When filing for bankruptcy, debtors must disclose all of the property they own on bankruptcy forms along with other financial information. You won't lose all of your assets, however. Filers can keep anything protected by their state exemption laws.
In some cases, a creditor or the bankruptcy trustee appointed to the case won't agree with the exemption and will challenge it by filing an objection. Objections to exemptions get resolved at a hearing in the bankruptcy court.
Creditors and trustees alike have a financial incentive to ensure that the debtor strictly abides by exemption laws. Not only does the Chapter 7 trustee sell all nonexempt property and distribute the funds to creditors, but the Chapter 7 trustee receives a percentage of the proceeds. Similarly, in Chapter 13, the debtor must pay creditors an amount equal to the value of the nonexempt assets, and the Chapter 13 trustee receives a percentage of all funds dispersed to creditors. Learn more about how bankruptcy trustees get paid and why it matters.
Example. Michael doesn't want to lose his houseboat worth $10,000 when he files for bankruptcy. Because houseboat exemptions don't exist, he decides to be creative and uses the homestead exemption. When reviewing his bankruptcy forms, the trustee notices the odd exemption and objects to it because the houseboat doesn't qualify as a "residence" as required by the homestead objection. The bankruptcy judge sides with the trustee, and as a result, Michael’s creditors receive an additional $10,000, minus the trustee's fee.
The objecting party must file an objection to exemptions within thirty days after the conclusion of the 341 meeting of creditors—the one hearing all filers must attend—or after an exemption list amendment (change). If a creditor or the trustee files an objection to exemption after the deadline has passed, the bankruptcy court won't consider the objection. A court can extend the time for cause (a good reason), and while there are several exceptions to the 30-day deadline, they don't apply to most debtors.
Also, the trustee or creditor must serve a timely-filed objection on the debtor, the debtor's attorney, and any other interested parties. The clerk will schedule a hearing will before a bankruptcy judge. The debtor and any interested parties will have a specified time to respond.
At the hearing, the creditor has the burden of proving that a particular exemption is improper. The most common challenges to a debtor's exemptions include:
If the trustee or creditor challenges the property value, the proper date of valuation is the petition filing date. Any increase in value after the petition date won’t be part of the bankruptcy estate.
Defending an Objection to Exemptions
At the hearing, the debtor will want to show that the exemption is appropriate and that the value of the property is accurate. Often, these disputes are resolved informally without a hearing. But if a hearing is needed, debtors and creditors commonly present appraisals or expert testimony to prove the value of the property.