Ninth Circuit Makes It More Difficult for Debtors to Retain Exemptions
Background
Debtors file bankruptcy to obtain a fresh start. In exchange for a discharge of debts, debtors are required to turn over their assets to a trustee who liquidates them for the benefit of creditors. An individual debtor, however, is entitled to exempt from the bankruptcy estate and retain certain assets that the law has provided are necessary for the debtor to have a “fresh start.” For example, household furnishings and clothing are usually exempt as is a limited amount of equity in a home or automobile.
When filing a bankruptcy petition, the debtor schedules a complete list of assets and then claims which of them are exempt. Bankruptcy Code § 341(a) requires that a debtor meet with a trustee and his creditors to answer questions about his schedules and claimed exemptions. All creditors are notified of this “meeting of creditors” or “341(a) meeting” when they are first notified of the debtor having filed a bankruptcy petition. The law further provides that the creditors and bankruptcy trustee have until thirty days after the conclusion of the 341(a) meeting to object to the assets the debtor claims is exempt.
The Court’s Decision
Often debtors’ schedules are not complete, or the trustee learns of information at the 341(a) meeting that requires further investigation. The bankruptcy law allows the trustee to “adjourn” a meeting by “announcement at the meeting of the adjourned date and time.” Thus, a meeting does not have to be concluded at the first meeting, so as to extend the time for creditors and the trustee to object to exemptions.
In the case of In re Smith, 2000 Daily Journal D.A.R. 8721 (August 8, 2000), the trustee adjourned a meeting “until further notice.” Since the date and time of the adjourned meeting was not announced, the debtor claimed that this was not a proper adjournment, that the meeting was concluded, and the thirty-day period for objecting to his exemptions had started to run. The Ninth Circuit Court of Appeals decided in favor of the creditors who claimed that they could object to the exemptions more than thirty days after that meeting. The Court held that unless the debtor moves to conclude a 341 (a) meeting, it is possible for a trustee to extend it indefinitely and thus, the period to object to exemptions.
Why This Case Is Important
In practice, 341(a) meetings are conducted very quickly, usually lasting less than five minutes. If an issue comes up that interests the trustee, he or she will usually adjourn the meeting to a date certain. Now, the trustee can simply say I will give you notice when I will hold a further hearing.
Trustees are often not clear at the end of a meeting. They may simply say “Thank you,” not state a further date, and move onto their next case. It is now important for debtors’ counsel to be certain that the meeting is “concluded” on the record.
Creditors have a new weapon. A creditor who hopes to develop information to use against the debtor can now suggest to the trustee that he or she will develop and provide further information and ask the trustee to keep the meeting open “until further notice.” In short, the debtor’s attorney has new burdens to be certain to conclude 341(a) meetings on the record. Creditors may have more opportunities to challenge exemptions.
