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). Mackenzie v. Schreiber (In the Matter of Schreiber), No. 20-1993 (D. Ariz. June 4, 2021). [Read more…] about Arizona District Court Addresses Eligibility for Exemptions
Automatic Homestead Exemption Applies to Trust Interest
A debtor may claim the California automatic homestead exemption with respect to property where he resides even though the property was owned by a trust created by his father and he and his brother were equal beneficiaries of the trust. In re Nolan, 2021 WL 528679, No. 20-1496 (C.D. Cal. 2021). The Ninth Circuit affirmed in Anderson v. Nolan (In re Nolan), No. 21-55204 (9th Cir. Feb. 3, 2022) (unpublished). [Read more…] about Automatic Homestead Exemption Applies to Trust Interest
Exemption under 522(d) Need Not Be Primary Residence
Adopting a plain-meaning approach, the Second Circuit found a debtor may avoid a lien that impairs her exemption on property her dependent son lives in part-time but is not his primary residence. Donovan v. Maresca (In re Maresca), No. 19-3331 (2d Cir. Dec. 14, 2020).
The debtor lived in an apartment, and her ex-husband lived in the marital residence (the Property) which he and the debtor owned jointly. They had joint custody of their dependent son whose primary residence was with his mother but who spent several days a week with his father in the Property as his “non-primary” residence. At the time the debtor filed for chapter 7 bankruptcy, her divorce lawyer had a judgment lien on the Property securing almost $71,000 in legal fees. She claimed an exemption on her interest in the Property under section 522(d) and sought to avoid the lien under section 522(f)(1)(A) as impairing that exemption. The bankruptcy court granted the debtor’s motion to avoid the lien. The district court affirmed. [Read more…] about Exemption under 522(d) Need Not Be Primary Residence
The Case of the Vanishing Homestead Exemption
When the debtor failed to reinvest the proceeds from the sale of his exempt homestead within the period required by state homestead exemption law, the exemption vanished. McCallister v. Wells (In re Wells), No. 20-86 (D. Idaho Oct. 14, 2020).
The debtor filed for chapter 13 bankruptcy and listed the equity in his home as exempt under Idaho law. During his bankruptcy, he sold the home in order to use the proceeds to pay off one of his creditors. He did not reinvest in a new home as required by Idaho exemption law. The trustee sought to capture the proceeds of the sale for the bankruptcy estate on the basis that the debtor’s homestead exemption vanished when the debtor sold the home without reinvesting within one year. The bankruptcy court overruled the trustee’s objection to the exemption. The trustee appealed to the district court. [Read more…] about The Case of the Vanishing Homestead Exemption
IRA Funds Garnished Pre-Petition Not Part of Bankruptcy Estate
Where the judicial lien against the debtor was fully satisfied before the debtor filed his bankruptcy petition, the transfer of funds from his IRA used to satisfy the lien was not an avoidable transfer under section 547 or section 522(f) or (h). Elliott v. Pacific Western Bank, No. 18-17421 (9th Cir. Aug. 12, 2020).
When the debtor defaulted on a loan held by Pacific Western Bank, PWB obtained a state court judgment against him and instituted a levy against the debtor’s employee retirement plan (IRA). Under California law, the funds in the debtor’s IRA were exempt only to the extent they were necessary for the debtor’s post-retirement support. The state court issued an executory lien against the debtor’s IRA, and PWB garnished the funds to cover the amount owed. Three months later, the debtor filed chapter 7 bankruptcy. After he received his discharge, he filed an adversary complaint seeking to recover the funds garnished from his IRA under the theory that they were exempt under state law and section 522(f) of the Bankruptcy Code. PWB argued that the funds were not exempt in the bankruptcy proceeding because the lien had been fully executed prior to the filing of the bankruptcy and, therefore, they did not become part of the bankruptcy estate. The bankruptcy court agreed. The district court affirmed. [Read more…] about IRA Funds Garnished Pre-Petition Not Part of Bankruptcy Estate
First-In First-Out Applies to Commingled Account
The Bankruptcy Court correctly used the first-in first-out approach to determine how much of a commingled account could be attributed to exempt funds. Tydings v. Reed (In re Tydings), No. 20-4057 (W.D. Mo. Sept. 3, 2020).
After her husband died, the chapter 7 debtor received surviving widow’s social security benefits which she deposited into her bank account where she also deposited her weekly pay checks. Prior to receiving the social security payments, the debtor had $581.27 in her bank account. In the three months prior to her bankruptcy filing, the debtor deposited $15,171.57 in social security funds and $6,670.38 in wages into the account. During that same period, the debtor withdrew $13,461.07 from the account, leaving a balance of $8,939.15 on the petition date. The debtor claimed the entire balance in her account as exempt in bankruptcy. The trustee objected on the grounds that not all the funds in account were exempt. The trustee argued that the court should apply a first-in first-out (FIFO) analysis which would allow the debtor to exempt $3,981. The bankruptcy court sustained the objection and the debtor appealed to the district court. [Read more…] about First-In First-Out Applies to Commingled Account
Uncashed Retirement Loan Check Not Exempt
The debtor’s uncashed loan check from her retirement account was property of the estate and was not exempt under section 522(d)(12). Ostrander v. Brown (In re Brown), No. 19-24 (B.A.P. 1st Cir. May 21, 2020).
Prior to filing her bankruptcy petition, the debtor received, but did not cash, an $18,000 check representing a loan from her retirement account. The chapter 7 trustee sought turnover of the check. The bankruptcy court denied the turnover motion finding that, because the funds were from an exempt retirement account and the debtor had not yet cashed the check, the check was likewise exempt. [Read more…] about Uncashed Retirement Loan Check Not Exempt
IRS Setoff Supersedes Exemption
The IRS’s right to set off the debtors’ tax overpayment against their pre-existing tax debt superseded the debtors’ right to exempt the anticipated refund. Copley v. U.S.A., No. 18-2347 (4th Cir. May 12, 2020).
When the Copleys filed for chapter 7 bankruptcy they listed a debt to the IRS of over $13,500. They also claimed their anticipated tax refund as exempt under Virginia’s exemption for “money and debts due the householder not exceeding $5,000.” They subsequently filed their tax returns which showed that their withheld income exceeded the amount they owed by over $3,000. Instead of sending the Copleys a refund, however, the IRS notified them that it had used the overpayment to set off the pre-existing tax debt. The debtors filed a complaint in the bankruptcy court seeking an order requiring the IRS to turn over the tax refund to the debtors. The bankruptcy court found that the refund was part of the bankruptcy estate and that the exemption superseded IRS’s right to set-off. The district court affirmed. [Read more…] about IRS Setoff Supersedes Exemption
Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds
The bankruptcy court properly reduced the debtor’s homestead exemption and imposed a constructive trust on the property where the debtor paid off her mortgage using funds from the sale of a vehicle she did not own and to which the creditor had the right of possession. Graybill v. Thomas (In re Bentley), No. 19-14758 (11th Cir. Apr. 22, 2020) (unpublished).
This case involved a 1930 Cord Phaeton automobile. Originally, the car was owned by the debtor’s son Lynford Bentley. Dr. Susan Kolb lent Lynford $50,000, which loan was secured by the car. Lynford stopped paying on the loan, then he died. Dr. Kolb sued Lynford’s girlfriend to obtain the car or its value. But Lynford’s mother, and the debtor in this case, Catherine Bentley, took possession of the car and removed it from Georgia to Florida. A Georgia judge issued an order giving Dr. Kolb the right to possession of the car, and Dr. Kolb informed Catherine of that order. Notwithstanding her knowledge of Dr. Kolb’s right to possession of the vehicle, Catherine sold it at auction, clearing $112,947.81. She used the majority of the funds to pay off her mortgage. Dr. Kolb sued Ms. Bentley for fraudulent transfer. Ms. Bentley filed for chapter 7 bankruptcy and claimed a homestead exemption under Florida law.
Finding that Ms. Bentley never owned the vehicle and therefore had no right to the funds she used to pay off her mortgage, the bankruptcy court sustained the trustee’s objection to the exemption claim, reducing the amount of the exemption by $112,947.81. The bankruptcy court also overruled the debtor’s objection to Dr. Kolb’s claim, and imposed a constructive trust on the debtor’s homestead property. On appeal, the district court affirmed. [Read more…] about Homestead Exemption Reduced when Mortgage Paid with Fraudulently Obtained Funds
IRA and 401(k) Obtained Through Divorce Not Exempt
Incorrectly relying on the decision in Clark v. Rameker, the Eighth Circuit found that the chapter 7 debtor was not entitled to exempt funds in his ex-spouse’s IRA and 401(k) which he obtained through a dissolution agreement but which had not been transferred to his name at the time of his bankruptcy petition. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), No. 18-3415 (8th Cir. Feb. 7, 2020).
The debtor acquired his ex-wife’s IRA and half of her 401K in a dissolution. When the debtor failed to pay his divorce attorney’s fees, his lawyer obtained an order from the court placing an attorney’s lien on the funds in the IRA and the 401K. The lien exceeded the value of the accounts. Six months later, Mr. Lerbakken filed for chapter 7 bankruptcy seeking to exempt the two accounts under section 522(b)(3)(C). At the time of his petition, he had not filed a Qualified Domestic Relations Order (QDRO), nor had the accounts been transferred to his name. Upon objection by the divorce attorney, the court found the two accounts were not “retirement funds” and disallowed the exemption. The BAP affirmed. Lerbakken v. Sieloff & Assoc., P.A. (In re Lerbakken), 590 B.R. 895 (B.A.P. 8th Cir. 2018). [Read more…] about IRA and 401(k) Obtained Through Divorce Not Exempt