (“Federal Benefits”) deposited via ACH.

For purposes of the rule, Federal Benefits include:
• Social Security and Supplemental Security Income benefits;
• Veterans benefits;
• Federal Railroad retirement, unemployment, and sickness benefits;
• Civil Service and Federal Employee retirement benefits.


A transfer made by check should be deemed to occur on the date the drawee bank honors it.

Barnhill v. Johnson, 503 US 393, 394–95, 112 S Ct 1386, 1387–88, 118 L Ed 2d 39 (1992)  The Supreme Court has answered this question- it’s the date the bank honor’s the check. Here’s some language from the case that you might find helpful:

Under the Bankruptcy Code’s preference avoidance section, 11 U.S.C. § 547, the trustee is permitted to recover, with certain exceptions, transfers of property made by the debtor within 90 days before the date the bankruptcy petition was filed. We granted certiorari to decide whether, in determining if a transfer occurred within the 90-day preference period, a transfer made by check should be deemed to occur on the date the check is presented to the recipient or on the date the drawee bank honors it. We hold that the latter date is determinative.


UCC 3-310(b) implements the general principle that a check is an order to pay, not an actual payment.

Under 3-310, if the check is given in satisfaction of an obligation (here the obligation to pay the judgment connected to the garnishment), liability on the underlying obligation is suspended (not discharged) until the check is either paid or dishonored.  Section 3-310(a) provides different rules for cashier’s checks.


When are the funds still property of the debtor when the check is written or when the check is honored?

In re Cresta Tech.(9th Cir BAP) holds that the defining date is the date on which the check is honored  Facts: Cresta Technology Corporation’s CFO, Matthew Lewis, learned this the hard way after Cresta filed a case under chapter 7 bankruptcy, and the court-appointed trustee pursued a claw-back action against Lewis. The action successfully targeted a check Cresta provided to Lewis prior to the petition date, which reimbursed Lewis for certain legal fees he paid on behalf of Cresta. Cresta’s bank, however, did not honor the check until after the petition date.   Both the Bankruptcy Court of the Northern District of California and the BAP found that the payment to Lewis was transferred when the check was honored by the Debtor’s bank, after the petition date, and it therefore constituted an impermissible postpetition transfer.

What if you name is on someone else’s bank account?

That could be a significant problem.  It is important to understand Arizona law as it governs the ownership of accounts:

14-6211. Ownership of accounts

A. During the lifetime of all parties an account belongs to the parties in proportion to the net contribution of each to the sums on deposit unless there is clear and convincing evidence of a different intent. As between parties married to each other, in the absence of proof otherwise, the net contribution of each is presumed to be an equal amount.

B. A beneficiary in an account having a pay on death designation has no right to sums on deposit during the lifetime of any party.

C. An agent in an account with an agency designation has no beneficial right to sums on deposit.

D. For the purposes of subsection A of this section, “net contribution” means the sum of all deposits to an account made by or for the party, less all payments from the account that are made to or for the party and that have not been paid to or applied to the use of another party and a proportionate share of any charges deducted from the account, plus a proportionate share of any interest or dividends earned, whether or not included in the current balance. Net contribution includes deposit life insurance proceeds added to the account by reason of the death of the party whose net contribution is in question.

Once you have unwound the ownership issues, then you have to look at the effect of bankruptcy.  It is extremely important that you get good advice, customized to you unique situation.

____________________________

See article by Cathy Moran, The Soap Box, Who Gets Grannie’s Cash – Grannie or the Bankruptcy Trustee?

Social Security benefits commingled in an account with nonexempt funds retain their exempt status

In re Hildestad 0:09-bk-17733-EWH (Bankr.Ariz. 1/20/2010) (Bankr.Ariz., 2010), social security benefits commingled in an account with nonexempt funds retain their exempt status. “The deposit of exempt funds in a bank account does not affect a debtor’s exemption, nor does it change the exempt character of the funds, so long as the source of the exempt funds is reasonably traceable.” In re Hanson, 41 B.R. 775 (Bankr. D. N.D. 1984); Matthews v. Lewis, 617 S.W.2d 43 (Ky. 1981) (was a case applying state law to trace the funds and retain the exemption}.  Also, in Arizona it appears that we recognize the “lowest intermediate balance rule” for tracing purposes. See A.R.S. Ann. § 47-9315, Comment 3 and Example 1; see also Case Corp. v. Gehrke, 208 Ariz. 140 n. 4, 91 P.3d 362 n. 4 (App. 2004).  In re Moore, 214 B.R. 628 (Bankr. D. Kan. 1997)NCNB Financial Services, Inc. v. Shumate, 829 F. Supp. 178 (W.D. Va. 1993), aff’d, 45 F.3d 427 (4th Cir. 1994)Hatfield v. Christopher, 841 S.W.2d 761 (Mo. Ct. App. W.D. 1992)see also In re Frazier, 116 B.R. 675 (Bankr. W.D. Wis. 1990) (social security benefits commingled with other exempt funds remain exempt)

FACTS OF HILDESTAD: “On July 14, 2009, the Social Security Administration deposited a lump sum of $15,192.00 (the “Payment”) into the bank account of Gaylyn and Virginia Hildestad (“Debtors”) for disability benefits.1 Debtors withdrew $15,200.00 (the “Withdrawal”) from their account on July 17, 2009, and filed for Chapter 7 bankruptcy on July 29, 2009.”

Trustee Lawrence Warfield objects arguing that the “Payment lost any exempt status it may have had when Debtors withdrew it as cash and set it aside prior to filing their Chapter 7 petition.”

“Specifically, social security benefits commingled in an account with nonexempt funds retain their exempt status. In re Moore, 214 B.R. 628 (Bankr. D. Kan. 1997); NCNB Financial Services, Inc. v. Shumate, 829 F. Supp. 178 (W.D. Va. 1993), aff’d, 45 F.3d 427 (4th Cir. 1994);Hatfield v. Christopher, 841 S.W.2d 761 (Mo. Ct. App. W.D. see also In re Frazier, 116 B.R. 675 (Bankr. W.D. Wis. 1990) (social security benefits commingled with other exempt funds remain exempt) (emphasis added).”

“On July 14, 2009, a lump sum payment of social security disability benefits was deposited into Debtors’ bank account. The entire Payment, plus $8.00 of Debtors’ nonexempt funds, was withdrawn several days later. These events occurred before Debtors’ Chapter 7 petition was filed on July 29, 2009. It appears that the Payment was cash in the possession of Debtors at the time the petition was filed. However, as demonstrated above, a prepetition lump sum payment of social security benefits remains exempt, despite commingling with nonexempt funds. Because the cash withdrawal is reasonably traceable to exempt funds, the Payment was exempt on the petition date and remains exempt, despite any (hypothetical) postpetition use.

Accordingly, Trustee’s Motion to Compel Turnover of Assets is denied.”


In re Matsuura, 13-40226-JDP, (D. Idaho 12/2013) exempting the exempt portion of tax refunds and spending the nonexempt portion. In Idaho the earned income credit portion of tax refunds is exempt. The trustee argued commingling and lost.

For state law cases that might be helpful, see Case Corp. v. Gehrke, 91 p.3d 362. (See FN 4, referencing the comments to ARS 47-9315(B)(2) for support on lowest intermediate balance rule).


SOCIAL SECURITY FUNDS:

 Philpott v Essex County Welfare Board, 409 U.S 413, 93 S.Ct. 590 (1973) holds that where defendant deposited his lump sum Social Security disability check into a bank account, pursuant to the Social Security Act, 42 USC 407, federal law protects the SSA “moneys paid” even after deposit into the debtors’ bank account.  Philpott cites Porter v Aetna Casualty & Surety Co., 370 U.S. 159, 82 S.Ct 1231 (1962) which gave the same protection to U.S. Veterans Administration benefits deposited into a credit union. In Porter, the Supreme Court held that the purpose of exemption statutes was to protect the government benefits intended by Congress for the support and maintenance of the beneficiaries. The Porter case also held that exemption laws should be liberally construed to protect the exempt funds. There are no “implied” exceptions to the protection against creditors which Congress gave in 42 USC 407, Bennett v. Arkansas,  485 U.S. 395, 108 S.Ct. 1204 (1988).

Philpott and Porter thus stand for the common sense principle that when Congress protected SSA and Veterans benefits from seizure, Congress intended that the recipient actually receive his SSA benefits and spend them to support himself and his family.

INTEREST ON GOVERNMENT BENEFITS:

Interest does not destroy the exempt character of government benefits: In Lawrence v. Shaw, 300 U.S. 245, 57 S.Ct. 443, 81 L.Ed. 623 (1937), the Court held that bank credits derived from veterans’ benefits were within the exemption, the test being whether as so deposited the benefits remained subject to demand and use as the needs of the veteran for support and maintenance required. It was noted that the allowance of interest on such deposits would not destroy the exemption.

Carpenter v. Ries (In re Carpenter), 614 F.3d 930 (8th Cir., 2010) or In re Buren, 725 F.2d at 1086 (noting “social security payments only become part of a debtor’s estate if he chooses to include them”). We conclude § 407 must be read as an exclusion provision, which automatically and completely excludes social security proceeds from the bankruptcy estate, and not as an exemption provision which must be claimed by the debtor. See [614 F.3d 937] 42 U.S.C. § 407; 4 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 522.09[10][a] n.76 (16th ed. 2010) (“Congress amended 42 U.S.C. § 407 to clarify that the inalienability of Social Security benefits was not repealed by the Bankruptcy Code, so that such benefits should not even become part of the bankruptcy estate.”).

Worker’s Compensation:

Vukovich v. Ossic, 50 Ariz. 194, 70 P.2d 324 (Ariz. 1937) Does not lose exemption because co-mingled.


Wages:

Frazer, Ryan, Goldberg, Keyt and Lawless v. Smith, 184 Ariz. 181, 907 P.2d 1384 (Ariz.App. 1995). LOSE EXEMPTIONS IF CO-MINGLED.


State Retirement Funds:

Forys v. Forys, 2010 WL 199695 (Ariz. App. 2010) (not reported).  LOSE EXEMPTIONS IF CO-MINGLED.  Also cites cases for retirement funds and the like from other jurisdictions.

In re PALIDORA, No. 2-03-15494-PHX-RJH. 5/24/04, Amded 6/7/04, RJ. HAINES, Bankruptcy Judge. The Court must here determine whether the cash derived from wages paid prepetition retains the status of a wage exemption, and whether cash derived from child support paid to the debtor prepetition is property of the estate. The Court concludes that the Arizona exemption for wages does not apply once they are paid, but that Arizona statutes and case law deem child support payments to be for the benefit of the child and therefore not property of the parent debtor’s estate, and in any event are exempt, even after receipt and deposit.

REAL ESTATE COMMISSIONS: In re Roetman, 405 B.R. 336 (Bankr.D.Ariz. 2009) held that real estate commissions are included among the types of wage earnings exempt pursuant to A.R.S. 33-1131. Warfield v. Alaniz, 2008 WL 700160 (D. Ariz. 2008); contra In re Osworth, 234 B.R. 497 (9th Cir. BAP 1999).

529 and 530: IRS section 529 college plans and educational IRAs for the benefit of the debtor’s child, stepchild, grandchild or stepgrandchild are not property of the bankruptcy estate to some extent, which is similar to an exemption. 0% exempt for contributions made less than 365 days before bankruptcy.$5,850 exempt limit for all accounts with the same beneficiary for contributions made 365 – 720 days before bankruptcy. 100% for contributions made more than 720 days before bankruptcy. 11 USC 541 (b)(5) and 541 (b)(6)(B) NOTE: 11 521(c) In addition to meeting the requirements under subsection (a), the debtor shall file with the court a record of any interest that a debtor has in an education individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) or under a qualified State tuition program (as defined in section 529(b)(1) of such Code).

Inherited IRA:

The US Supreme Court ruled unanimously in Clark v. Rameker, (13-299 6/12/2014) that funds held in inherited individual retirement accounts (IRAs) are not “retirement funds” for bankruptcy purposes. Section 522 of the Bankruptcy Code [text] exempts tax-exempt retirement funds from the bankruptcy estate.

In an opinion by Justice Sonia Sotomayor, the Supreme Court agreed with the Seventh Circuit: “the possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAs bear the defining legal characteristics of retirement funds. Were it any other way, money in an ordinary checking account (or, for that matter, an envelope of $20 bills) would also amount to “retirement funds” because it is possible for an owner to use those funds for retirement.”

In Arizona, as with some other states, there are state exemptions that may protect these inherited IRA, even if they are not protected under federal law(s).   See A.R.S. Section 33-1126.  But, as we all know, laws change and so do the answers to the questions.


Inherited 401k – using Arizona exemptions not federal:

The Supreme Court ruled that a 401k  is a spendthrift trust in the case of Patterson v. Shumate and hence not property of the Bankruptcy Estate.

In re Pacheco –  Warfield argues debtor cannot exempt 401k inherited from ex-husband (33-1126).  Court (J. Ballinger 6/2015) disagrees.


What is a cash balance pension plan?


Definitions of terms in an annuity (From Annuities For Dummies, By Kerry Pechter)

THE OWNER

The owner of an annuity is just that — the owner. This person

  • Pays the premiums
  • Signs the application
  • Agrees to abide by the terms of the contract
  • Decides who the other parties of the contract will be
  • Can withdraw money or even sell the annuity (depending on the type of contract or the stage it’s in)
  • Is liable for any taxes that are due

Two people can own an annuity contract jointly. The owner should be a person, but it can also be a trust that represents the interest of a person. If one owner dies, the joint owner, like a copilot, takes the helm. A corporation can’t own an annuity.

Depending on the contract, the owner may be able to change the annuitant (see the following section) after buying the annuity. The owner can pass ownership over to someone else, but a taxable event (where the owner ponies up the income taxes on the contract’s gains) may result. That is, the owner may have to shell out the income taxes on the contract’s gains.

THE ANNUITANT

The annuitant is the person on whose life expectancy the annuity payments will be calculated. If and when the owner decides to start taking a guaranteed lifetime income from the annuity, the size of the (typically monthly) annuity payments is based on the annuitant’s age and life expectancy — not the owner’s.

For instance, if the owner is 68 years old but the annuitant is his 65-year-old wife, then the insurance company will assume that it will make monthly payments to her for about 19 years, which is the life expectancy of a 65-year-old woman. (Keep in mind, however, that insurance companies may base annuity payments on the life expectancies of annuity purchasers, who tend to live longer than average.)

In most annuity contracts, however, the owner and the annuitant are the same person. In fact, if they are not the same person, and one of them dies, trouble can result.

THE BENEFICIARIES

beneficiary is the person designated to receive assets upon someone else’s death. When filling out an annuity contract application, the owner names his own beneficiary and also the annuitant’s beneficiary. The owner and the annuitant can be each other’s beneficiary (which simplifies matters); no one can be his or her own beneficiary.

THE ISSUER

The insurance company that issues the contract and puts itself on the hook for any guarantees in the contract is the issuer.


Warnings about annuities: Notes from ACBC: 12/10 – be careful with annuities. I agree that you must get copy of the annuity. Determine owner and beneficiary and whether it is qualified as a retirement account under the IRS code. I know of a case where the debtor was the beneficiary of an annuity that was set up to settle an automobile accident personal injury claim. The other driver’s insurance company remained the owner of the annuity, as is standard practice. There was about a 9 month period a few years ago when Arizona exempted all annuities, regardless of who was the owner. The legislature then jammed through a law with an emergency clause that went into effect immediately and required that the debtor be the owner of the annuity for 2 years to exempt it. The debtor in the case filed chapter 7 shortly after the law changed, not being aware of the change. Judge Baum reluctantly ruled that the annuity was not exempt. The chapter 7 trustee sold the annuity future income stream to an investor at a cash discount.

Under the current law an ordinary non-retirement annuity is exempt where the debtor is the owner for two full year and there are certain specified beneficiaries. ARS 33-1126(A)(7) requires this: An annuity contract where for a continuous unexpired period of two years such contract has been owned by a debtor and has named as beneficiary the debtor, debtor’s surviving spouse, child, parent, brother or sister, or any other dependent family member. In re Hummel, __ B.R. __, 2010 WL5076421 (9th Cir. BAP, Nov. 19, 2010) “ARS Section 20-1131(D) and 33-1126(A)(6) and (7) require that the child of a debtor named as a beneficiary be a dependent in order for the debtor to obtain an exemption under those sections” Ninth Circuit reversed BAP and remanded 8/10/12 “As a matter of first impression in Arizona, we conclude that the statutory text does not require a debtor’s child to be a “dependent” to qualify for the exemption. Therefore, we REVERSE the Bankruptcy Appellate Panel’s (“BAP”) ruling and REMAND for further proceedings.
It will be exempt per 522(b)(3)(C) if the annuity is “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.”

In addition or in the alternative it will be exempt per ARS 33-1126 (B) if it is “Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under section 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under section 457 of the United States internal revenue code of 1986, as amended, shall be exempt from any and all claims of creditors of the beneficiary or participant. This subsection shall not apply to any of the following: 1. an alternate payee under a qualified domestic relations order, as defined in section 414(p) of the United States internal revenue code of 1986, as amended. The interest of any and all alternate payees is exempt from any and all claims of any creditor of the alternate payee. 2. Amounts contributed within one hundred twenty days before a debtor files for bankruptcy. 3. The assets of bankruptcy proceedings filed before July 1, 1987.

By the way, it is my position that 522(b)(3)(C) provides broader protection than ARS 33-1126 (B) because 522(b)(3)(C) has no exception for contributions within 120 days before filing bankruptcy. On the other hand, I believe that the $1,171,650 limit on IRAs (sections 408 and 408A of internal revenue code) in 522(n) controls over 33-1126 (B), which has no dollar limit.

In Re: Krebs>, No. 06-2959 (U.S. 3rd Circuit Court of Appeals, May 19, 2008)
In an appeal addressing whether a debtor’s right to receive payment from an individual retirement account (IRA) may be exempt from the bankruptcy estate under 11 U.S.C. section 522(d)(10)(E), even though the debtor has not yet reached retirement age, the circuit court rules that an intervening Supreme Court decision implicitly overrules prior precedent, and thus the debtor’s right to receive payments from her IRA may be exempt from the bankruptcy estate under section 522(d)(10)(E).

In re Payne (9th Cir. BAP 2005) ANNUITY MAY BE EXEMPT AS LIFE INSURANCE –
Single-premium annuity may qualify for bankruptcy exemption as life insurance under California state law only if primary purpose is insurance and not investment. (Note- this is not an Arizona case.)
Patterson vs. Shumate, 504 U.S. 753 (1992), the Supreme Court was presented with the question whether the debtor’s interest in an employer pension plan that contained the anti-alienation provision required by Title I of the Employee Retirement Income Security Act of 1974 (ERISA) was included or excluded from the bankruptcy estate under section 541. The Court held that the term “applicable nonbankruptcy law” in section 541(c)(2) was not limited to state law (and thus included ERISA and other federal law) and that the anti-alienation provision required for qualification under Title I of ERISA was enforceable under applicable nonbankruptcy law. The Court concluded that under section 541(c)(2) the debtor’s interest in the pension plan was excluded from the bankruptcy estate. 504 U.S. at 760.

Rousey et ux v. Jacoway, (8th Cir CT APP) No. 03¬1407. April 4, 2005. Cite as: 544 U. S. ____ (2005) HELD: The Rouseys can exempt IRA assets from the bankruptcy estate because the IRAs fulfill both of the §522(d)(10)(E) requirements at issue here―they confer a right to receive payment on account of age and they are similar plans or contracts to those enumerated in §522(d)(10)(E). Pp. 4¬14. (a) The Court reaffirms its suggestion in Patterson v. Shumate, 504 U. S. 753, 762¬763, that IRAs like the Rouseys’ can be exempted from the bankruptcy estate pursuant to §522(d)(10)(E). Pp. 4¬5. (b) The Rouseys’ IRAs provide a right to payment “on account of . . . age” within §522(d)(10)(E)’s meaning. The quoted phrase requires that the right to receive payment be “because of” age. Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street Partnership, 526 U. S. 434, 450¬451. This meaning comports with the common, dictionary understanding of “on account of,” and §522(d)(10)(E)’s con-text does not suggest another meaning. The statutes governing IRAs persuade the Court that Jacoway is mistaken in arguing that there is no causal connection between that right and age or any other factor because the Rouseys’ IRAs provide a right to payment on demand. Their right to receive payment of the entire balance is not in dispute. Because their accounts qualify as IRAs under 26 U. S. C. §408(a), they have a nonforfeitable right to the balance held in those accounts, §408(a)(4). That right is restricted by a 10 percent tax penalty on any withdrawal made before age 59½, §72(t). Contrary to Jacoway’s contention, this 10 percent penalty is substantial. It applies proportion-ally to any amounts withdrawn and prevents access to the 10 percent that the Rouseys would forfeit should they withdraw early. It therefore effectively prevents access to the entire balance in their IRAs and limits their right to “payment” of the balance. And because this condition is removed when the accountholder turns age 59½, the Rouseys’ right to the balance of their IRAs is a right to payment “on account of” age. Pp. 5¬8.

(c) The Rouseys’ IRAs are “similar plan[s] or contract[s]” to the “stock bonus, pension, profit sharing, [or] annuity . . . plan[s]” listed in §522(d)(10)(E). To be “similar,” an IRA must be like, though not identical to, the listed plans or contracts, and consequently must share characteristics common to them. Because the Bankruptcy Code does not define the listed plans, the Court looks to their ordinary meaning. E.g., United States v. LaBonte, 520 U. S. 751, 757. Dictionary definitions reveal that, although the listed plans are dissimilar to each other in some respects, their common feature is that they provide income that substitutes for wages earned as salary or hourly compensation. That the income the Rouseys will derive from their IRAs is likewise income that substitutes for wages lost upon retirement is demonstrated by the facts that (1) regulations require distribution to begin no later than the calendar year after the year the accountholder turns 70½; (2) taxation of IRA money is deferred until the year in which it is distributed; (3) withdrawals before age 59½ are subject to the 10 percent penalty; and (4) failure to take the requisite minimum distributions results in a 50 percent tax penalty on funds improperly remaining in the account. The Court rejects Jacoway’s argument that IRAs cannot be similar plans or contracts because the Rouseys have complete access to them. This argument is premised on her view that the 10 percent penalty is modest, a premise with which the Court does not agree. The Court also rejects Jacoway’s contention that the availability of IRA withdrawals exempt from the early withdrawal penalty renders the Rouseys’ IRAs more like savings accounts. Sections 522(d)(10)(E)(i) through (iii)―which preclude the debtor from using the §522(d)(10)(E) exemption if an insider established his plan or contract; the right to receive payment is on account of age or length of service; and the plan does not qualify under specified Internal Revenue Code sections, including the section governing IRAs―not only suggest generally that the Rouseys’ IRAs are exempt, but also support the Court’s conclusion that they are “similar plan[s] or contract[s]” under §522(d)(10)(E).

Kaelin v. Bassett (10/21/02 – No. 02-1119) (8th Cir) Bankruptcy court erred in denying debtor leave to amend his exemptions as the court’s findings that debtor was acting in bad faith, and that amendment would prejudice the creditors, were not supported by the record.

IRA: Dudley vs Anderson, No 99-55756 (9th Cir. May 23, 2001) Under California Code of Civil Procedure 704.115(a)(3), an Individual Retirement Account may be exempt from a bankruptcy estate even if it is used primarily for retirement purposes rather than solely for retirement purposes.

Little v. Reaves, No. 00-57110 (9th Cir. April 08, 2002) Petitioner who sought and was denied exemption for her vehicle from enforcement of a secured debt could still pursue special vehicle exemptions when later filing a bankruptcy petition.

Nelson v. Ramette (03/21/02 – No. 01-6072MN) (8th Cir Ct Appeals) Debtor’s undistributed interest in his former spouse’s ERISA-qualified retirement plan, obtained pursuant to a qualified domestic relations order, is not property of his Chapter 7 bankruptcy estate.

Hebbring v. U.S. Trustee (09/11/06 – No. 04-16539) (9th Cir) The Bankruptcy Code does not, per se, disallow voluntary contributions to a retirement plan as a reasonably necessary expense in calculating a debtor’s disposable income, but rather requires courts to examine the totality of the debtor’s circumstances on a case-by-case basis to determine whether retirement contributions are a reasonably necessary expense for that debtor.

In re Moreno, BAP No. WW-21-1124-LBS (9th Cir BAP, Chapter 7 trustee Kathryn A. Ellis (“Trustee”) appeals the Washington bankruptcy court’s order overruling in part her objection to the debtor’s exemption of a portion of debtor’s 2020 federal income tax refund and denying her motion for turnover. The bankruptcy court concluded that the portion of the refund comprised of the Earned Income Tax Credit (“EITC”) and the Additional Child Tax Credit (“ACTC”), was “federal aid assistance” under Revised Code of Washington (“RCW”) § 74.04.280 and was thus properly exempted under that statute and therefore not subject to turnover.  9th Cir BAP affirms.

But see Arizona case law In re Helen Howard Builder, 368 B.R. 10 (Bankr. Ariz. 2007) 2:05-21148-CG – ARS 46-208 “In this case, the EIC is assistance that is granted by the Internal Revenue Code, and not by Arizona’s Title 46.” Court finds that the tax refund is not exempt.

In re Adinolfi, 9th Circuit BAP, January 19, 2016  Court finds that California’s Adoption subsidy are “benefits received under the Social Security Act and are excluded from [Debtor’s] current monthly income.’”

FACTS: Debtor Nancy Adinolfi appeals from the bankruptcy court’s order denying the confirmation of her chapter 13 plan. A chapter 13 debtor whose income exceeds the applicable median must devote all of her “projected disposable income” to the payment of her unsecured creditors. The statute excludes “benefits received under the Social Security Act” from “disposable income.” The Debtor argues that Adoption Assistance payments she receives are “benefits received under the Social Security Act,” but the bankruptcy court ruled to the contrary. We hold that the bankruptcy court erred, and therefore we REVERSE.

According to this website: https://www.nacac.org/help/adoption-assistance/adoption-assistance-us/state-programs/arizona-adoption-assistance-program/, 67.23% of Arizona’s funds for adoption subsidies come from the federal government.

Perhaps this could be interpreted to mean the benefits are subject to all of the protections for social security benefits (42 USC § 407), if the funds for the subsidy are derived from the SSA?

NOTE: a new CUSTODIAL account should be opened in the child’s name, with the adoptive parent as authorized signor.


Does the state-only funded adoption assistance program differ in any way from the Title IV-E program?

To be eligible for state-funded adoption assistance a child must meet the same special needs criteria established in the Title IV-E program. In addition the child must be in the custody of the Arizona Department of Child Safety or an Arizona licensed private child-placing agency and legally present in the United States.

8-142. Adoption subsidy program; funding; claims; limitation

  1. The department shall establish and administer an ongoing program of subsidized adoption. Adoption subsidies shall be provided from monies appropriated to the department or made available to it from other sources.
  2. The department shall not pay claims for a special services subsidy that are submitted more than nine months after the date of the service for which payment is claimed except as authorized by rules of the department.
  3. The department shall not consider an applicant for a state adoption subsidy until the applicant has applied for all existing federal eligibility categories under the title IV-E program.
  4. The total amount that may be expended in any fiscal year by the department for the adoption subsidy program shall not exceed the amount appropriated in the general appropriations act for the program and any monies granted by the federal government, together with additional amounts appropriated for the program by any special legislative appropriation. Transfers of monies between and among classes and programs shall continue to be permitted in accordance with the provisions of section 35-173.

Hamblin vs Hamblin, 54 P.3d 371, 203 Ariz. 342 (2002) This Arizona case has a good description of the Adoption subsidy program but more importantly it concludes that the payment is the child’s and not the adoptive parent.

In re Garcia (Juan (deceased) and Teresa Garcia vs Warfield) No. CV16-02835-PHX DGC BK NO. 0:15-bk-06493-BMW  Debtor Teresa Garcia appeals an order of the bankruptcy court sustaining Trustee Lawrence J. Warfield’s objection to her claimed exemption for group life insurance proceeds paid to her as a surviving spouse. Doc. 8. Trustee asks the Court to affirm the bankruptcy court’s decision. Doc. 9. The appeal is briefed, and no party has requested oral argument. Docs. 8, 9. For reasons set forth below, the Court will reverse the bankruptcy court’s decision.

The provision relevant to this case was codified as A.R.S. § 20-1132


Debtor’s child is not required to be a dependent.

In re Tober v Lang, 11-60018, BAP 10-1206 and In re Hummel v Nowak, 11-60019, BAP 10-1202. Arizona Revised Statutes Sections 33-1126(A)(6) and (7) allow a debtor in a bankruptcy proceeding to exempt the cash surrender value of life insurance policies and proceeds of annuity contracts from the bankruptcy estate if the debtor names certain beneficiaries. Arizona law requires us to construe these bankruptcy statutory exemptions in favor of the debtor. As a matter of first impression in Arizona, we conclude that the statutory text does not require a debtor’s child to be a “dependent” to qualify for the exemption. Therefore, we REVERSE the Bankruptcy Appellate Panel’s (“BAP”) ruling and REMAND for further proceedings consistent with this opinion.

Scholarly article


Traditional term life insurance vs group insurance: A.R.S. 20-1131 limits the exemption to $20,000 of 33-1126(a)(1); it is supposed to be identical to 1126(a)(6).  A.R.S. 20-1132 is the absolute exemption of group life insurance benefits.

20-1132. Exemption of group life insurance proceeds from creditors; exception

A.R.S. Section 33-1126 applies only to plans or programs “in use by an employer.” In re Hoffpauir, 125 B.R. 269, 272 (Bankr. D. Ariz. 1990) (Curley, J.). Thus, to the extent that Debtor’s disability income does not derive from a plan or program “in use by an employer,” the statute does not apply, and the Debtor is not entitled to claim the exemption.


Arizona insurance proceeds for exempt property:

Insurance-proceeds-re-dog-11-15-18.pdf (83 downloads) 2:18-bk-07595-DPC Dog worth about $100.  Pre-petition, dog got sick.  Debtor had pet insurance, and the pet insurance reimbursed debtor $7400 for vet bills, way over the $800 pet exemption (that was applicable when Carrie filed).  Under A.R.S. § 33-1125(3), insurance proceeds are exempt with respect to any personal property exempt by any of the other personal property exemptions.  The statute DOES NOT specifically limit the insurance proceeds to the maximum amount of the exemption.  Judge Collins agreed and said the entire $7,400 of insurance proceeds for the pet are exempt, even though they are over $800.

“If your stocks are part of a retirement plan under section 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under section 457 of the United States internal revenue code of 1986, as amended, whether the beneficiary’s interest arises by inheritance, designation, appointment or otherwise, then the stocks are exempt from all claims of creditors of the beneficiary or participant. Two exceptions, any funds contributed in the 120 days prior to filing, and if you are subject to a QDRO.” Thomas Cesta, Mesa bankruptcy attorney, 11/12

COURTS DISAGREE IF HSA ACCOUNT IS EXEMPT

In re Melton, 4:17-BK-03210-BCW (6/2019) is an HSA an “insurance plan”?   THE COURT ISSUES ITS RULING ON THE RECORD WITH RESPECT TO THE LIFE INSURANCE PROCEEDS. BASED UPON SUCH RULING, THE COURT FINDS THAT $7,440.43 OF THE $8,297.23 IN THE PFCU ACCOUNT AS OF THE PETITION DATE ARE TRACEABLE LIFE INSURANCE PROCEEDS THAT ARE EXEMPT UNDER A.R.S. § 33-1126(A)(1). THE COURT ISSUES ITS RULING ON THE RECORD WITH RESPECT TO THE HEALTH SAVINGS ACCOUNT. BASED UPON SUCH RULING, IT IS THE DETERMINATION OF THE COURT THAT THE FUNDS, IN THE AMOUNT OF $8,172.00, IN THE HSA ACCOUNT ARE EXEMPT PURSUANT TO A.R.S. § 1126(A)(4). 

Traceable funds: Hildestadt (sp?) (Hollowell) if funds can be “reasonably traced” then the exemption will cover the funds. Life insurance deposited into one account, small amount of funds added, then withdrawn, spent down and balance put into new account = “reasonably traceable” all funds, except small amount added.

Insurance statute: “or similar plans or programs”  HSA designed to provide medical care and offset expenses for debtor and family.  Employee must be covered by a high deductible insurance plan.  Employee may use HSA to pay the expenses which would have been covered by a low deductible insurance plan.

Transcript

Suggested language for Motion to Compel Abandonment:

2.  Debtor’s Health Savings Account.  Debtors’ hold a Health Savings Account (“HSA”) provided through Mr. ’ Employer.  This account is administered by HSA Bank.  A copy of the statement of that account is attached as Exhibit A.  At the time of filing, the amount of that HSA was $4,300.00. [Docket #1, Schedule A/B, item #17.6, page 15.] Debtors exempted the HSA under Ariz. Rev. Stat. § 33-1126(A)(4).  Section 33-1126(A)(4) allows Debtors to claim an exemption in money proceeds or benefits provided by an employer to the Debtors any policy of health insurance.  Exhibit B is the Debtors’ Declaration of Evidence of Employers’ Payments Within 60 Days. [Docket #10.]   Pages 3 to 8 are the paychecks of Debtor.  Each of these paycheck reflect a pre-tax benefit in the nature of a HSA.  Exhibit A and B establish that Mr. ’ employer funded the HSA account.  Exhibit B reflects pay-outs and reimbursement for Debtors’ medical expenses.  The Debtors’ HSA is entitled to full exemption under  Ariz. Rev. Stat. § 33-1126(A)(4).  As such, the HSA is not property of the Bankruptcy Estate and the Debtors are entitled to to the Court’s Order of Abandonment of this property.”
Suggested language for A/B: “Health Savings Account (Created by employer as a supplement to High Deductible Health Plan (HDHP) employee benefit – employer deposits $600 twice a year). “

In re Hoffbauer (? sp) – Note that Judge Curley found there was no exemption under Arizona law and the debtor’s attorney did not argue that they were exempt under 541. but see Leitch v. Christians (In re Leitch), No. 13-6009 (8th Cir. B.A.P. Jul. 16, 2013) case holding that HSA is property of the Estate; therefore not exempt (using federal exemptions). The BAP on de novo review AFFIRMED the Bankruptcy Court’s determinations that: (1) the Debtor’s health savings account (“HSA”) was not excluded from the Debtor’s bankruptcy estate pursuant to Section 541(b)(7)(A)(ii) because the HSA did not constitute a health insurance plan regulated by state law and, further, Congress would have included HSAs in Section 541(b)(7) if it intended HSAs to be excluded; and (2) the HSA could not be exempted under Section 522(d)(10)(C) or (11)(D) because the HSA funds could be used for purposes other than “disability, illness, or unemployment” and, further, Sections 522(d)(10)(C) and (11)(D) only apply to a debtor’s right to receive money, not to money that has already been received.

541 provides that a HSA that is subject to state law is not property of the estate .. so that is where the fact inquiry starts ….
(7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions—
(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986;
except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325 (b)(2); or
(ii) to a health insurance plan regulated by State law whether or not subject to such title; or
(B) received by an employer from employees for payment as contributions—
(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986;
except that such amount under this subparagraph shall not constitute disposable income, as defined in section 1325 (b)(2); or
(ii) to a health insurance plan regulated by State law whether or not subject to such title;

Nichols v. Birdsell, No. 05-15554 U.S. 9th Circuit Court of Appeals, May 09, 2007
Debtors’ pre-bankruptcy application of their right to tax refunds to post-bankruptcy tax obligations constitutes an asset that must be turned over to the bankruptcy trustee pursuant to the Bankruptcy Code, 11 U.S.C. section 542.


Henry A. KOKOSZKA v. Richard BELFORD, Trustee, 395 U.S. 337 (89 S.Ct. 1820, 23 L.Ed.2d 349) (June 1974) – tax refunds are not “earnings”.

The provision in the Consumer Credit Protection Act limiting wage garnishment to no more than 25% of a person’s aggregate ‘disposable earnings’ for any pay period does not apply to a tax refund, since the statutory terms ‘earnings’ and ‘disposable earnings’ are confined to periodic payments of compensation and do not pertain to every asset that is traceable in some way to such compensation. Hence, the Act does not limit the bankruptcy trustee’s right to treat the tax refund as property of the bankrupt’s estate. Pp. 648—652

VINCENT G. DAGIEL, In re Dagiel, Chapter 7 Proceedings, Debtor. Case No. 3:17-BK-07444-DPC. (US Bankruptcy Court, D. Arizona. March 26, 2018) D. Collins 1. The Court finds that the statute at issue, A.R.S. § 33-1130(1), permits an exemption for certain tools and equipment which are “primarily used in, and necessary to carry on or develop, the commercial activity, trade, business or profession of the debtor.” The statute does not, however, permit such an exemption for “every” activity, trade, business or profession in which the debtor may be engaged. Rather, the statute, by its terms, is limited to “the” commercial activity, trade, business or profession of the debtor.

2. The evidence presented to the Court established that, at all relevant times, the debtor’s principal occupation was that of a nurse. His wages as a nurse have and continue to provide the vast majority of his net income. While the evidence also showed that the debtor generated some additional revenue from horse training and/or raising livestock, that income was de minimis in comparison to the income the debtor received from his employment as a nurse. Moreover, the evidence established that the debtor’s occupation as a nurse has been his primary occupation since at least 2003, whereas his income from horse training and/or raising livestock began in 2016.

3. The evidence established that the asset which the debtor was claiming exempt under the statute, a livestock trailer, was also used by the debtor to haul water and firewood for his residence, since his residence does not have traditional utility services. The Court cannot conclude that, at the date of the filing of his bankruptcy petition, the livestock trailer was “primarily” used for the horse training and livestock activities in which the debtor is also engaged. Thus, even if the Court were to conclude that horse training and livestock raising were the debtor’s principal occupation, the evidence was inconclusive on the question of whether the livestock trailer was primarily used for horse training or raising livestock.

4. For these reasons, the trustee’s objection to the exemption claimed by the debtor in the livestock trailer pursuant to A.R.S. § 33-1130(1) is sustained and that exemption asserted by the debtor is denied. SO ORDERED.


LARSON V. SHARP (10TH CIR.) The Tenth Circuit BAP affirmed a bankruptcy court’s denial of a chapter 7 trustee’s objection to a debtor’s exemption for tools of the trade. The court ruled that the “gainful occupation” requirement of the “tools of the trade” exemption under Colo. Rev. Stat. 13-54-102(1)(i) (2010) does not require “profitability” on the petition date.

In re LETIZIA and CHEN, 3:13-bk-09233-RJH (AZ Bankruptcy court, January 14, 2014) In a Chapter 13 a creditor filed an objection to the debtor using the personal vehicle exemption on a vehicle used primarily for business purposes. The issue presented is whether the Debtors may exempt two vehicles, utilized primarily for business purposes in a sole proprietorship, using Arizona’s personal item exemptions provided in A.R.S. § 33-1125(8). As this specific question has not been addressed in Arizona case law, the Court took this matter under advisement. The Court holds that debtors in Arizona, doing business as sole proprietors, may not exempt vehicles used primarily for business using Arizona personal item exemptions, and instead must use Arizona’s tools of the trade exemptions.

Debtor reopens chapter 7 19 years after discharge to claim homestead exemption.

In re Muscato, 98-14386 (Bankr. W.D.N.Y. March 22, 2018)  When the court’s sense of equity collides with a statute, the Supreme Court held in Law v. Siegel, 134 S. Ct. 1188, 188 L. Ed. 2d 146, 82 U.S.L.W. 4140 (2014), that the statute prevails when it comes to exemptions.

Relying on Law, Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y., held that a debtor was entitled to a homestead exemption, although she made the claim 19 years after receiving a chapter 7 discharge.  Citing the Ninth Circuit Bankruptcy Appellate panel, he said that Bankruptcy Rule 9006(b) does not apply because the Code does not require the amendment of schedules within a specified time.

In re Lee, No. 15-17451 (9th Circuit, May 07, 2018) Ninth Circuit affirmed bankruptcy court (D. Hawaii) ruling, affirmed by district court, finding that Trustee’s adversary proceeding constituted valid objection under FRBP 4003 to debtor’s claim of objection, and affirming turnover order of property in which debtor claimed exemption. Trustee’s avoidance action adequately notified debtor of objection to claim of exemption within deadline under FRBP 4003. Separate objection was unnecessary.

Viegelahn v. Lopez (In re Lopez), 17-50297 (5th Cir. July 31, 2018)  Debtors who sell their exempt homestead and lose the exemption because they do not reinvest the proceeds in another home are nonetheless entitled to retain the proceeds on dismissal of their chapter 13 case, the Fifth Circuit held.

The debtors confirmed a chapter 13 plan calling for payments of $1,100 a month for 60 months. About two years into the plan, they sold their exempt home without court authorization. Two years later, they sought approval of the sale. Because they had not reinvested the proceeds in another home within six months, the net proceeds of more than $40,000 had lost their exempt status under Texas law.

The bankruptcy judge gave the debtors a choice. They could remain in chapter 13 and use about half of the proceeds for needed medical care, but the other half would go to the trustee for distribution to creditors. Or, the bankruptcy judge said, they could dismiss the case and retain the proceeds, but they would not receive a discharge. Meanwhile, the bankruptcy judge approved the sale nunc pro tunc but directed the trustee to hold the proceeds for the time being.

The debtors took the second option and filed a motion to dismiss voluntarily. In response, the chapter 13 trustee argued that the debtors’ failure to obtain court approval before the sale showed bad faith, constituting “cause” for overriding the presumption in Section 349(b) and blocking the proceeds from revesting in the debtors.

Bankruptcy Judge dismissed the chapter 13 case without prejudice, found no “cause” for overriding Section 349(b), and directed that the proceeds be turned over to the debtors after deducting the trustee’s commissions. (upheld by Circuit Court – noting that “proceeds from post-petition sales of a debtor’s exempt homestead generally must be returned to the debtor upon voluntary dismissal.” Alluding to Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015), she said the Supreme Court firmly rejected the suggestion that a confirmed chapter 13 plan gives creditors a vested right to funds held by a trustee. The trustee who lost in Judge Elrod’s opinion was the same chapter 13 trustee who lost in Harris.

Debtor claimed the exemption under ARS § 33-1126(A)(1) for “[A]LL MONEY RECEIVED by or payable to a surviving spouse or child ON THE LIFE OF a deceased spouse, parent or legal guardian, not exceeding twenty thousand dollars..” The Trustee has taken the very narrow position that the twenty thousand dollars must be from a life insurance policy. However, it is axiomatic that exemption statutes are to be liberally construed in favor of the claim of exemption. In re Thiem, 443 B.R. 832, 837–38 (Bankr. D. Ariz. 2011). See also In re Arrol, 170 F.3d 934, 937 (9th Cir. 1999); Gardenhire v. Glasser, 26 Ariz. 503, 226 P. 911, 912 (1924); In re Herrscher, 121 B.R. 29, 31 (Bankr. D. Ariz. 1989). In In re Thiem, the Court found that exemption under ARS § 33-1126(A)(1) extends beyond life insurance proceeds to the funds in an inherited IRA. Thiem 846–847. Similarly, the money inheritance of Mr. Berryhill is entitled to exemption.

In re Berryhill, 2:19-BK-07421-BKM (Az 10/10/19) “the Court has reviewed the party’s arguments and the case cited by (the trustee), In re Royal 165 B.R. 802 (Bankr. MD 1994). In analyzing a Maryland exemption statute, the court in Royal determines that it is appropriate to disƟnguish an inheritance from third party obligations triggered upon a person ‘s death. This distinction is significant because the Maryland statute lists out various third party obligations as being covered by the statute. In contrast, ARS 33‐1126(A)(1) lists no such examples and by its wording applies to any and all monies “payable or received… upon the life of a deceased….” The Court agrees with the analysis in In Re Thiem that the Arizona statute contains nothing to suggest the source of the funds received by the beneficiary is limited to insurance pay outs, or to amounts paid from third party sources. The Court, thus, concludes that ARS 33‐1126(A)(1) applies to all monies received by way of inheritance. Accordingly, the Trustee’s objection to Debtor’s exemption is overruled.”

Is a trust property of the bankruptcy estate?

Just a few of the important questions to ask:

  1. What is the nature of the trust?
  2. Is a spendthrift trust?
    1. A spendthrift trust is not property of the Bankruptcy Estate under 541(c)(2), but get the opinion of tax attorney to make that determination.
  3. Is the Debtor, the current beneficiary?
  4. What are the terms and conditions of the Debtor receiving funds?

Note – If the Debtor would receive the property during the course of the Chapter 13, then monies would be subject to turnover during the Chapter 13 minus the exemption under ARS 33-1126(a).  However, the Chapter 13 could also be dismissed to prevent that.

This issue is beyond the knowledge of most bankruptcy attorneys.

DEFINITION OF “VEHICLE” BROADLY INTERPRETED

Motor home is a vehicle and owner can use exemption (in Arizona) See In re Sleeth, 300 BR 351 (Bankr. D. Ariz 2003) (“Construing the motor vehicle exemption in favor of the debtor, the court holds that a motor home is a motor vehicle for purposes of Ariz.Rev.Stat. § 33–1125(8)“)

Judge Haines said the definition of “motor vehicle” is very broad. In re Buchberger, 311 BR 794 (Bankr. D. Ariz. 2004) (“All-terrain vehicle (ATV) qualified as “motor vehicle,” for purposes of Arizona exemption statute, since it was self-propelled vehicle and it was drawn by mechanical power, although it could serve only recreational purposes”).

Question – Debtor has unemployment under the CARES Act.  Is it exempt in Arizona?  The following is a summary of some Arizona statutes.

WARNING – NEVER CO-MINGLE UNEMPLOYMENT FUNDS.

Tips – look at the check.  Is  it made our from AZ DES and cites to Arizona law?

Then consider this analysis: ARS 23-783 is an unemployment exemption that provides: “No assignment, pledge or encumbrance of the right to benefits which are or may become due or payable under this chapter shall be valid, and the rights to benefits shall be exempt….”

The definition of “benefits” under ARS 23-608 is “money payments payable to an individual as provided in this chapter”. So if you ended the argument here, it would appear that the CARES unemployment would not be exempt, as it is not considered unemployment under the AZ Unemployment Chapter.

However, there is also an “extended benefits” article 1.1 in the unemployment chapter. “Extended benefits” is defined under ARS 23-629 as “benefits, including benefits payable to federal civilian employees and to ex-servicemen pursuant to 5 U.S.C. chapter 85, payable to an individual under the provisions of this article”. Could the CARES unemployment would be considered “extended benefits”?  Suggestion – analyzed the rest of Article 1.1 to see what constitutes extended benefits.

However, there is also a “regular benefits” definition under ARS 23-632 (part of article 1.1): “Regular benefits” means benefits payable to an individual under this chapter or under any other state or federal unemployment compensation law other than extended benefits and shared work benefits.

Finally, under the “extended benefits” article 1.1, ARS 23-639: “Except where inconsistent with the provisions of this article, as provided in the regulations of the commission, the terms and conditions of all other articles of this chapter shall apply to this article

So, considering all this, it appears that the CARES unemployment should be considered, at the very minimum, “regular benefits” under ARS 23-532 under article 1.1. And by virtue of ARS 23-639, the exemption under ARS 23-783 applies to benefits under article 1.1, which would include both “regular benefits” (which includes federal unemployment) and “extended benefits”.

But, do your own research.  Remember that statutes, Code and case law change regularly.

There is a significant difference in a debtor who operates a business as a sole-proprietor and a debtor who has an interest in an LLC.

See In re Nakhuda, 9th Cir. BAP (3/2/15) Chapter 71 debtor Farouk E. Nakhuda (“Debtor”) appeals from an order granting the ex-parte application of chapter 7 trustee Paul J. Mansdorf (“Trustee”) and requiring the Debtor’s turnover of bankruptcy estate assets and records and discontinuance of the Debtor’s operation of two businesses. He also appeals from two orders denying his subsequent requests to set aside the order. We AFFIRM the bankruptcy court.
At the time that he filed a chapter 7 petition, the Debtor operated four laundromats. Two of the laundromats were sole proprietorships owned by the Debtor; according to the Debtor, the other two laundromats were partnerships in which the Debtor was an equal partner.

Before the § 341(a) meeting of creditors, the Trustee learned from Debtor’s counsel that the Debtor continued to operate the two sole proprietorship laundromats post-petition.  In response, the Trustee advised counsel that continued operations of the laundromats was inappropriate. At the § 341(a) meeting, the Debtor testified that the laundromat operations (and his independent consulting business) were funded from a single bank account in his name, which he
continued to use. He also testified that, notwithstanding the Trustee’s earlier communication with counsel, he continued to operate the sole proprietorship laundromats.

As of July, 2022 crypto assets are not exempt.  If you file bankruptcy it is very important to confirm any assets you have, or have access to, including any type of electronic assets.  The creditors and trustees may check out this site: Coinbase Trustee Guidelines