Supreme Court Decides Exemption Case

A recent United States Supreme Court decision has resolved a conflict among the various Circuits regarding how the value of certain exemptions are claimed and the effect on the trustee’s ability to administer those assets. See, Schwab v. Reilly, 130 S.Ct. 2652 (2010).

In Schwab, the debtor listed business equipment on schedule B as an asset and valued the business equipment at $10,718.00. On schedule C, the debtor claimed the business equipment as exempt with the same value of $10,718.00. The trustee did not object to the exemption because the amount of the claimed exemption was within the allowed statutory dollar amount. When the trustee later had the equipment appraised and found out the equipment was worth $17,200.00, the trustee filed a motion to sell the equipment to recoup the excess value for the bankruptcy estate. The debtor opposed the motion and argued that the equipment was fully exempt because the trustee did not object to the claimed exemption. The bankruptcy court denied the trustee’s motion and the district court and Third Circuit affirmed. The United States Supreme Court reversed and held that a chapter 7 trustee (or another interested party) is not required to object to a claimed exemption that is within statutory limits in order to preserve the estate’s right to retain any value in the asset beyond the value of the exempt interest. Id.

In Schwab, the Court focused on the language of 11 U.S.C. §522(l) which states:

The debtor shall file a list of property that the debtor claims as exempt under subsection (b) of this section . . . Unless a party in interest objects, the property claimed as exempt on [schedule C] is exempt.

The Court found the portion of 11 U.S.C. §522(l) that resolves this case is not the provision stating that the “property claimed as exempt on [schedule C] is exempt.” Rather, it is the portion that defines the objection’s target, namely, the “list of property that the debtor claims as exempt under subsection (b).” Id. Subsection (b) of §522 states a debtor may exempt property specified under §522(d). Most of the exemptions listed under §522(d) specifically refer to a debtor’s “interest” in the property up to a specified dollar amount, not the property itself. Therefore, the exemption claimed is the debtor’s “interest” in the property and not the actual asset. Accordingly, if the value of the asset is greater than the debtor’s interest in the property, then the trustee may liquidate the asset and retain the value of the asset over the claimed exempt value for the benefit of the bankruptcy estate.

The practical effect of the Schwab decision, as noted by the Court, is that if a debtor wants to exempt the full market value of an asset or the asset itself, the debtor should list the value of the claimed exemption as “full fair market value” or “100% of the fair market value.” This type of claimed exemption will then encourage the trustee to promptly object to the exemption if the trustee wishes to challenge the claimed exemption. If the trustee fails to object or if the trustee’s objection is overruled, then the debtor will be entitled to keep the full value of the asset. If the trustee’s objection is sustained, then the asset, or a portion of it, will be turned over to the estate. Either of these scenarios will facilitate the prompt disposition of the asset and provide the debtor and creditors with finality.