Bankruptcy/Debtor-Creditor Rights Blog

SUPREME COURT OF THE UNITED STATES TO DECIDE THE EXTENT TO WHICH A DEBTOR MAY FULLY EXEMPT PROPERTY FROM THE BANKRUPTCY ESTATE

Posted February 22, 2010

Author: Chris A. McNulty

There has been much debate among the circuits about whether a trustee is required to object to a debtor’s claimed exemption when the debtor’s bankruptcy schedules list identical amounts in the value and exemption columns even though the value of the asset may be understated.  Some circuits, including the Eighth Circuit, have answered this question in the negative, holding that where a debtor lists identical amounts in the value and exemption columns, the debtor’s exemptions are limited to the dollar amounts provided for under the Bankruptcy Code and any amount in excess of those limitations goes to the bankruptcy estate despite the trustee’s failure to object to the exemption.  See In re Wick, 276 F.3d 412 (8^th Cir. Minn. 2002).  Other circuits have answered in the affirmative, holding that by listing identical amounts in the value and exemption columns in the debtor’s Schedule C, the debtor signals his or her intention to exempt certain property in its entirety, and the trustee must object to the claimed exemption in order to limit the debtor to the statutory exemption.  See In re Reilly, 534 F.3d 173 (3^rd Cir. Penn. 2008).

            The In re Reilly case is currently before the United States Supreme Court to hopefully settle this issue once and for all.  The debtor in In re Reilly listed the value and exempted amount of business equipment as $10,718 in its Schedule C.  The equipment was subsequently appraised at approximately $17,200.  The trustee in the case did not object to the exemption within the 30-day period prescribed by Federal Rule of Bankruptcy Procedure 4003(b), and, as stated above, the court found that the debtor’s intention to fully exempt the asset was indicated through the identical amounts listed in the value and exemption columns; therefore, the debtor was able to exempt more property than the Bankruptcy Code allows. The outcome of this case could affect the exemption amounts potentially available to debtors in bankruptcy.  If the Third Circuit’s holding is affirmed by the Supreme Court, debtors may be able to exempt more than the statutory limitations under the Bankruptcy Code; this assumes, of course, that the trustee does not object to the exemptions.  On the other hand, by overruling the Third Circuit the Supreme Court would limit debtors’ exemptions to the specified amounts listed in the Bankruptcy Code.

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