Court Denies Trustee’s Effort To Strip Debtor’s Exemptions

Is it ever possible for a Chapter 7 trustee to take a debtor’s exempt assets? The answer is “yes” in extraordinary cases. The issue was addressed in a recent bankruptcy court decision.

A debtor filed Chapter 7 bankruptcy and omitted from his schedules a contract he had already entered in to for the purchase of an investment property. The debtor had intended to “flip” the property for a profit. More than a year after filing the petition, the debtor did in fact sell the property for a significant profit.

The Trustee obtained a judgment in bankruptcy court ordering the debtor to pay the profit to the bankruptcy estate. The Trustee further asked the court to make the debtor turn over exempt assets to pay the judgment. The Trustee argued that the debtor’s failure to list the contract to purchase as an asset warranted a “surcharge” on the debtor’s exemptions.

The court denied the Trustee’s motion to attack the debtor’s exempt assets. The court said that it had the authority to order turnover of exempt assets only when the debtor engaged in fraud or exceptional misconduct. The court found that there must be conduct worse than failing to disclose a contract interest and turn over property before the court could take away a debtor’s lawful exemptions.

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