§ 90.3 — Exclusions and Exemptions after BAPCPA
Revised: July 13, 2007
The best-interests-of-creditors test in § 1325(a)(4)1 was not amended by BAPCPA, but new exclusions from property of the estate and new exemption rules will affect the § 1325(a)(4) calculation.
Detailed elsewhere,2 BAPCPA added to § 541 significant new exclusions from property of the bankruptcy estate—several with respect to pension and profit-sharing interests. For example, funds in an education individual retirement account are not property of the estate after BAPCPA.3 Similarly, funds used to purchase a tuition credit or contributed to a state tuition program are excluded from the bankruptcy estate.4 Amounts withheld or received by an employer as contributions to an employee benefit plan, a deferred compensation plan, a tax-deferred annuity or a health insurance plan are excluded from the bankruptcy estate by BAPCPA.5 Because these interests in property are excluded from property of the bankruptcy estate, the value of these interests is not included in the hypothetical liquidation analysis required by the best-interests-of-creditors test in § 1325(a)(4).6 Some Chapter 13 estates will be smaller because of these new exclusions, and the minimum amount that unsecured creditors must receive to confirm a Chapter 13 plan under § 1325(a)(4) will be lower in those cases.
The exemptions available to individual debtors were also changed by BAPCPA in ways that will affect the best-interests-of-creditors test in Chapter 13 cases. The new domicile rules in § 522(b)(3) will require some debtors to claim exemptions under the laws of a state in which they no longer reside.7 Depending on the "extraterritorial effect" of exemptions under that other state's law, some debtors will get more generous exemptions than before BAPCPA, others will fare more poorly.
For example, a Chapter 13 debtor with a homestead in the state of current residence could forfeit any right to a homestead exemption if the new domicile rules point to a different state that either has no homestead exemption or does not allow extraterritorial effect for its homestead exemption. The opposite could also be true—the homestead exemption in that other state may be larger and could actually increase the debtor's homestead exemption over what would otherwise be available under the law of the state of current residence. Whichever effect applies, the value of non-exempt homestead property is affected in a way that either increases or decreases the minimum amount that must be paid to unsecured creditors to satisfy § 1325(a)(4) at confirmation of a Chapter 13 plan.
There is also the possibility that the new domicile rules in BAPCPA will render the debtor ineligible for "any"8 exemption, in which case, the debtor may be able to claim federal exemptions in § 522(d). The federal exemptions are more generous than some state exemptions and less generous than others. Either way, the availability of federal exemptions will change the value of the Chapter 13 estate for best-interests-of-creditors-test purposes.
In a few Chapter 13 cases, the new caps on state homestead exemptions in § 522(p) and (q) may increase the value of the estate in the § 1325(a)(4) calculation.9 These new caps are only relevant in states with homestead exemptions that could exceed $125,000, and the new caps will affect the § 1325(a)(4) calculation only in the unusual case when the debtor has an exemptible homestead that exceeds that amount.
In re Walsh10 illustrates the intricacies of new § 522(p) in a Chapter 13 case. Massachusetts recently increased its homestead exemption to $500,000. Walsh is a one-spouse case, and the filing spouse proposed a 1 percent plan. The debtor and nonfiling spouse had equity of $271,440 in their homestead, and the debtor acquired ownership in the homestead 371 days before the Chapter 13 petition. The new $125,000 homestead exemption cap in § 522(p) applied to the debtor, but the bankruptcy court concluded that, in a hypothetical Chapter 7 case, the nonfiling spouse could claim the entire $500,000 Massachusetts homestead exemption, saving the 1 percent plan from the best-interests-of-creditors test:
[T]he Plan reflects compliance with Section 1325(a)(4): in the Debtor's Chapter 7 case, general creditors would not receive the benefit of the equity above the amount of the cap, and therefore they would receive no distribution; under the Plan, general creditors will receive a one percent distribution. The best interests test is thus met. If the Debtor were the homestead declarant and the sole owner and the sole occupant of the Residence, then the applicability of the cap would (at least arguably) be clear: in that case, the only person protected by the homestead estate would be the debtor herself, who, in seeking the benefits of bankruptcy, would voluntarily subject herself to the limitations on such benefits, including the cap on a state law homestead exemption claim. Here, however, it is the non-debtor husband who can invoke the full Massachusetts homestead protections for his benefit and that of his family without regard to his wife's bankruptcy and, because he is not the debtor, without being subject to any limitations that would otherwise be applicable were he in bankruptcy. He can (and presumably would) assert his state law homestead exemption protection unlimited by the federal bankruptcy law $125,000 cap notwithstanding his debtor spouse's Chapter 7 case.11
BAPCPA added a new subsection (n) to § 522 describing an exemption for assets in individual retirement accounts described in § 408 or § 408A of the Internal Revenue Code. This new exemption protects an IRA and earnings on an IRA up to $1 million in a bankruptcy case for an individual debtor, except that amount "may be increased if the interests of justice so require."12 Chapter 13 debtors with money in an IRA can exempt those funds after BAPCPA and reduce the value of the Chapter 13 estate for § 1325(a)(4) purposes.
And then there is new § 522(o), which reduces some exemptions to the extent the debtor's interest in the exempt property is attributable to a disposition within 10 years of the petition "with the intent to hinder, delay or defraud a creditor."13 In In re Maronde,14 the bankruptcy court found that the debtor sold a trailer and truck on the eve of the Chapter 13 filing and used the proceeds to increase a homestead exemption by $18,750.46. Because the plan proposed payments to unsecured creditors of only $16,420, the plan failed the best-interests-of-creditors test after application of the new homestead exemption limitation in § 522(o).
BAPCPA creates the possibility that debtors can act or fail to act during a bankruptcy case in ways that will affect the best-interests-of-creditors test. One of the stranger new provisions of the Bankruptcy Code brought to us by BAPCPA is this hanging run-on sentence at the end of § 521(a)(6):
If the debtor fails to so act within the 45-day period referred to in paragraph (6), the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor which is affected, such property shall no longer be property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law, unless the court determines on the motion of the trustee filed before the expiration of such 45-day period, and after notice and a hearing, that such property is of consequential value or benefit to the estate, orders appropriate adequate protection of the creditor's interest, and orders the debtor to deliver any collateral in the debtor's possession to the trustee; and . . . 15
The "paragraph (6)" cross-referenced in the first sentence above is, awkwardly, § 521(a)(6)—the subsection to which the run-on sentence appends. Somewhat simplified, § 521(a)(6) requires a Chapter 7 debtor to reaffirm or redeem debts secured by personal property within 45 days of the first meeting of creditors.16 The hanging sentence says that some personal property leaves the Chapter 7 estate altogether if the debtor fails to timely act during the Chapter 7 case (and the Chapter 7 trustee does not intervene).
It is generally held that the § 1325(a)(4) hypothetical liquidation calculation takes place as of the effective date of the Chapter 13 plan.17 In cases converted from Chapter 7 to Chapter 13, this can be weeks or months after the filing of the Chapter 7 case. If the Chapter 7 converts to Chapter 13 after the hanging sentence has been triggered, personal property may have exited the estate and any value for unsecured creditors is lost for § 1325(a)(4) purposes at confirmation of a plan.
The net result of these new exclusions from the estate and exemptions is that some Chapter 13 estates will have less value and the hypothetical liquidation analysis in § 1325(a)(4) will require smaller dividends to unsecured creditors. As illustrated in Maronde, there will be a few Chapter 13 cases in which the hypothetical liquidation value of the estate will be increased by new limitations on exemptions in § 522(p), (q) and (o).
1 11 U.S.C. § 1325(a)(4), discussed in § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
2 See § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
3 See 11 U.S.C. § 541(b)(5), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
6 See 11 U.S.C. § 1325(a)(4), discussed in § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
7 See 11 U.S.C. § 522(b)(3), discussed in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
8 "Any" is the magic word in the hanging sentence BAPCPA added at the end of 11 U.S.C. § 522(b)(3). See discussion in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
9 See 11 U.S.C. § 522(p) and (q), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
10 359 B.R. 389 (Bankr. D. Mass. 2007).
12 11 U.S.C. § 522(n), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
13 11 U.S.C. § 522(o), discussed in § 407.1 [ New Exemptions and New Exemption Limitations ] § 48.3 Exemptions and Exemption Limitations Added by BAPCPA.
14 332 B.R. 593 (Bankr. D. Minn. 2005).
15 11 U.S.C. § 521(a)(6).
16 Put aside, for purposes of this book, the timing conflict between new 11 U.S.C. § 521(a)(6) and (a)(2), as amended by BAPCPA. One more good reason to file a Chapter 13 case in the first instance—avoiding Chapter 7 altogether.
17 See §§ 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation and 326.1 [ Effects of Conversion from Chapter 7 to Chapter 13 ] § 148.3 Effects of Conversion from Chapter 7 to Chapter 13.
Bradley R. Kirk & Assocs., Inc. v. Spellman (In re Spellman), No. CC-15-1026-KiKuF, 2016 WL 1165827, at *8 (B.A.P. 9th Cir. Mar. 22, 2016) (unpublished) (Kirscher, Kurtz, Faris) (Because more than 75% of spendthrift trust is excluded from bankruptcy estate by § 541(a)(1) and (c)(2), plan satisfies best-interests-of-creditors test when unsecureds will receive $7,000—notwithstanding that debtor keeps an interest in trust that contains assets worth $600,000. "California law recognizes the validity of spendthrift trusts. . . . Debtor does not have access to the Trust's benefits until he turns 35 on November 22, 2017 (a postpetition event). . . . 75% of Debtor's interest in the Trust is excluded from property of the bankruptcy estate pursuant to § 541(c)(2).", aff'd, No. 15-56508, 2018 WL 2996772 (9th Cir. June 15, 2018 (unpublished) (McKweon, Callahan, Quist).).
In re Galvin, 583 B.R. 262 (Bankr. D. Colo. Mar. 2, 2018) (Rosania) (Plan fails best-interests-of-creditors test in § 1325(a)(4) because Winnebago is motor home, not mobile or manufactured home, and is not eligible for Colorado homestead exemption.).
In re Regenhardt, No. 17-01225-5-JNC, 2017 WL 3701217 (Bankr. E.D.N.C. Aug. 24, 2017) (Callaway) (Because adjacent undeveloped lot is part of homestead under North Carolina law, debtors can structure their exemptions to claim equity in both the homestead and the adjacent lot for purposes of best-interests-of-creditors test. Debtors slightly exceeded available exemptions under North Carolina law and a small amount of equity remains for unsecured creditors. Debtors permitted to restructure exemptions to avoid capture of excess equity for unsecured creditors.).
In re McDonald, 519 B.R. 324, 333-38 (Bankr. D. Kan. Oct. 27, 2014) (Karlin) (Contingent expectancy of per capita payments from tribal gambling revenues is property of Chapter 13 estate, is not exempt and must be valued for § 1325(a)(4) purposes; per capita payments are not exempt because "local law" is the debtors' Kansas domicile, not tribal lands. "The Tribal Code simply fails to create a trust for payments made to anyone except minors and incompetent adults, which is the basic requirement for § 541(c)(2) to apply to Debtors' per capita payments here. . . . [T]he best interest of the creditors test of § 1325(a)(4) is a separate and distinct test from the best effort requirement of § 1325(b)(1). . . . [T]hat Debtors are proposing to commit all of their disposable income to plan payments during the life of their chapter 13 plan has no bearing on the § 1325(a)(4) analysis. If the result of subtracting their living expenses from their income demonstrates an inability to repay the value of this contingent interest, that unfortunately means that their plan is not feasible, not that they do not have to account for that interest in the first instance.").
In re McKinney, 507 B.R. 534, 543 (Bankr. W.D. Pa. Mar. 18, 2014) (Agresti) (Postpetition domestic support obligation payments are not counted to determine whether best-interests-of-creditors test is satisfied because ongoing alimony is not an "allowed claim" for purposes of §§ 502(b)(5) and 1325(a)(4). "In calculating the applicable asset and claim values for meeting the requirements of the [best-interests-of-creditors test], the Bankruptcy Code distinguishes between prepetition and postpetition alimony. . . . [O]nly the prepetition portion of a domestic support obligation can be an 'allowed claim' under Section 502(b)(5). . . . Debtor is not entitled to include payments on his postpetition domestic support obligation as part of his plan base to demonstrate compliance with 11 U.S.C. § 1325(a)(4) since such obligation is not an 'allowed claim' under 11 U.S.C. § 502(b)(5).").
In re Boyd, 487 B.R. 669 (Bankr. E.D.N.C. Jan. 14, 2013) (Doub) (Early termination provision that would permit the debtors to complete payments in less time than applicable commitment period is void for additional reason that early termination language does not provide an exception for payments that would fail to meet the best-interests-of-creditors test under § 1325(a)(4). Debtor had a small amount of nonexempt equity in a car, and early termination provision would allow plan to complete payments before unsecured creditors received at least what they would receive in a liquidation under Chapter 7.).
In re Bond, No. 4:11-bk-33849-EWH, 2012 WL 3867427 (Bankr. D. Ariz. Sept. 5, 2012) (Hollowell) (Business debtors undervalued ownership interest in delicatessen by scheduling liquidation value rather than going concern value when plan would continue operation of business and debtors would continue to receive profits.).
In re Edwards, No. 11-80962, 2012 WL 3584769 (Bankr. W.D. La. Jan. 5, 2012) (Hunter) (Best-interests-of-creditors test is calculated differently than projected disposable income test after BAPCPA: best-interests test is satisfied when distributions to priority creditors would exhaust liquidation value of estate; projected disposable income test would be measured against distributions to only general unsecured creditors.).
In re Melvin, No. 10-92360, 2011 WL 1303307, at *2 (Bankr. C.D. Ill. Apr. 6, 2011) (Fines) (Inheritance was income that must be included in projected disposable income under § 1325(b)(2) and is not an asset of the bankruptcy estate whose value is accounted for under best-interests-of-creditors test in § 1325(a)(4). "Following the enactment of BAPCPA, this Court finds that 11 U.S.C. § 101(10A) and 11 U.S.C. § 1325(b)(2) control the definition of income. The Bankruptcy Code has clearly rejected the taxation limitation on the definition of income. . . . [T]he subject inheritance is income which should be paid into the Debtors' Chapter 13 Plan in addition to the payments already proposed. . . . [I]f the Court were to follow the argument espoused by the Debtors, the Debtors would experience a windfall at the expense of their creditors.").
In re Timothy, No. 08-28332, 2009 WL 1349741, at *3-*4 (Bankr. D. Utah May 12, 2009) (Mosier) (When liquidation analysis requires payment of $1,394.06 to unsecured creditors, debtors with negative disposable income on Form B22C have "special circumstance" that permits use of Schedule I to find some projected disposable income under the forward-looking approach in Hamilton v. Lanning (In re Lanning), 545 F.3d 1269 (10th Cir. 2008). "Pursuant to § 1325(a)(4), Debtors must pay a minimum of $1,394.06 to unsecured creditors and they must pay their attorneys' fees through the plan. Debtors cannot confirm a plan without some projected disposable income. According to their Form [B]22C, Debtors have no Disposable Income to fund a plan. . . . Debtors have shown that Form [B]22C Disposable Income fails to reasonably reflect the Debtors' projected disposable income and they actually have monthly net income to pay to the chapter 13 plan. . . . The Court finds that the Debtors' need to rebut the negative Disposable Income calculation on their Form [B]22C constitutes a special circumstance that permits the use of the forward-looking approach to establish a positive projected disposable income." Schedules I and J showed monthly net income of $130 based in part on social security income. Voluntary election to file Chapter 13 included social security in projected disposable income notwithstanding that social security is excluded from CMI by § 101(10A).), aff'd, No. UT-10-003, 2010 WL 5383897 (B.A.P. 10th Cir. Dec. 29, 2010) (Cornish, Karlin, Somers).).
In re Walsh, 359 B.R. 389, 394 (Bankr. D. Mass. Jan. 11, 2007) (One percent plan does not fail best-interests-of-creditors test because § 522(p) would not limit homestead exemption of nonfiling spouse in a hypothetical Chapter 7 case; nonfiling spouse can assert $500,000 Massachusetts homestead exemption. Debtor and nonfiling spouse had net equity of $271,440 in homestead. Debtor acquired ownership interest 371 days before Chapter 13 petition. "[T]he Plan reflects compliance with Section 1325(a)(4): in the Debtor's Chapter 7 case, general creditors would not receive the benefit of the equity above the amount of the cap, and therefore they would receive no distribution; under the Plan, general creditors will receive a one percent distribution. The best interests test is thus met. If the Debtor were the homestead declarant and the sole owner and the sole occupant of the Residence, then the applicability of the cap would (at least arguably) be clear: in that case, the only person protected by the homestead estate would be the debtor herself, who, in seeking the benefits of bankruptcy, would voluntarily subject herself to the limitations on such benefits, including the cap on a state law homestead exemption claim. Here, however, it is the non-debtor husband who can invoke the full Massachusetts homestead protections for his benefit and that of his family without regard to his wife's bankruptcy and, because he is not the debtor, without being subject to any limitations that would otherwise be applicable were he in bankruptcy. He can (and presumably would) assert his state law homestead exemption protection unlimited by the federal bankruptcy law $125,000 cap notwithstanding his debtor spouse's Chapter 7 case.").
In re Maronde, 332 B.R. 593 (Bankr. D. Minn. Nov. 8, 2005) (Plan fails best-interests-of-creditors test because new limitation in § 522(o) disallows homestead exemption created on eve of bankruptcy by sale of a trailer and truck with actual intent to hinder, delay or defraud creditors; $18,750.46 added to homestead exemption and now disallowed exceeds plan payments that total $16,420.).