Subtle Difference Between “Deemed Exempt” versus “Claimed Exempt” — Just Because Schedule C Lists the $100 in Bank Account Does Not Mean Debtor Can Immediately Use It

I tried to make the title as concise as possible — Ockham’s Razor failed.

Client comes to see you and they have $5,000 in their checking account.  You list it on Schedule B then exempt it on Schedule C and file the case.  The 341(a) is in 30 days.  Client goes to the bank the next day and withdraws all of the funds to pay rent and spend it on gambling.  You don’t think it is a problem because the funds have been fully exempt.

But is it?

In Section 70a of the former Bankruptcy Act, there was an automatic exclusion of exempt property such that by simply listing the asset on Schedule C — then that asset was automatically and immediately exempt.  That is not how it works under the current Code — it is not automatic.  I was reading the Mwangi case from the Ninth Circuit that clarifies a subtle distinction between an asset that has been “claimed exempt” versus one that is actually “deemed exempt.”   In the hypo above, it is a “no harm, no foul” situation but it’s still worth thinking about.

Section 541(a) re: property of the estate needs to be liaised with Rule 4003(b)(1) re: objection to exemptions.

Rule 4003(b)(1) says a party in interest has 30 days after the 341(a) or amended schedule to file an objection to the claimed exemption.  So, because the property is only “claimed as exempt” during this 30 day period, the asset is not “deemed exempt” until the objection period is over.  So you are “claiming an exemption” when you list it on Schedule C but the property is still property of the estate until the objection period ends — and only after that time has the asset been deemed exempt, which revested back to the Debtor and Debtor has right to possess and control the funds.

So, if your client pulls the funds out of the bank account the day after filing bankruptcy — are they dissipating with estate assets without the trustee’s consent?

The below is from Mwangi:

The Debtors filed their Chapter 7 bankruptcy petition on August 3, 2009. The account funds automatically became part of the bankruptcy estate with the filing of the Debtors’ petition. 11 U.S.C. § 541(a). On August 11, 2009, the Debtors filed an Amended Schedule C in which they claimed an exemption in seventy-five percent of the value of each of their Wells Fargo accounts. But the account funds did not become exempt on that date. Under Federal Rule of Bankruptcy Procedure 4003(b)(1), “a party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under § 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later.” Because the property is only “claimed as exempt” during this 30–day objection period, it may be inferred that the property is not deemed exempt, and therefore the property does not revest in the debtor, until the end of the objection period. The § 341 meeting of creditors was held on September 18, 2009, after the filing of the Amended Schedule C. Accordingly, any interested party had thirty days after the § 341 meeting of creditors to object to the Debtors’ claimed exemption. During this period—from the filing of the Chapter 7 bankruptcy petition on August 3, 2009, to the end of the thirty-day objections period on October 18, 2009—the account funds remained estate property. Because all interested parties failed to act during the objections period, however, the account funds passed out of the bankruptcy estate and revested in the Debtors on October 19, 2009.4 On that date, the Debtors developed a right to possess and control the account funds.

Thanks for reading,

Sevan Gorginian, Esq. 

Law Office of Sevan Gorginian

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