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Monday, March 7, 2016

Fair Market Value Exemptions in Chapter 7 Bankruptcy

 In  Schwab v. Reilly130 S. Ct. 2652 (2010) the United States Supreme Court made an important ruling effecting the treatment of exemptions for debtors' assets. The debtor in that case valued and exempted under the federal exemptions her business equipment at $10,718.00. Her clear intention was to exempt all of her business equipment to retain her ownership post-bankruptcy. The Chapter 7 trustee did not object to her exemption within the requisite 30 day period. Nevertheless the trustee did file an application with the court to appoint an auctioneer to sell this business equipment to net any proceeds above the exemption amount after fees and costs involved. The bankruptcy court denied the trustee's motion to sell based on the premise the assets were fully exempted., This ruling was upheld by the Third Circuit on appeal. Judge Thomas wrote a majority decision for the Supreme Court which reversed and remanded this decision ruling in part that with a facially valid exemption claimed by the debtor it is too burdensome to require a Chapter 7 trustee to object to the exemption. The court further clarified that a debtor can signal it intends to exempt the entire asset by listing the exempt value as either "fair market value (FMV)" or "100 percent of FMV". One can certainly argue that the Third Circuit's reasoning that the debtor intended to exempt the 100% of FMV by valuing and exempting the equipment assets at $10,718.00 was enough. The Supreme Court has added this extra requirement to make it more than clear when a debtor is exempting the full value of an asset. The result of the subject case is telling since by avoiding an objection to exemption hearing re: valuation of the equipment assets the trustee clearly placed the debtor in a difficult position. One can presume she exempted this business equipment to continue to use it in her business to generate income, The trustee now had the ability to seize this property to sell it. The likely result is that debtor would settle with the trustee and possibly pay even more than what the trustee would recover at auction to maintain possession of this business equipment to keep her business running.
     Therefore, in exempting assets like business equipment where a debtor provides a value that may be subject to question claiming 100% of FMV is a necessity based on ruling in Schwab v. Reilly.


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