Exempt Property — Exempt from What?

When BAPCPA first passed the exemption issue that caught the most attention was the homestead cap. I thought at the time that this would be a non-issue for my practice, because I just don’t have clients with more than $125,000 in equity in their homesteads. Even if I do it will be because they have lived in the property forever and paid it off — so, the homestead cap won’t apply, because they haven’t acquired it in the last few years.

The two areas of exemption changes that I was leery of are:

  1. That the residency requirements to determine the available exemptions apply to all exemptions, not just homestead; and
  2. The subjection of exempt property to so-calledDomestic Support Obligations which is a new term that basically covers child support and alimony

I had visions of ex-spouses showing up in the Bankruptcy Court and filing motions for turnover of the debtor’s home, car, gun collections and retirement account. The experts assured me I was wrong.

One set of experts insisted that the scenario was much worse, because the Trustee would be administering exempt assets. I didn’t see how this would work, because the Trustee’s authority is limited to property of the estate, and nothing in 522 brings this property back into the estate after the Debtor files his claim of exemption.

The other school of experts explained to me that what this statute really means is that post-discharge State law exemptions do not reattach to the exempt property with respect to support creditors. I never managed to understand this argument. Neither have the courts.

As of last week, we now have at least two written opinions interpreting this provision making exempt property subject to the claims of support creditors. In re: Quezada, Case No. 06-15240-BKC-RAM, (Bankr., S.D. Fla., Miami Div. 2007); and In re: Covington, Case No. 06-21066-A-7, (Bankr. E.D. Ca., Sacramento Div., 2006). In both of these opinions the Court has held that the Trustee does not have the power to administer exempt assets. However, the Court has also found, although in dicta in Quezada, that the support creditor does have standing to appear and demand turnover of the property.

To think the Bankruptcy Judges all thought that with the repeal of the balancing test in 523(a)(15) they were getting out of the family law business.

Elaine

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