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Consumer Bankruptcy Law and Practice: 10.4.2.6.6 Postpetition transfers—§ 549

In line with the general principle that filing a bankruptcy freezes the debtor’s property for administration by the bankruptcy court, section 549 allows the trustee to avoid most postpetition transfers of the debtor’s property. Like the other avoiding powers, this power may be exercised by the debtor under Code section 522(h), if the property was not concealed and the transfer was not voluntary. As elsewhere in the Code, “transfer” is broadly defined to mean almost any parting with an interest in property.657

Consumer Bankruptcy Law and Practice: 10.4.2.6.7 Setoff—§ 553

The Code gives the trustee the power to avoid some, but not all, setoffs of mutual debts in the ninety days prior to filing of the petition.680 If a setoff is otherwise permissible under nonbankruptcy law,681 section 553 provides certain tests that must be met before it can be avoided.

Consumer Bankruptcy Law and Practice: 10.4.2.7 Other Limitations on Debtor’s Use of Trustee Avoiding Powers

In addition to the overriding limitations on section 522(g) and (h) that the debtor may not avoid any voluntary transfer or transfer when the debtor concealed property,708 there are a number of other limitations on the debtor’s avoiding powers.

Naturally, the avoiding powers are limited by the extent of the debtor’s available exemptions. Subsection 522(j) permits exemption of particular property only to the extent that the exemption for that type of property is still available.

Consumer Bankruptcy Law and Practice: 10.4.2.8 Recovery of Property After Transfer Is Avoided

When a transfer is avoided, section 550 generally allows recovery of the transferred property (or its value in some cases) from both the initial transferee and a subsequent transferee.716 In some cases, after an avoidance proceeding, a separate action must be brought under section 550 to recover the property that was transferred.717 Usually, though, the avoidance proceeding should also seek recovery of property under section 550.

Consumer Bankruptcy Law and Practice: 10.4.2.9 Preservation of Avoided Transfers or Recovered Property

An important but often overlooked addition to the avoiding powers is the right to preserve avoided transfers for the benefit of the debtor. Subsection 522(i)(2) provides that a transfer avoided or property recovered by the debtor or the trustee may be preserved for the benefit of the debtor to the extent that the debtor may exempt that property under section 522(g) or could have avoided the transfer under section 522(f)(1)(B).725

Consumer Bankruptcy Law and Practice: 10.4.2.10 Limits on Availability of Debtor’s Avoiding Powers Based on Liens Predating Current Law

A flood tide of cases challenging the retroactive application of the debtor’s powers to avoid pre-Code liens under 11 U.S.C. § 522(f) reached the United States Supreme Court in 1982. In United States v. Security Industrial Bank,729 the Court held, in order to avoid reaching a difficult constitutional question, that Congress’ failure to explicitly deal with retroactivity evidenced an intent that the avoiding powers were to apply only prospectively.

Consumer Bankruptcy Law and Practice: 10.2.2.2 Homestead—§ 522(d)(1)

The largest specific dollar amount applicable to particular property is the $27,900 that each debtor may claim as a homestead exemption.58 This exemption, like all of the other exemptions, applies only to the debtor’s interest in property, that is, the equity over and above liens. Hence, a debtor with a one-half interest in a $60,000 jointly-owned home encumbered by a $30,000 mortgage, has a $15,000 interest in that home (1/2 x [$60,000–$30,000]). Being not more than a $27,900 interest, the debtor’s interest would be fully exempt.

Consumer Bankruptcy Law and Practice: 10.2.2.3 Motor Vehicle—§ 522(d)(2)

A debtor may exempt an interest of up to $4450 in one motor vehicle under section 522(d)(2).71 It is important to note the limitation in this provision to one vehicle per debtor.72 And there may be a dispute about whether certain property is a motor vehicle.73 Again, the exemption need be applied only to the debtor’s interest over and above any security interest or other lien.74 And an interest in excess of t

Consumer Bankruptcy Law and Practice: 10.2.2.4 Household Goods, Household Furnishings, Wearing Apparel, Appliances, and Similar Items—§ 522(d)(3)

Section 522(d)(3) allows a debtor to exempt an interest of up to $700 in value in any item of household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments held primarily for the personal, family, or household use of the debtor or the debtor’s dependents.77 Like the other exemptions, this exemption may be doubled in a joint case to include items of up to $1400 in value if jointly owned by the debtors.78 There is an aggregate dollar limit of $14,87

Consumer Bankruptcy Law and Practice: 10.2.2.12 Rights to Compensation for Injury or Losses, and Payments for Lost Earnings—§ 522(d)(11)

Another exemption covers the right to receive, and property traceable to, payments for various types of injury or loss.157 These include crime-victim reparations awards, as well as payments, not to exceed $27,900, on account of bodily injury of the debtor or a person upon whom the debtor is dependent (but not including pain and suffering or pecuniary loss).158 They also cover wrongful death awards based upon the death of someone of whom the debtor was a dependent, payments on life insurance that

Consumer Bankruptcy Law and Practice: 10.2.2.13.2 Guidelines for exempt retirement funds

If the debtor’s funds are in a retirement fund that has received a favorable tax determination (under section 7805 of the Internal Revenue Code), and that determination is in effect when the debtor’s petition is filed, the funds are presumed to be exempt for purposes of section 522(d)(12).181 However, the presumption may be overcome by proof that certain prohibited actions have caused the retirement account to lose its tax exempt status before the bankruptcy is filed.182 If such funds are in a r

Consumer Bankruptcy Law and Practice: 10.2.3.1 Federal Bankruptcy Modifications of These Exemptions

In cases in which the federal bankruptcy exemptions are either not chosen or not available, debtors may use the exemptions in effect on the date the bankruptcy case is filed195 provided to them by the state or local law deemed applicable to them,196 by federal nonbankruptcy law,197 and by section 522(b)(3)(C).198 State law exceptions to general exemption statutes generally are not preserved in bankrup

Consumer Bankruptcy Law and Practice: 10.2.3.3 Special Retirement Exemptions Available to Debtors Who Utilize State and Federal Nonbankruptcy Exemptions

Section 522(b)(3)(C) permits a debtor claiming the state exemptions to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.246 These sections of the Internal Revenue Code deal with pension, profit-sharing, and stock bonus plans; employee annuities; individual retirement accounts (including Roth IRAs); deferred compensation plans of state and local government, and tax-exempt organizations; and certain trusts.

Consumer Bankruptcy Law and Practice: 10.2.3.4.3 Homestead limitation based on fraudulent conversion of nonexempt property

Section 522(o) provides that the value of the debtor’s interest in certain homestead property shall be reduced to the extent that it is attributable to any nonexempt property that the debtor disposed of within ten years before the filing of the petition with the intent to hinder, delay, or defraud a creditor.257 This restriction on the debtor’s homestead exemption is therefore limited to the conversion of nonexempt property into exempt homestead property with fraudulent intent.258 If th

Consumer Bankruptcy Law and Practice: 10.2.3.4.4 Cap on homestead property acquired during 1215-day period before filing

Under new section 522(p)(1), the debtor may not exempt “any amount of interest that was acquired by the debtor” in homestead property by the debtor during the 1215-day period before the filing of the petition that exceeds the amount of $189,050.268 The determination of whether there is such an excess is based on the value on the date of the petition.269 The monetary cap imposed by section 522(p)(1) does not apply to any interest transferred from a debtor’s previous principal residence to the deb

Consumer Bankruptcy Law and Practice: 10.2.3.4.5.2 Felony conviction

The debtor may not exempt an interest in homestead property that exceeds $189,050278 if the debtor has been convicted of certain criminal conduct. Under section 522(q)(1)(A), the cap applies if the court determines, after notice and a hearing on an objection to the exemption, that the debtor has been convicted of a felony (as defined by 18 U.S.C. § 3156),279 “which under the circumstances, demonstrates that the filing of the case was an abuse” of the bankruptcy provisions.

Consumer Bankruptcy Law and Practice: 10.2.3.4.5.7 Application of homestead caps in joint cases

If the homestead cap under section 522(p) (for property acquired within the 1215-day period before filing) or section 522(q) (for certain criminal or wrongful conduct) is imposed, it is applicable to interests that exceed “in the aggregate” $189,050 in value in homestead property.301 The use of the word “aggregate” in referring to the debtor’s interest, consistent with its application in other subsections such as section 522(d)(6),302 suggests Congress intended the dollar limit to be applied to

Consumer Bankruptcy Law and Practice: 10.3.1 The Initial Claim

The Bankruptcy Code itself says little regarding the procedure for claiming exemptions, other than that the debtor or a dependent shall “file a list” of property claimed exempt.305 If the debtor does not file such a list, a dependent of the debtor may do so.306 The procedure for a dependent claiming exemptions is set out in Federal Rule of Bankruptcy Procedure 4003(a), which sets the deadline for filing as thirty days after the debtor’s deadline for filing.

Consumer Bankruptcy Law and Practice: 10.3.2 Amending the Claim of Exemption

Under the rules, any part of the schedules, including the exemption claim, may be amended as a matter of right before the case is closed.317 An amendment may include a change from the state to the federal exemption scheme or vice versa,318 or a change in the exemption statute relied upon.319 Under similar language in the prior rules, some courts had imposed time limitations on the right to amend the exemption claim, holding that the claim became “f

Consumer Bankruptcy Law and Practice: 10.3.3 Objections to Exemptions

The Code allows objections to claims of exemption by “a party in interest,” again specifying no procedure.337 The procedure is provided by Bankruptcy Rule 4003(b), though the rule does not prescribe any particular form for the objection,338 but it seems clear that an objection initiates a contested matter under Bankruptcy Rule 9014. In most cases the party who would be likely to object is the trustee.