Bankruptcy Article #5
A. State Exemptions
There are two statutory exemptions schemes available under the Bankruptcy Code. The federal exemptions, 11 U.S.C. Section 522, are available if permitted under state law. States are allowed to "opt - out" of the federal exemptions pursuant to Section 522(b) (1). Maine has chosen to use only state law exemptions in Bankruptcy proceedings. See 14 M.R.S.A. Section 4425, noting decision In re Hilder, 192 B.R. 790 (Bankr. D. Me. 1996) and Petit v. Fessenden, 182 B.R. 59 (D. Me. 1995).
Exempt property is property that is protected from creditors and trustee. Although exempt property is property of the bankruptcy estate under 11 U.S.C. Section 541, it is not available for liquidation or distribution to creditors. It is essential for a debtor and counsel to analyze the nature of his or her property to determine if an exemption is available. Without an exemption, the property is subject to the control of the trustee.
Occasionally, creditors will pressure a debtor to "waive" his or her exemption in certain property. Any "waiver" of an exemption is unenforceable under 11 U.S.C. Section 522(e)
States, like Maine, which have "opted-out", usually have several statutory sources of exemptions for various types of property. Most counsel know about 14 M.R.S.A. Sections 4422 et. seq., but there are other statutes with which careful debtor's counsel must be familiar in order to protect a debtor's property from assertive trustee. See 3 M.R.S.A. Section 703; 4 M.R.S.A. Section 1201; 5 M.R.S.A. Section 17001; 24-A M.R.S.A. Section 2428-2432. It is important to remember that the Bankruptcy Court will apply the exemptions liberally in many circumstances, but follow the exemptions according to the precise wording of the statutory language in other cases.
The First Circuit concluded that the federal exemption for personal injury claims only permitted a debtor to exempt one personal injury claim pursuant to 11 U.S.C. Section 522 (d)(11)(D). In re Christo, 192 F.3d 36 (1st Cir. 1999). The federal exemption for personal injury claims is remarkably similar to Maine's personal injury exemption. The Maine Bankruptcy Court recently decided that a pop-up camper did not fit under the definition of a household good under the Maine exemptions. In re Schreiber, 231 B.R. 17 (Bankr. D. Me. 1999). Such a ruling does not bode well for snowmobile and ATV enthusiasts hoping to protect those items of personal property from the trustee.
B. Procedure to Claims Exemptions
In order to claim an exemption, a debtor must provide a list of exempt property pursuant to 11 U.S.C. Section 522(1) within 15 days of filing the petition. Bankruptcy Rules 1007 and 4003(a). Failure to timely list exemptions may result in a loss of the exemptions and would require the debtor to file a motion with the Court for permission to file the exemption list. Petit v. Fessenden, 80 F.3d 29 (1st Cir. 1996). Court closely examine a debtor's asserted exemptions, since the exemptions claimed, but not object to by the trustee and creditors will be deemed valid and binding. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). Although Courts have attempted to minimize the seeming harshness of the Taylor decision, see Mercer v. Monzak, 53 F. 3d 1 (1st Cir. 1995), the necessity of a timely objection to a claimed exemption remains the law of the land.
Exemptions may be lost by a debtor by incorrectly characterizing the property as exempt and receiving an objection from the trustee or a creditor, or from other actions of the debtor. If a debtor fraudulently transfers exempt property, the trustee can retrieve the property and eliminate the debtor's exemption in the property as well. Howison v. Hanley, 141 F.3d. 384 (1st Cir. 1998). This double penalty should serve as a warning to potential debtors in the bankruptcy system who believe that transferring their interest in their house to their spouse or best friend prior to bankruptcy is a good mechanism to protect that asset from creditors.
C. Retirement Plans
14 M.R.S.A. Section 4422(13) protects stock bonus, pension, profit-sharing, annuity, individual retirement accounts or plans to the extent reasonably necessary for the support of the debtor or any dependent of the debtor. This provision requires a debtor to demonstrate his or her need for the retirement funds in the foreseeable future. Whether a debtor is entitled to the exemption, depends upon the debtor's age, education, health, dependents, employments prospects and nondishchargeable debts that the debtor might need to contend with in the future. In Re Bates, 176 B.R. 104 (Bankr. D. Me. 1994); In Re Yee, 147 B.R. 624 (Bankr. D. Mass. 1992).
Most conventional retirement plans, however, are not even considered property of the bankruptcy estate under 11 U.S.C. Section 541. After the Supreme Court decision in Patterson v. Schumate, 112 S. Ct. 2242 (1992), any retirement plan that was deemed "ERISA qualified" was automatically protected form the grasp of a bankruptcy trustee. Consequently, retirement plans of most major employers are not property of the estate. Trustees will still investigate the retirement plans of small businesses, especially ones in which the debtor was a corporate officer or principal shareholder to determine whether there were violations of ERISA requirements. Violations o the ERISA plan requirements could cause the plan to no longer be "qualified" and therefore become property of the trustee subject only to the 14 M.R.S.A. Section 4422 (13)(E) protections. Debtor's counsel representing a small business shareholder or officer should determine the risk of loss of the plan prior to filing a bankruptcy petition since the retirement funds may be the largest asset.