National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Exemptions

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Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

Under the totality of the circumstances test, the bankruptcy court erred when it found that the debtor’s student loans of $106,000 were not dischargeable as undue hardship because she had sufficient exempt equity in her home to fully repay the debt. Schatz v. Access Group, No. 18-16 (B.A.P. 1st Cir. July 26, 2019).

To increase her earning potential, Audrey Schatz, a single mother, obtained a law degree when she was in her fifties, financing her education with student loans. After she graduated and passed the bar, however, Ms. Schatz spent three years unsuccessfully seeking work in her field. Ultimately, she earned minimal income through a variety of avenues including self-employment, operation of a legal non-profit for low-income clients, using her home as an Air BnB, and performing real estate closings.

[Read more…] about Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

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7th Circuit Certifies Workers’ Compensation Exemption Question to Illinois Supreme Court

The Seventh Circuit Court of Appeals has certified a question to the Illinois Supreme Court concerning “whether the Illinois Workers’ Compensation Act [IWCA], as amended, allows care-provider creditors to reach the proceeds of workers’ compensation claims.” In re Hernandez, No. 18-1789 (7th Cir. March 18, 2019).

When Elena Hernandez filed for chapter 7 bankruptcy, she listed a workers’ compensation claim in the amount of $31,000 and claimed the entire amount as exempt under Illinois law. She also listed health care debts arising out of work-related injuries of over $130,000. She settled her workers’ compensation claim shortly after filing her bankruptcy petition. The healthcare providers objected to the exemption on two bases: first, that the IWCA as amended, permitted them to reach the workers’ compensation settlement; and second, that the settlement was the product of fraud. After a hearing, the bankruptcy court denied the exemption on the basis of fraud without reaching the statutory objection. The district court, however, based its affirmance on interpretation of the IWCA. Ms. Hernandez appealed to the Seventh Circuit.

Section 21 of the IWCA provides: “No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.” Although the Illinois Supreme Court has never addressed the issue, the parties do not dispute that this section creates an exemption in bankruptcy for workers’ compensation claims. The disagreement arises out of whether amendments to the Illinois statute carved out an exception to this exemption for healthcare providers.

In 2005, the Illinois legislature amended the IWCA by limiting how much healthcare providers can charge for treatment of work-related injuries. In the case of undisputed claims, the amendments permit healthcare providers to bill and be paid by the employers directly. The amendments also ended the practice of allowing a healthcare provider to bill the employee for any fees not paid by the employer. Where the employer disputes the workers’ compensation claim, the amendments provide that if the employee challenges the employer’s position, the healthcare provider may not bill the employee or the employer until resolution of the dispute, and the statute of limitations on the debt is tolled. Perhaps most significantly, under new section 8.2(e-20) of the IWCA, in the event a disputed workers’ compensation claim is settled, the healthcare provider is then free to seek payment from the employee. The Illinois legislature did not alter the language of section 21.

The healthcare providers argued that permitting Ms. Hernandez to exempt her workers’ compensation settlement from the reach of the work-injury healthcare providers would obviate the language of section 8.2(e-20), and run counter to the state legislature’s intention of allowing healthcare providers access to workers’ compensation funds in exchange for capping the amounts they can charge for treatment.

On the other hand, Ms. Hernandez argued that section 21 was not altered by the amendments and had the state legislature intended to create an exception to the exemption, it could have done so in plain language.

The Seventh Circuit found merit to both sides. Adopting the healthcare providers’ view would harmonize with the legislature’s obvious goal of protecting those providers and would advance the goal of encouraging healthcare providers to provide care to people injured in work-related accidents. The court agreed, however, that while Ms. Hernandez’s interpretation would hinder the effectiveness of the amendments, it would not necessarily render any provision absurd or surplusage.

Finding itself “genuinely uncertain about a question of state law that is key to a correct disposition” of the case before it, the circuit court granted the parties’ motion to certify the following question to the Illinois Supreme Court:

“After the 2005 amendments to 820 ILL. COMP. STAT. 305/8 and the enactment of 305/8.2, does section 21 of the Illinois Workers’ Compensation Act exempt the proceeds of a workers’ compensation settlement from the claims of medical-care providers who treated the illness or injury associated with that settlement?”

Hernandez 7th Cir March 2019 cert question

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“Snapshot” Rule Precludes Amended Homestead Exemption

The snapshot rule governs whether the chapter 13 debtor may claim a homestead exemption for one residence after the residence for which she originally claimed the exemption was subject to foreclosure. Earl v. Lund Cadillac, LLC, No. 16-16428 (9th Cir. Nov. 27 2017) (unpublished).

When Rachael Earl filed her chapter 13 petition she owned two residential properties: Claiborne and Sunnyvale. She resided in the Claiborne property and she claimed it as her homestead exemption. Unable to stop the foreclosure proceedings on that property, however, Ms. Earl converted to chapter 7 and sought to claim an exemption in the Sunnyvale property. The bankruptcy court sustained the unsecured creditor’s objection, and the district court affirmed.White v. Stump, 266 U.S. 310, 313 (1924) teaches that exemptions are fixed at the time of filing the petition. Under this “snapshot” rule, exemptions claimed post-petition may be allowed only if they could have been claimed on the petition date. Likewise, while under Rule 1009(a) the debtor has right to amend her exemptions at any time before the case is closed, the amended exemption must still be one she could have claimed on the petition date.

The court looked to Arizona law to determine whether Ms. Earl could have claimed the Sunnyvale property as her homestead at the time she filed her petition. In Arizona, entitlement to a homestead exemption depends upon the debtor’s actually residing on the property. In this case, Ms. Earl lived, at all relevant times, in the Claiborne residence. The fact that she converted from chapter 13 to chapter 7 did not change the result, even if the court were to agree with those cases looking at exemptions as of the conversion date, as Ms. Earl still lived in the Claiborne property at the time of the conversion.

Because Ms. Earl had no right to claim the exemption under state law, she had no right to amend her bankruptcy exemptions to claim it post-petition. The court affirmed.

Earl 9th Cir opinion Nov 2017

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Trustee $65,000 Fee Application Denied

“Trustee’s plan of action from the minute he was assigned these Chapter 7 cases was abundantly clear: he sought to manufacture equity through the Stipulations and Carve-Outs with the IRS to sell the Homesteads and generate funds that would primarily benefit Trustee, Counsel, and other bankruptcy professionals, while only minimally benefitting unsecured creditors.” Based on this conclusion, the Bankruptcy Appellate Panel for the Tenth Circuit, in a lengthy opinion, upheld the denial of over $65,000.00 in fees for the chapter 7 trustee and his counsel. Jubber v. Bird (In re Bird), Nos. 16-39, Jubber v. Christensen (In re Christensen), 16-40 (B.A.P. 10th Cir. Nov. 30, 2017). [Read more…] about Trustee $65,000 Fee Application Denied

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In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over

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. Hawk v. Engelhart (In re Hawk), No. 16-20641 (5th Cir. Sept. 5, 2017).

Chapter 7 debtors, Gregory and Marcie Hawk, listed an IRA on their schedules and claimed an exemption for the account funds under Texas exemption law. The trustee did not object within thirty days and the court allowed the exemption. Over several months, the Hawks withdrew funds from the account and did not roll them over into a new retirement account within sixty days as required under Texas law. The bankruptcy court found that the funds had lost their exempt status and ordered the Hawks to turn them over to the trustee. The district court affirmed. [Read more…] about In Chapter 7 IRA Exemption Protects Funds even if not Rolled Over

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Clark v. Rameker Does Not Limit State IRA Exemption

The interpretation in Clark v. Rameker of the federal exemption relating to inherited IRAs does not preclude a state from providing a broader exemption for inherited IRAs in its exemption scheme.

When Waheeda Kara filed for Chapter 7 bankruptcy she opted to use Texas state exemptions and claimed an exemption in an inherited IRA under section 42.0021 of the Texas Property Code. The trustee objected to the exemption arguing that it did not meet the criteria outlined in Clark for an exemptible “retirement fund.” The court found that state exemptions permitted her to exempt the IRA and overruled the objection. In re Kara, No. 16-51059 (Bankr. W.D. Tex. July 13, 2017). [Read more…] about Clark v. Rameker Does Not Limit State IRA Exemption

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Equitable Estoppel vs. Right to Amend Schedules

Where new facts arose to support a claim for homestead exemption and the debtor did not make any misrepresentation upon which the trustee reasonably relied, the bankruptcy court erred in disallowing the exemption based on equitable estoppel. Lua v. Miller (In re Lua), No. 15-56814 (9th Cir. June 27, 2017) (unpublished).

Rosalva Lua claimed a homestead exemption in her initial bankruptcy schedules, removed the claim in her First Amended Schedules, and reasserted it in her Second Amended Schedules approximately three years later. The bankruptcy court sustained the trustee’s objection to the exemption based on equitable estoppel. The district court affirmed. [Read more…] about Equitable Estoppel vs. Right to Amend Schedules