In Schwab v. Reilly, the Supreme Court has ruled that bankruptcy debtors are protected only up the value they claim exempt in their bankruptcy petitions. A divided Supreme Court ruled that bankruptcy debtors do not exempt the full amount of an asset by claiming an exemption equal to the full scheduled value of the asset. If it later turns out that the asset is worth more the amount scheduled in the bankruptcy petition, the trustee may assert the estate’s interest in the excess value even though the trustee did not object to the debtor’s claimed exemption in the full scheduled amount of the asset.
What this Supreme Court decision means for Georgia Bankruptcy Debtors is that debtors must be extremely careful when listing a value of an asset. For example, lets say a person in Rome, GA wishes to file Chapter 7 and thinks their house is worth $100,000.00. They owe only 95,000.00. Thus, they have $5,0000.00 worth of equity in the house. Let’s say this Rome person files Chapter 7 claiming only a $5,000.00 exemption. The Chapter 7 trustee believes that the house is worth $110,000.00. To the horror of the Rome debtor, the Trustee finds a buyer willing to pay this price. In this scenario, the debtor will receive a check for $5,000.00 and the rest of the proceeds get used to pay their creditors.
In Schwab v. Reilly, the issue was valuation of catering equipment. In this case, the debtor made a low estimate $10,718.00 for the value of the catering equipment and exempted all of the value. The Chapter 7 trustee never filed any objections to the debtor’s valuation of the catering equipment. Later on in the case, an appraisal revealed that the equipment was worth $7,000.00 more than what the debtor had listed in the bankruptcy petition. At that point, the Chapter 7 trustee asked the Bankruptcy Court for permission to auction the equipment so that $7,000.00 difference could be used to pay creditors. The debtor objected to sale on the basis that Rule 4003(b) requires a Chapter 7 Trustee to object to a debtor’s claimed exemptions within 30 days after the creditor’s meeting. The Supreme Court ruled that the Chapter 7 had no duty to object because the exemption amounts were not in excess of the Bankruptcy Code limitations.
The lesson of this case is that any person who is considering filing bankruptcy in Georgia should understand is that you won’t get to keep an asset just because you make a low valuation of it. If it turns out to be worth more than what you say in your bankruptcy petition, the Chapter 7 trustee may sell it.
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