National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Exemptions

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State Exemption Need Not Specify that it Applies in Bankruptcy

Reversing the courts below, the Seventh Circuit found that unpaid vacation wages that were exempt under state law were also exempt under bankruptcy law notwithstanding the lack of explicit reference to bankruptcy in the state statute. In re Burciaga, No. 19-2246 (7th Cir. Dec. 13, 2019).

The debtor filed for bankruptcy shortly after losing his job and at a time when his employer owed him $24,000 in unused vacation pay. The debtor sought to exempt 85% of the unpaid vacation time under an Illinois law that allows creditors to reach only 15% of unpaid wages. It was undisputed that Illinois law treats vacation time as wages. The trustee objected to the exemption arguing that there was no suggestion that the state legislature intended the exemption to apply in the federal bankruptcy context. The bankruptcy court sustained the objection, and the district court, agreeing with the trustee’s position, affirmed. [Read more…] about State Exemption Need Not Specify that it Applies in Bankruptcy

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Rhode Island Exempts Inherited IRAs

In answer to a question certified by the Bankruptcy Court for the District of Rhode Island, the Rhode Island Supreme Court determined that “under the plain and ordinary meaning of the language in § 9-26-4(11) and § 408, an inherited IRA is defined under § 408, and it is, therefore, exempt under § 9-26-4(11).” In re Kapsinow, No. 2018-94-M.P. (R.I. Dec. 11, 2019) (Bankr. D. R.I. 16-11859).

Chapter 7 debtor, Lynette Kapsinow, inherited an IRA from her mother which she sought to exempt from her bankruptcy estate under the Rhode Island exemption laws. It was undisputed that the account when held by the debtor’s mother was a qualified retirement account under 408 of the Internal Revenue Code. Once her mother died, Ms. Kapsinow had access to the funds without penalty, could not make contributions to the account, and was required to take minimum distributions. [Read more…] about Rhode Island Exempts Inherited IRAs

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Court May Not Deny Amendment to Exemptions Based on Bad Faith

Based on Law v. Siegel the bankruptcy court properly overruled the trustee’s objection to the debtor’s amendment to his exemptions without regard to whether the debtor concealed assets in bad faith. Rucker v. Belew (In re Belew), No. 18-3045 (8th Cir. Nov. 26, 2019).

In his bankruptcy schedules, the debtor initially failed to disclose that he had $30,000 in cash in a home safe. When the trustee learned of the cash, the debtor sought to amend his exemptions to exempt the money. The trustee objected because the debtor had intentionally concealed the asset and was therefore precluded from amending based on bad faith. The bankruptcy court overruled the objection and the BAP affirmed. [Read more…] about Court May Not Deny Amendment to Exemptions Based on Bad Faith

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Vanishing Homestead Exemption Reappears in Bankruptcy Despite Conversion

The District Court for the District of Maine adopted the “complete snap-shot” rule for treatment of a homestead exemption attached to property the debtor owned at the time of his chapter 13 petition and sold during the pendency of that case, even though he failed to reinvest the proceeds within six months as required by state exemption law, and converted his case to chapter 7. Hull v. Rockwell, No. 18-385 (D. Me. Sept. 24, 2019).

When Jeffrey Rockwell filed his chapter 13 petition in August, 2015, he claimed an exemption on his residence for the maximum amount of $47,500. During the course of his chapter 13 plan, in March, 2017, Mr. Rockwell sold the property and contributed the proceeds over and above the amount of his exemption to his plan. In August, 2017, Mr. Rockwell converted his case to chapter 7. He received a discharge in November, 2017. In December, 2017, the trustee filed an objection to Mr. Rockwell’s homestead exemption because he had not reinvested the funds in a new homestead within six months as required by state exemption law. After a hearing, the bankruptcy court overruled the objection. [Read more…] about Vanishing Homestead Exemption Reappears in Bankruptcy Despite Conversion

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Federal Homestead Exemption Applies to Property Debtor’s Dependent Lives on Part-Time

The creditor’s judgment lien impaired the debtor’s federal homestead exemption even though she did not reside on the property, where her dependent son lived on the property part-time with the debtor’s ex-husband. Donovan v. Maresca, No. 18-1146 (D. Conn. Sept. 30, 2019).

When Melissa Maresca filed for Chapter 7 bankruptcy, her divorce attorney held a judgment lien against real property Ms. Maresca owned with her ex-husband. Although Ms. Maresca did not use the property as her residence, her ex-husband resided there and her dependent son used the home as his part-time residence. In her bankruptcy, Ms. Maresca elected to use the federal exemptions and she sought to avoid the lien as impairing her federal homestead exemption under section 522(f). The creditor objected arguing that because Ms. Maresca did not reside on the property, she was not entitled to use the homestead exemption. The bankruptcy court granted Ms. Maresca’s motion to avoid the lien. [Read more…] about Federal Homestead Exemption Applies to Property Debtor’s Dependent Lives on Part-Time

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Bankruptcy Court Gets Undue Hardship Right on Remand

The Bankruptcy Court for the District of Massachusetts applied the totality-of-the-circumstances test to find that the Chapter 7 debtor was entitled to have her student loans discharged in bankruptcy notwithstanding the fact that she had substantial exempt equity in her home. Schatz v. U.S. Dept. of Ed., No. 14-30825, Adv. Proc. No. 15-3001 (Bankr. D. Mass. Oct. 2, 2019).

When the debtor, Audrey Schatz, was in her fifties she attempted to improve her earning potential by attending law school, for which she incurred $106,000 in student loans. After becoming a lawyer, however, she was unable to find satisfactory employment and was earning approximately $25,000 when she filed for bankruptcy. The bankruptcy court rejected her position that the student loan debt caused her undue hardship and found that the loans were nondischargeable under section 523(a)(8). [Read more…] about Bankruptcy Court Gets Undue Hardship Right on Remand

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Contingent Future Interest In Tenancy by Entirety Not Exempt

Where state exemption law does not specifically apply to a contingent future interest in a tenancy by the entirety, the interest is not exempt under bankruptcy law and the debtor cannot avoid a judgment lien under section 522(f). In re Jaffe, No. 18-2726 (7th Cir. Aug. 5, 2019).

Including a mini-tutorial on the history of women’s property rights, from coverture (married woman’s property interests absorbed by her husband), to tenancy by the entirety (co-ownership and transfer to surviving spouse), to the Married Women’s Property Acts (providing means for women to own property and emerge from financial and social dependency), the circuit court explored the interaction of bankruptcy exemptions and Illinois property law.

The debtor entered bankruptcy owning his residence with his wife as a tenant in the entirety. When his wife died post-bankruptcy, he sought to exempt his entire fee simple interest in the property and avoid his creditor’s judgment lien under section 522(f) as impairing his exemption. The district court found that he could do so, and the creditor appealed.

[Read more…] about Contingent Future Interest In Tenancy by Entirety Not Exempt

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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