Debtor Misconduct and Bankruptcy Exemptions

When a debtor in Oak Park files for consumer bankruptcy, there are many steps that are necessary to complete in the filing process as well as throughout the bankruptcy case. Bankruptcy forms and document requirements can be extremely complicated, and many debtors who attempt to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy on their own make errors in the paperwork. For example, debtors almost always need to provide tax returns, income documentation that might include W-2s or self-employment forms, proof of real estate owned and its current market value, proof of vehicles owned and the remaining amount owed, information about bank accounts and retirement accounts, documentation of child support or alimony paid or received, and many other materials.

When you file for bankruptcy, you also need to disclose any and all assets that are exempt. In a consumer bankruptcy case, certain assets are exempt. Exempt assets cannot be liquidated in order to repay creditors—the debtor is allowed to keep these assets even if all debts are discharged. What happens when a debtor fails to disclose an asset that is exempt under the law? That is the question that arose in the recent case of Rucker v. Belew (2018). Although the case was decided in the Eighth Circuit Court of Appeals, it could end up being persuasive authority for courts in Illinois.

Understanding Bankruptcy Exemptions in Illinois

Before we get into the details of the case, we want to say more about bankruptcy exemptions. Debtors in Illinois need to use Illinois bankruptcy exemptions (735 ILCS 5/12-1001). In Illinois, the following are all examples of exempt property in a bankruptcy proceeding:

• $15,000 of value in a home (homestead exemption);
• Personal property that includes necessary apparel, school books, family photos, a bible, and $4,000 additional dollars of value in other personal property;
• $2,400 of value in one motor vehicle;
• $1,500 of value in tools of the debtor’s trade, which can include implements, professional books, and other tools;
• Health aids that have been prescribed by a medical professional;
• Life insurance proceeds;
• Benefits including Social Security benefits, public assistance benefits, veteran’s benefits, and disability benefits;
• Alimony and other family support;
• Damages awards from personal injury lawsuits up to $15,000; and
• Restitution payments.

Exempt property allows debtors to rebuild their lives after bankruptcy, and debtors rely on these exemptions when filing for personal bankruptcy.

Getting the Facts of the Case in Rucker v. Belew

In the Rucker case, the debtor filed for Chapter 7 bankruptcy. When he did so, he failed to list an exempt asset in his initial bankruptcy filing. More specifically, he failed to disclose a debit account. Upon realizing his error during the meeting of creditors, the debtor attempted to amend his schedules in order to disclose the debit account and to ensure that it would be exempt. The trustee began an investigation and determined that the debtor had additional undisclosed assets that also were exempt. Those assets included an equitable interest in a bank account, unpublished fiction manuscripts, and cash in a house safe. The debtor then attempted to amend the claim of exemptions a second time to disclose these assets and to claim them as exempt.

The trustee objected to the second amended claim of exemptions, arguing that “the second amended claim of exemptions was filed in bad faith” and thus should not have been allowed.

The U.S. Bankruptcy Code does not say anything about denying exemptions on bad faith grounds. The trial court found in favor of the debtor, ruling that a bankruptcy court cannot deny an exemption for a reason that is not outlined in the Bankruptcy Code (specifically, bad faith). The trustee appealed, and the case ultimately was heard by the Eighth Circuit Court of Appeals. The Eighth Circuit relied on the U.S. Supreme Court case of Law v. Siegel (2014), which held that “federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code.”

The Eighth Circuit reasoned that an amended claim of exemptions is similar to an initial exemption, and since the Bankruptcy Code does not provide authority for bankruptcy courts to deny exemptions on bad faith grounds, bankruptcy courts accordingly cannot deny an amended claim of exemptions on bad faith grounds. In so ruling, the Eighth Circuit affirmed the trial court’s decision and aligned itself with similar decisions from the Sixth Circuit and the Ninth Circuit.

Contact an Oak Park Bankruptcy Lawyer

Do you have questions about bankruptcy exemptions? An Oak Park Bankruptcy lawyer can help. Contact the Emerson Law Firm today.

See Related Blog Posts:

Can I File for Two Types of Bankruptcy at the Same Time?

Learning More About Bankruptcy Discharge