New First Circuit Case on Claiming Exemptions

The U.S. Court of Appeals for the First Circuit recently issued an important opinion concerning the claiming of exemptions in bankruptcy cases. In re Barroso-Herrans, 2008 WL 1960365 (1st. Cir 2008) the Court heard the appeal of a Chapter 7 debtor who had attempted to exempt proceeds from two collection lawsuits by listing their value as $4,000 and claiming an exemption for this same $4,000. The trustee did not object to the exemption. The trustee subsequently reached a settlement with the third-party for $100,000 and sought the bankruptcy court's approval. The debtor claimed that he had effectively exempted the entire suits and their proceeds, and was re-vested with the lawsuit assets upon expiration of the period for objections to exemptions. The First Circuit disagreed an provided useful guidance for a debtor wishing to exempt an entire asset, regardless of its ultimate value, from his bankruptcy estate. The Court endorsed the use of terms such as "100% [of the property's value]," "unknown," "to be determined," "tba" and "$1.00" when expressing an asset's value to achieve this end. The Court stated that these terms are "red flags" to trustees and creditors that "put them on notice that if they do not object, the whole value of the asset-whatever it might later turn out to be-will be exempt."

The Court cited but disagreed with the view that simply listing the value of an asset in the same amount as its exemption is enough to bring the asset itself outside of the bankruptcy estate after expiration of the objection period.