Court Gets It Wrong on Exempt Property as Disposable Income

Posted by NCBRC - August 29, 2017

The bankruptcy court ignored the plain language of section 522(c) to find that exempt funds may be used in the calculation of disposable income in a chapter 13 bankruptcy. In re Ortiz-Peredo, No. 17-50814 (Bankr. W.D. Tex. July 18, 2017).

Chapter 13 debtors, Jose Ortiz-Peredo and Lilia Guadalupe Lopez, included in their schedules a worker’s compensation settlement of over $8,000 which they claimed as exempt under section 522(d)(5).

Although the trustee did not object to the exemption, she objected to confirmation of their plan on the basis that the debtors did not include the settlement in their calculation of disposable income under section 1325(b)(2)(A)(i). That section provides, “For purposes of this subsection, the term ‘disposable income’ means current monthly income received by the debtor . . . less amounts reasonably necessary to be expended” for the maintenance or support of the debtor.

The debtors maintained that section 522(c) prohibits use of exempt property for payment of pre-petition debts, and therefore the settlement cannot be included in the disposable income calculation. Section 522(c) provides that exempt property is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case.” That section goes on to list four exceptions under which exempt property may not be withheld from the payment of certain debts.

The court laid out the conflicting judicial views noting that the majority view, represented by In re Launza, 337 B.R. 286 (Bankr. N.D. Rex. 2005), reasons that, because section 1325 does not specifically reference section 522, even properly exempted property counts toward disposable income. The minority view, represented by In re Graham, 258 B.R. 286 (Bankr. M.D. Fla. 2001), relies on the plain language of section 522(c) to the effect that exempt property may not be liable for payment of pre-petition debt.

The court adopted Launza’s view stating that exemptions are less significant for chapter 13 debtors and that given the broad discharge afforded debtors in chapter 13, having the debtors pay otherwise exempt income to their creditors furthers the goal of making chapter 13 debtors pay as much as they can to their creditors.”

In holding that exempt property may be used to pay pre-petition debts in chapter 13, the Ortiz-Peredo court, like the court in Launza, elevated policy considerations over the plain language of section 522(c). The court’s distinction between chapter 7 and chapter 13 for purposes of its analysis is untenable. Exemptions are found in chapter 5 of the Code and are therefore equally applicable to both chapter 7 and 13.

Relying on the statutory text rather than non-legislative policy considerations, the Eleventh Circuit in In re Gamble, 168 F.3d 442 (11th Cir. 1999), ordered the trustee to turn over to the debtor exempt property because the “[t]he plain language of the bankruptcy code and precedent from this court are clear that exempt property is no longer part of the bankruptcy estate, and is available for the debtor’s use.” Simply stated, property that is exempt under section 522, is excluded from the bankruptcy estate. Schwab v. Reilly, 560 U.S. 770, 774 (2010).

Had Congress intended exempt property to be available for use in chapter 13 plans it could have limited application of section 522(c) in that regard just as it limited removal of exempt property with respect to certain debts. It did not do so. To the contrary, in section 522(c) Congress prohibited the very thing the Ortiz-Peredo court ordered.

Ortiz-Peredo Bankr. WD Tex opinion July 2017

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