Exempt assets aren’t always exempt in chapter 13, according to Bankruptcy Judge Craig A. Gargotta of San Antonio, who adopted the majority view.
After bankruptcy, the debtor settled a worker’s compensation retaliation case for about $9,000. The debtor scheduled the recovery as a wildcard exemption under Section 522(d)(5). No one objected to the claimed exemption.
The chapter 13 trustee objected to confirmation of the debtor’s plan, contending that the plan failed the so-called best efforts test under Section 1325(b) because the debtor was not devoting all of his projected disposable income to payments toward creditors’ claims.
The debtor argued that the exemption shielded him from being required to use the recovery under the plan by virtue of Section 522(c), which says that exempted assets cannot be used to pay creditors’ claims.
In his July 18 opinion, Judge Gargotta sustained the trustee’s objection to confirmation and declined to approve the plan.
The debtors relied also on In re Frost, 744 F.3d 384 (5th Cir. 2014), where the Fifth Circuit held that the proceeds of a homestead sale are not exempt if the debtor sells the homestead after filing but does not reinvest the proceeds in another homestead within six months as required by Texas law. In Frost, the appeals court made a distinction between conditionally and unconditionally exempt assets.
The Fifth Circuit said that a homestead was an unconditionally exempt asset so long as it wasn’t sold. The debtor in Judge Gargotta’s court contended that the recovery proceeds were also unconditionally exempt.
Judge Gargotta disagreed, saying, “the temporal aspects of the exemption in Frost [do] not apply to an unconditional exemption in settlement proceeds.”
Taking sides with the majority of courts, Judge Gargotta said that “exemptions serve little purpose in chapter 13.” The “plain meaning” of Section 1325(b) leads to the conclusion that the exempt status of an asset does not remove the asset from the calculation of disposable income, in part because that section does not say that disposable income is limited by Section 522(c).
Since the settlement proceeds were income and therefore disposable income, the money qualified as projected disposable income that the debtors had not included in the calculation of their plan payments.
Judge Gargotta gave the debtor 14 days to modify the plan or he would dismiss the case.