In chapter 13, any appreciation in the value of an exempted asset is retained by the debtor and cannot be captured by the trustee, even if it turns out that the property was later proven to be worth more than the permissible amount of the exemption, according to Bankruptcy Judge Marvin Isgur of Houston.
The debtor in Judge Isgur’s case filed her schedules and claimed exemptions using the official forms that became effective Dec. 1. Electing federal exemptions, the debtor exempted the entire negative equity value of her home and $22,975 to cover the full value in a handful of items of personal property.
The trustee, according to Judge Isgur, “lamented the need to continue to monitor each asset sale during the five-year bankruptcy case so as to adjust the allowed exemptions in the remaining assets.”
Interpreting the Supreme Court’s 2010 decision in Schwab v. Reilly, Judge Isgur said, in so many words, “Too bad.” Congress “has chosen a different path – one that benefits the debtor rather than the estate. This path presents difficulties for trustee administration, but those difficulties cannot alter the law.”
If the trustee doubts the value of an exempted asset, the trustee must object to the claimed exemption within the allowed time. Absent successful objection, the debtor can retain the property or its proceeds if turns out to be worth more than the permissible exemption. On the other hand, the debtor is the loser if the property turns out to be worth less than the claimed amount of an exemption.
For instance, the debtor exempted her home, which she claimed to have a value of $228,000. Mortgages on the property exceeded the claimed value of the home. Consequently, Judge Isgur said in his March 2 opinion that she was exempting her “bare legal title” because there was no equity to exempt.
Citing Schwab, Judge Isgur said that property is taken out of the estate if the trustee does not object to an exemption or an objection is denied. For example, if it turns out later that the home was worth more than the mortgages, Judge Isgur said the debtor could retain her home if the trustee has not successfully challenged the asserted value of the house.
Consequently, the burden is on the trustee to mount a timely challenge to a debtor’s valuation of exempt property. In chapter 13, where a case typically remains open for five years, the trustee cannot claw back exempted property if it is later sold for more than the claimed exemption.