What Happens If My Bankruptcy Trustee Objects To My Exemptions?

You call your lawyer! Prior to filing, part of the analysis that an experienced bankruptcy attorney will perform is the applicability of the exemptions allowed in your jurisdiction to the assets you hold. If there is a reasonable risk of an exemption being objected to, they will advise you of the risk and potential repercussions prior to the case being filed. Keep in mind that the law is always evolving and is, at times, unsettled. Legitimate arguments can be raised over the applicability of exemptions to specific types of assets. For example, most exemption laws were written well before cryptocurrencies were a real thing.

As a practical matter, objections to claimed exemptions are relatively rare. In order to object to an exemption, the trustee must prepare and file an objection clearly stating the basis for the objection with the court. You, of course, have the opportunity to file a response to the objection and make arguments in support of allowing the exemption to be claimed. Discovery can be performed and, if it gets that far, the matter can be litigated in front of the court. The judge will make a decision and prepare an opinion on the issue, which can be taken through the appeals process. In reality, most issues surrounding exemptions are negotiated directly with the trustee and resolved without the cost and burden of litigation.

The effects of an objection to an exemption vary with which chapter of bankruptcy protection you have elected to file. In Chapter 13, if an exemption is reduced or completely disallowed, it simply increases the amount of unprotected equity in the bankruptcy estate and will require an increase in distribution to unsecured creditors in order to protect the now non-exempt asset. In plain English, it may require your monthly payment to the trustee to increase. In Chapter 7, the effects are a bit more severe. If an exemption is reduced or disallowed, creating unprotected equity in an asset, the Chapter 7 trustee has a nearly absolute right to liquidate the asset for the benefit of your creditors. Depending on your specific circumstances, your jurisdiction and the level of aggression of your trustee, you may be able to protect the now non-exempt asset by converting the case to Chapter 13, however conversion to Chapter 13 from Chapter 7 is not an absolute right of the debtor. The trustee can object to the conversion and, depending on the circumstances, may win on that objection as well, leading to the liquidation of the asset in question.

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