Exemptions

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Tenth Circuit Affirms Exemption of Child Tax Credit Refunds in Garcia-Morales

In Cohen v. Garcia-Morales, No. 24-1384 (10th Cir. Aug. 19, 2025), the Tenth Circuit addressed whether a Chapter 7 debtor’s federal tax refund, traceable to a refundable child tax credit, must be turned over to the bankruptcy trustee. Affirming both the bankruptcy and district courts, the panel held that the refund was wholly exempt under Colorado law.

The Case Below

Jose L. Garcia-Morales filed for Chapter 7 in Colorado in 2021. His 2021 federal tax return showed $8,140 in withholdings, a $1,800 refundable child tax credit, and a $1,455 refund. The Chapter 7 trustee sought turnover of the refund, arguing that it should be prorated between tax withholdings (nonexempt) and the refundable credit (exempt). The bankruptcy court disagreed, ruling that because the refundable child tax credit was a “but-for” cause of the refund, the entire $1,455 was exempt under Colo. Rev. Stat. § 13-54-102(1)(o). The district court affirmed.

Trustee’s Position

On appeal, the trustee argued that the statute exempts only the portion of a refund “attributed to” a child tax credit, not the entire refund whenever a credit is present. Relying on In re Borgman, 698 F.3d 1255 (10th Cir. 2012), he urged a pro-rata allocation methodology, contending that applying a tort-like “but-for causation analysis “makes little sense” in this context. In his reply, the trustee criticized both debtor and amici for relying on policy-based arguments, maintaining that the statute’s plain text required mathematical allocation and that extrinsic legislative history or policy considerations should not control.

Debtor’s Position

The debtor responded that the statute’s plain meaning supported the bankruptcy court’s approach. “Attributed to” should be understood as requiring a “but-for” causation analysis: if the refund would not exist but for the refundable child tax credit, then the full refund is exempt. He further argued that Borgman’s discussion of attribution was dicta, that later legislative amendments repudiated that approach, and that tracing methods proposed by the trustee were inapplicable to a debtor-creditor relationship.

NACBA/NCBRC Amicus Position

Amici NACBA and NCBRC filed a brief supporting Garcia-Morales. They emphasized the historic role of exemption statutes in preserving a debtor’s fresh start and protecting family support. Their brief provided an extensive review of the history and impact of the federal child tax credit, particularly its function as an antipoverty tool. They argued that denying exemption would undermine the statute’s remedial purpose and effectively penalize families for relying on benefits designed to ensure child welfare.

The amici brief was written by Prof. Michael D. Sousa, Professor of Law, University of Denver Sturm College of Law.

The Tenth Circuit’s Decision

Judge Federico, writing for the panel, affirmed. The court held that the Colorado statute exempts “the full amount of any federal or state income tax refund attributed to” a child tax credit. Applying a plain-meaning analysis, the panel agreed with the bankruptcy and district courts that the refundable credit was a “but-for” cause of the refund. Because the $1,455 refund would not have existed without the $1,800 refundable child tax credit, the entire refund was exempt.

The court rejected the trustee’s reliance on Borgman. That case had addressed nonrefundable credits and defined “refund,” but its dicta about apportionment did not control here. The panel also declined to adopt the trustee’s proposed pro-rata approach, noting that it would effectively rewrite the statute.

Significance

This decision provides important clarity for Colorado debtors claiming exemptions for tax refunds tied to refundable credits. By embracing a “but-for” causation analysis, the Tenth Circuit reinforced that exemption statutes should be interpreted to protect the debtor’s fresh start, especially where benefits like the child tax credit are involved. For families in bankruptcy, the ruling ensures that refundable credits designed to support child welfare remain shielded from creditors’ claims.

Opinion and Briefs

Cohen v Garcia – 10th Circuit Opinion

Appellant’s Brief

Appellee’s Brief

Amici Brief

Reply Brief

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Langston v. Dallas: The Fifth Circuit’s Chance to Reinforce the Finality of Bankruptcy Deadlines

In consumer bankruptcy, finality and procedural certainty are paramount. The ability of debtors to claim exemptions—and for creditors to challenge those claims—is governed by well-defined rules that ensure the timely administration of cases. Yet, in Langston v. Dallas Commodity Company, the courts have permitted an untimely objection to stand, raising critical concerns about the enforceability of procedural deadlines and the integrity of the bankruptcy process.

At issue is Rule 2003(e) of the Federal Rules of Bankruptcy Procedure, which explicitly requires that a meeting of creditors may only be adjourned by announcing a specific date and time for continuation, followed by prompt docketing of the adjournment. In this case, the Chapter 7 trustee failed to satisfy that requirement. Nevertheless, nearly a year later, Dallas Commodity Company filed an objection to Langston’s claimed exemptions—far beyond the 30-day deadline established under Rule 4003(b)(1).

Despite the clear procedural bar, both the bankruptcy court and district court upheld the late objection, citing Peres v. Sherman (5th Cir. 2008). However, Peres was decided under a prior version of Rule 2003, which then allowed sine die continuances of § 341 meetings. The 2011 amendment to Rule 2003(e) expressly abrogated that practice, imposing a bright-line requirement that an adjourned meeting must have a scheduled continuation date. Courts across jurisdictions have acknowledged this shift, recognizing that the rule change eliminated open-ended meeting adjournments. See In re Jenkins, 784 F.3d 230 (4th Cir. 2015); In re Vierstra, 490 B.R. 146 (Bankr. D. Idaho 2013).

In its amicus brief, the National Consumer Bankruptcy Rights Center (NCBRC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) urge the Fifth Circuit to acknowledge this fundamental rule change and apply the law as written. If the trustee failed to continue the meeting in compliance with Rule 2003(e), then the meeting was effectively concluded, and the 30-day deadline under Rule 4003(b)(1) began to run. The consequence is clear: Dallas Commodity’s objection was untimely and should not have been considered.

This case presents an important opportunity for the Fifth Circuit to reinforce the principle that procedural deadlines in bankruptcy are not aspirational—they are mandatory. The Supreme Court has repeatedly emphasized that bankruptcy deadlines must be strictly enforced. See Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) (strictly enforcing Rule 4003’s 30-day deadline for objections to exemptions); Law v. Siegel, 571 U.S. 415 (2014) (holding that bankruptcy courts lack equitable authority to contravene express provisions of the Code). Allowing an untimely objection to stand undermines the predictability and finality that debtors and creditors alike rely upon in bankruptcy proceedings.

If the Fifth Circuit fails to correct the lower courts’ misapplication of Peres, it risks injecting uncertainty into the exemption process and eroding confidence in the enforceability of procedural safeguards. Clarity in bankruptcy law is essential to its function, and adherence to well-defined deadlines is necessary to ensure efficient case administration. The court should take this opportunity to affirm that Rule 2003(e) and Rule 4003(b)(1) mean what they say—and that deadlines in bankruptcy law are to be enforced as written.

Langston v Dallas Amici Brief

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Fighting for Fairness: NCBRC, NACBA, and NCLC File Amicus Brief in Michigan Bankruptcy Exemptions Battle

“Michigan’s most vulnerable debtors deserve protection—not political obstruction.”

That’s the central argument made by the National Consumer Bankruptcy Rights Center (NCBRC), the National Association of Consumer Bankruptcy Attorneys (NACBA), and the National Consumer Law Center (NCLC) in a critical amicus brief filed before the Michigan Court of Claims. These leading consumer advocacy organizations are weighing in on a legal battle that could determine the financial future of countless struggling Michiganders.

At issue is House Bill 4901 (HB 4901)—a long-overdue update to Michigan’s bankruptcy exemption laws that would allow debtors to keep their homes, cars, and basic assets while seeking financial relief. The bill passed both chambers of the Michigan Legislature. But in a stunning act of defiance, House Speaker Matt Hall and Clerk Scott Starr have refused to present the bill to Governor Gretchen Whitmer, effectively blocking it from becoming law.

NCBRC, NACBA, and NCLC have stepped in to argue that this political maneuver not only undermines democracy but has real and devastating consequences for Michigan residents who desperately need relief from crushing debt.

Why This Amicus Brief Matters

The amicus brief filed by these three consumer advocacy powerhouses makes it clear: Michigan’s outdated bankruptcy laws are leaving debtors trapped in financial ruin. The brief highlights several key points:

  • The Michigan House’s refusal to present HB 4901 violates the state’s constitutional process. Once a bill passes both chambers, it must be transmitted to the Governor.
  • Current bankruptcy exemptions are outdated and inadequate. The laws were last updated in 2005, and inflation has left homeowners and car owners with far less protection.
  • Michigan’s most vulnerable residents—seniors, widows, and those on fixed incomes—are being unfairly punished. Many are forced to sell their homes or avoid bankruptcy altogether because the law doesn’t protect enough of their assets.
  • HB 4901 was passed with bipartisan support and must be enacted to ensure that Michigan residents can get the “fresh start” that bankruptcy is meant to provide.

A copy of the brief is here: Amici Brief

What Happens Next?

The Michigan Court of Claims will now decide whether the House Speaker and Clerk must comply with the law and transmit HB 4901 to Governor Whitmer. If the court rules in favor of the Senate, it will be a victory not just for legislative transparency, but for thousands of Michigan families who are struggling to stay afloat.

Stay Updated

NCBRC, NACBA, and NCLC remain committed to fighting for consumer bankruptcy protections. Follow this case closely—its outcome will affect thousands of Michigan families.

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Tenth Circuit to Decide Dispute Over Child Tax Credit Exemption in Bankruptcy

Facts

The Tenth Circuit is reviewing a case that centers on Colorado’s bankruptcy exemption statute, which allows debtors to exempt the “full amount” of tax refunds attributed to the Child Tax Credit (CTC). The debtor, Jose L. Garcia-Morales, filed for Chapter 7 bankruptcy in 2021 and claimed an exemption for his $1,800 CTC, which resulted in a $1,455 tax refund.

The Chapter 7 trustee, Robertson Cohen, objected, arguing that the refund was only partially exempt and sought to retain $914.40 for the bankruptcy estate using a pro-rata allocation method. The bankruptcy court, and later the district court, sided with Garcia-Morales, finding that the entire refund was exempt under the plain meaning of the statute. The trustee has appealed to the Tenth Circuit.

Issues on Appeal

The case raises significant questions about how bankruptcy exemptions should be applied:

  1. Interpretation of “Attributed To”: Does Colorado’s statute require a pro-rata allocation of tax refunds based on the contribution of different sources, such as wage withholdings and the Child Tax Credit? Or does it exempt the entire refund if the CTC is a “but-for” cause?
  2. Public Policy Goals: How should bankruptcy courts balance the legislative intent of providing debtors with a financial “fresh start” against trustees’ duty to maximize estate value for creditors?
  3. National Implications: Could this case set a precedent for how other courts interpret similar exemption statutes, particularly in states that allow for federal tax credit exemptions?

Amici Brief

The National Consumer Bankruptcy Rights Center (NCBRC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amici curiae brief supporting the debtor. The key arguments include:

  • Fresh Start Policy: Bankruptcy exemptions, such as those for tax credits, are designed to shield essential assets and ensure families can maintain a minimal standard of living. Denying full exemptions for public assistance benefits like the CTC undermines this purpose.
  • Role of the CTC: The CTC is a critical part of the social safety net, aimed at reducing child poverty and supporting working families. Exempting it in full aligns with public policy and ensures its intended benefits reach families in need.
  • Trustee Incentives: Current compensation structures incentivize Chapter 7 trustees to pursue minor assets, often at a net loss to creditors. In this case, litigation costs would likely consume most of the funds the trustee seeks to recover.

Conclusion

This appeal has far-reaching implications for bankruptcy law, particularly regarding the treatment of public assistance benefits. If the Tenth Circuit affirms the lower courts’ decisions, it would bolster protections for vulnerable families by ensuring tax credit exemptions are interpreted broadly. Conversely, a reversal could encourage more aggressive challenges to exemptions, reducing the effectiveness of safety-net programs in bankruptcy.

A decision is expected later this year. Oral arguments have yet to be scheduled.

Garcia-Morales Amici Brief

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The 9th Circuit Holds A Homestead Exemption Is Limited to Statutory Cap in a Chapter 11 to 7 Conversion

The Ninth Circuit held that the failure to object to a claimed homestead exemption within the 30-day period does not allow the debtor to exempt more than the statutory limit when the case originated as a Chapter 11 bankruptcy and included conflicting representations regarding the exemptions.

Facts

Monte and Rosana Masingale filed for Chapter 11 bankruptcy in 2015, claiming a homestead exemption of “100% of FMV” (fair market value) for their residence. No party in interest objected within the 30-day window. The case was later converted to Chapter 7, and the Masingales sought to sell the home and retain all proceeds, despite the statutory cap on the homestead exemption.

Analysis

The court’s legal analysis focused on whether the initial lack of objection to the homestead exemption claim allowed the Masingales to exempt more than the statutory limit. The court distinguished this case from Taylor v. Freeland & Kronz and Schwab v. Reilly, which involved different circumstances and did not originate in Chapter 11.

The court noted that the Masingales, as Chapter 11 debtors-in-possession, owed fiduciary duties to their creditors. During the Chapter 11 proceedings, they made representations in their Disclosure Statement and Chapter 11 Plan that they were not claiming above-limit exemptions or that such exemptions would only be allowed after creditors were fully paid. These representations indicated that the homestead exemption would be limited to the statutory cap, contrary to their Schedule C notation of “100% of FMV.”

The court reasoned that these conflicting representations within the 30-day objection period affected whether the “100% of FMV” notation created a clear and objectionable exemption. The court emphasized that the fiduciary duties and specific statements made in Chapter 11 documents provided context that negated the need for an early objection based solely on the Schedule C notation. Therefore, the initial failure to object did not permit the Masingales to claim an exemption above the statutory limit.

Tips

  1. Clarify Exemption Claims: Ensure that exemption claims are clear and consistent across all bankruptcy documents to avoid disputes and objections.
  2. Understand Fiduciary Duties: Recognize that debtors-in-possession in Chapter 11 have fiduciary duties to creditors, and their representations can impact exemption claims.
  3. Timely Objections: While objections to facially invalid exemptions should be timely, consider the entire context and any additional representations made by the debtor within the objection period.

NCBRC filed an amicus brief in support of the Debtors and provided a moot court to Debtors’ counsel to prepare for oral arguments.

Masingale 9th Circuit Opinion

NACBA-NCBRC Amicus Brief in Support of Appellee

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The 9th Circuit Reviews Whether Res Judicata Applies to Exemptions

The 9th Circuit Court in Nance v Warfield is considering whether to overrule the District Court of Nevada which held that the bankruptcy court erred in overruling the trustee’s res judicata-based objection to the debtor’s federal exemptions in the property and RV. The court also concluded that the bankruptcy court exceeded its authority by sua sponte granting an exemption for the RV under the federal wildcard exemption.

Facts

Lawrence Warfield, the trustee of Johnie Lee Nance’s bankruptcy estate, objected to Nance’s claimed exemptions for his property and RV under Arizona law. After the court sustained the trustee’s objections, Nance amended his schedule to claim exemptions under Washington law, and the trustee again objected. When those objections were sustained, Nance amended his schedule to claim federal exemptions. The bankruptcy court overruled the trustee’s objections to these federal exemptions and sua sponte granted an exemption for the RV under the federal wildcard exemption.

Analysis

The district court analyzed the applicability of res judicata to the debtor’s successive exemption claims. It noted that claim preclusion, a form of res judicata, bars litigation of claims that were or could have been raised in a prior action. The court applied the three-part test for claim preclusion: identity of claims, final judgment on the merits, and identity or privity between parties. The court found that the debtor’s claims for exemptions in the property and RV, regardless of the legal framework (Arizona, Washington, or federal law), arose from the same nucleus of operative facts and involved the same property. Therefore, the claims were identical.

The court also determined that the previous rulings sustaining the trustee’s objections constituted final judgments on the merits, satisfying the second criterion. Finally, the parties involved in the objections were identical, fulfilling the third requirement for claim preclusion. Consequently, the court concluded that the bankruptcy court erred in overruling the trustee’s objections based on res judicata.

Additionally, the court addressed the bankruptcy court’s sua sponte action to grant an exemption for the RV under the federal wildcard exemption. The court emphasized the principle of party presentation, which requires courts to decide only the questions presented by the parties. The court found that the bankruptcy court exceeded its authority by granting an exemption that the debtor had not claimed, noting that the debtor, represented by counsel, could have asserted the exemption but did not. Therefore, the court held that the bankruptcy court’s action was improper and reversed its decision.

NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellant.

Warfield v Nance Amici Brief NACBA-NCBRC

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State Law Does Not Create Exemption in Trust

A state statute protecting a trust from judgment creditors is not an exemption statute for bankruptcy purposes where it was not designated as such and it did not provide unequivocal protection against all forms of collection. In re Morris, No. 21-30468 (Bankr. N.D. Ill. Jan. 13, 2023).

In his chapter 7 bankruptcy schedules, the debtor listed an interest as a potential beneficiary in a trust that did not have a spendthrift provision. The debtor claimed an exemption for the interest under Illinois law, 735 ILCS 5/2-1403 (1999), which provides:

Judgment debtor as beneficiary of trust. No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor. . . .

The trustee objected, arguing that the statute did not create a bankruptcy exemption.

Illinois is an opt-out state, so the court looked to state law to determine whether the trust interest would be exempt even though, unlike other specified exemptions like retirement plans and worker’s compensation awards, the statute at issue here did not create an explicit exemption. The court found that exemptions under the state laws are not limited to those so designated. Rather, “exempt property is any property that the legislature has identified and declared to be free from liability to processes such as seizure and sale, or attachment to satisfy debts.” The essential characteristic of an exemption “is simply whether the provision unequivocally protects the identified property against all forms of collection.”

In this case, the statute the debtor relied on was limited to protecting a debtor’s interest in a trust from judgment creditors. But the court found the chapter 7 trustee was merely gathering estate assets under section 541. He was not a judgment creditor nor was he attempting to collect on a judgment. The court quoted from In re Gutterridge, 2013 WL 395140 (Bankr. C.D. Ill., Jan. 31, 2013), discussing the same state statute, that “once a bankruptcy petition is filed, the Illinois statute in this case cannot apply to create an exemption to a trust that is otherwise simply an asset of the bankruptcy estate.”

The court noted that the grantors could have placed the trust out of reach under section 541(c)(2) by including a spendthrift provision. But the trust in this case did not do so.

The court rejected the debtor’s argument that because certain forms of collection such as levy, garnishment and attachment, all involve a judgment the state statute essentially applies to all collection actions. The court found no support for the argument in the language of the statute. Had the legislature intended to create an exemption, it could have done so.

The court concluded that the narrow language of the Illinois statute was not an “unequivocal” protection of the trust for bankruptcy exemption purposes. It sustained the trustee’s objection.

Morris Bankr SD Ill Jan 2023

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The Ninth Circuit Reviews Whether an Exemption of “100% of FMV” Protects the Entire Value of the Property Including any Post-Petition Appreciation

UPDATE: The Ninth Circuit has since decided this case. Click here to read our article discussing their ruling.

The Ninth Circuit Court of Appeals is considering whether an exemption of “100% of FMV” protects all the equity in the property, over and above the allowable exemption, and any appreciation in value post-petition.  The Ninth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court and found that an exemption claim of “100% of FMV” included the entire value of the property, not the allowable exemption. Further, the court held that this exemption claim included any post-petition appreciation because there was no objection to the exemption.  Masingale v. Munding, 644 B.R. 530 (B.A.P. 9th Cir. 2022).  The BAP held:

“Monte L. Masingale and Rosana D. Masingale filed a chapter 11 bankruptcy petition and claimed a “100% of FMV [fair market value]” exemption in their homestead. No one objected. Years later, the bankruptcy court converted the case to chapter 7. Mrs. Masingale and the chapter 7 trustee disputed the amount of the homestead exemption to which Mrs. Masingale was entitled: the chapter 7 trustee argued that she was bound by the statutory limit under § 522(d)(1), but Mrs. Masingale contended that she was entitled to the entire fair market value of the property, because no one had objected to the claimed homestead exemption. The bankruptcy court agreed with the chapter 7 trustee and approved his request to sell the property, limiting the homestead exemption to $45,950.

“Mrs. Masingale appeals, arguing that the bankruptcy court erred in determining the amount of the homestead exemption. We agree with Mrs. Masingale. We REVERSE the portions of the order on appeal that determine the amount of the homestead exemption and REMAND. We publish to explain the effect of a “100% of FMV” exemption claim and to reiterate that parties must timely object to any improper exemption claim, no matter how frivolous. …

“As a matter of first impression, we hold that the Masingales’ claim of an exemption equal to “100% of FMV” includes postpetition appreciation and becomes incontestable if there is no timely objection. The snapshot rule is one of the limits on a debtor’s entitlement to exemptions. Taylor holds that, if no one objects, the debtor can get the benefit of exemptions to which the debtor is not entitled. In other words, in order to get the benefit of the snapshot rule, a trustee or party in interest must object to an exemption claim that contradicts that rule.”

The case is tentatively set for oral argument in early December 2023.

Appellant Trustee Munding Brief

Appellee Masingale Brief

NCBRC Amicus Brief In Support of Appellee – Masingale

Appellant Trustee Munding Reply Brief

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“Sham” Carve-Out Agreement Rejected

Calling the agreement a “sham,” the district court affirmed the bankruptcy court’s denial of a carve-out agreement between the chapter 7 trustee and the state and federal tax creditors. The court found the agreement would adhere to no one’s benefit but their own. The court also upheld the bankruptcy court’s finding that the debtor’s homestead exemption applied to section 724(b). Summerlin v. Turnage (In re Turnage), No. 22-122 (W.D. N.C. March 14, 2023).

The 72-year-old widowed debtor living on Social Security income and help from her son, filed for chapter 7 bankruptcy. She claimed an exemption of $55,000 in her home which she valued at $124,510.00. Her secured debts at the time of her petition totaled $231,788.29, and consisted of a mortgage on her home and both federal and state tax debts.

The chapter 7 trustee valued the debtor’s home at between $175,000 and $180,000. He objected to her exemption as inapplicable to her tax liens under North Carolina law. He then entered into a carve-out agreement with the debtor’s tax creditors under which he would receive $30,000 for his expenses and “[t]he IRS and NCDOR each get 60% of their secured tax liens. The remaining 40% carved out of the tax liens (approximately $38,000 after payment of the Trustee’s expenses) would be used to pay priority unsecured claims in full and the remainder would be disbursed pro rata among the general unsecured creditors.” He moved the court for authority to sell the property so he could carry out this distribution plan.

The bankruptcy court denied the motion to sell and overruled the objection to the debtor’s exemption. The trustee appealed to the district court.

The court found the appeal turned on application of section 724(b). In addition to establishing the order of distribution where tax liens are involved, that section provides that after the first mortgage is paid off, claimants holding certain types of priority claims may substitute in for the tax lien to the extent of the tax lien. The court noted that the only priority claim that would be available to substitute in for the tax lien would be the trustee’s own compensation, related primarily to the sale of the debtor’s home.

Notably, section 724(b) makes no provision for exemptions. Because North Carolina opted out of the federal exemptions, the court turned to state law to determine how the debtor’s homestead exemption would fare under a section 724(b) distribution scheme. It found state law emphasizes a liberal construction of exemption laws, favoring their application.

The court was unpersuaded by the trustee’s argument that permitting the debtor to take her homestead exemption would impinge on the tax liens. The court differentiated between the homestead exemption’s applicability to proceeds from sale of the home and its applicability to the tax liens themselves. It found that “once the tax agencies agree to the carve-out they cannot direct the allocation of the value created by such carve-out.”

Finally, the court noted with distaste that the carve-out benefited only the trustee and the tax agencies. It stated: “for her ‘fresh start,’ the Debtor, a 72- year-old widow with no meaningful source of income, loses her home and gets no more than a check for about $2,000. The minimal benefit to the other general unsecured creditors does not obscure the reality of this agreement.”

The court affirmed the Bankruptcy Court’s decision that the Debtor’s homestead exemption applies to section 724(b) and its denial of the Motion to Sell.

Turnage WD NC March 2023

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Trustee Entitled to Attorney’s Fees for Exemption Dispute

Where the debtor’s original exemption claim was for bodily injury, the trustee had a reasonable argument that the actual post-petition settlements of her personal injury case, which specified that they were for non-bodily injury damages, did not fall under that exemption. Because the trustee’s objection related to the post-settlement exemption claim, it was timely. Biondo v. Gold, Lange, Majoros & Smalarz, P.C., No. 22-1666 (6th Cir. Feb. 8, 2023).

Before filing for Chapter 7 bankruptcy, the debtor was in a car accident. In her bankruptcy filings, she listed the personal injury claim with an unknown value. She claimed an exemption in potential recovery, tracking the text of section 522(d)(11)(D), for “payment[s]” she received “on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss.”

The trustee did not object to the exemption. He hired a law firm to litigate the debtor’s claims against the driver of the other vehicle and the debtor’s insurance company. The insurance company settled for $48,500 specifically covering “medical expenses, attorney’s fees, ‘lost wages,’ and all ‘other forms of economic or non-economic loss.’” The driver of the other car settled for $70,000, covering “pain and suffering.”

The debtor moved to compel the trustee to turn over $23,675 from the settlement recovery arguing that the funds were exempt under section 522(d)(11)(D). She and the trustee settled the exemption claim, and the trustee moved to recover $2,880 in attorney’s fees he incurred in litigating the motion to compel. The debtor objected, arguing that the attorney’s services did not fulfill the requirement under section 330(a)(1)(A) that they be either reasonably likely to benefit the estate or necessary to the administration of the case. The bankruptcy court granted the trustee’s request for fees, and the district dismissed the appeal as equitably moot.

The debtor appealed to the Sixth Circuit.

The court began with the parameters of section 522(d)(11)(D)’s exemption, finding that while funds resulting from personal bodily injury are exempt, the exemption does not include “payments for pain and suffering and pecuniary losses.” The exemption is also typically interpreted to exclude payments for medical bills. Here, the two settlements specified that they were for damages other than personal bodily injury. For that reason, the circuit court found the trustee’s objection to the exemption was reasonable and for the benefit of the estate.

The debtor argued that the trustee forfeited his opportunity to object to the exemption because he failed to do so when she filed the exemption claim in her original bankruptcy schedules.

Under section 522(l), in the absence of a timely objection, an exemption is automatically allowed. Citing Mercer v. Monzack, 53 F.3d 1 (1st Cir. 1995), the court found that “exemptions should be unambiguous and should be read to conform with the law.” The debtor must therefore unambiguously identify a particular property as exempt before the clock begins to run.

Here, the debtor’s claimed exemption related only to recovery for bodily injury, as contemplated by section 522(d)(11)(D). It was not until the actual settlements were reached that the debtor at least arguably attempted to apply the exemption to non-bodily injury recovery. The trustee’s post-settlement objection was related to the debtor’s recovery based on medical expenses and other pecuniary losses, as well as pain and suffering. Because the actual funds the debtor sought to exempt differed from the description in her claimed exemption, the court found her original exemption claim did not trigger section 522(l)’s clock and the trustee’s objection was not time-barred. While the trustee could have lodged a prophylactic objection to the debtor’s exemption from the outset, he was not obligated to do so.

Because the district court’s finding that the appeal was equitably moot was not jurisdictional, the circuit court declined to address that issue.

The court affirmed.

Biondo 6th Cir Feb 2023