Utilizing Exemptions in Bankruptcy

As discussed in our earlier blogs, Section 522 of the Bankruptcy Code provides many protections and powers in connection with debtors’ exemption rights. The amount of property that may be claimed as exempt can be greatly increased, if necessary, by careful exemption planning. For example, cash in a bank account that cannot be claimed as exempt can be used to pay down a mortgage to create equity which can be claimed as exemptions

Avoiding Powers of Debtor

The power of the debtor to avoid transfer is expansive. Section 101(54) defines “transfer” to include any lien, execution sale, setoff, or any other mode of disposing of or parting with an interest in property, whether voluntarily or involuntarily, including foreclosure of the debtor’s equity of redemption. If the interest in property involved fits within the exemption scheme utilized by the debtor and if the interest is impaired by a transfer of a type covered by Section 522, then that transfer may be avoided. However, if only a portion of the transferred property may be claimed as exempt, the transfer may be avoided only to that extent.

How to Use Avoiding Powers with Federal Rules of Bankruptcy Procedure

The Federal Rules of Bankruptcy Procedure provides that lien avoidance actions shall be by motion with the exception of a chapter 11 which requires an adversarial proceeding initiated by a complaint. It may be possible to include in a chapter 13 plan provisions which effectuate the avoidance of transfer upon confirmation. Although the Rules provide that a motion or complaint are necessary in a “proceeding” to avoid a lien, it can be argued that when the lien is avoided in the plan, no separate “proceeding” is necessary. It is the debtor’s burden to file a lien avoidance motion. If none is filed, all liens on the debtor’s property, including otherwise exempt property, will normally survive the bankruptcy.

Limitations on Avoiding Powers of Debtor

The Bankruptcy Rules do not set a time limit for debtor lien avoidance. Lien avoidance is a personal right which does not affect the administration of the bankruptcy case, thus there is no need for the bankruptcy case to be reopened in order for the debtor to avoid a lien. However, actions to avoid transfers under section 522(h) are subject to a two year statute of limitations. The clock starts on the two year time period upon the order of relief or the date the case is closed or dismissed, whichever is earlier.

In our next blog in our bankruptcy series we will talk about a debtor’s power to avoid judicial liens.

Bankruptcy or Other Debt Issues in Illinois or Arizona?

The Kepple Law Group is highly knowledgeable in bankruptcy matters and can advise clients in all aspects of bankruptcy proceedings.

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