Bankruptcy Schedules, Exemptions and Debtor Bad Faith . . .
Are Amendments to Bankruptcy Schedules Freely Allowed?
Once a Chapter 7 bankruptcy case is filed, how much time does a Debtor have to amend the schedules? Suppose you filed a joint Chapter 7 bankruptcy case with your spouse, and subsequently after you received your bankruptcy discharge, your spouse unexpectedly passes away. Suppose even further that you then discover that your deceased Spouse had named you as a beneficiary of a life insurance policy of which you had no such knowledge a policy existed. Moreover, your interest to the life insurance proceeds were acquired prior to 180 days of your case filing, and that your beneficiary interest in that policy had existed at that time as well. And of course, your bankruptcy petition reflects no mention of the life insurance policy. But, fortunately for you, your chapter 7 case was not closed.
Under section 541(a)(5)(C) of the bankruptcy code, the insurance policy would be deemed property of the estate. Can you amend your petition to add the life insurance policy proceeds and exempt that asset under section 522(d)(11)(C)? The Sixth Circuit Court of Appeals in Lucius v. McLemore, 741 F. 2d 125 (6th Cir. 1984) held that pursuant to Bankruptcy Rule 1009, a debtor may amend his filed schedules to exempt property 'as a matter of course at any time before the case is closed'. But, that Court did however hold in part, the notion of Bad Faith on the part of the Debtor or where the Debtor actively concealed the property, as a possible reason that a Court could disallow the amendment/exemption.
What about the Debtor's Bad Faith/property concealment under LAW V. SIEGEL?
The Supreme Court addressed the issue of bad faith and the concealment exception in the case of Law v. Siegel, 134 S. Ct. 1188 (2014), when it held, with certain exceptions contained under section 522(c), that a debtor can exempt an asset even when the debtor fraudulently conceals an exempt asset. The Court essentially nullified the Bankruptcy Court's general powers of equity under section 105 the ability to deny a debtor to claim an exemption which resulted from the debtor's bad faith conduct. However, the Court did state that their holding only applied to Federal law when a Debtor uses the Federal exemptions and not State law when the Debtor chooses to use the State exemptions.
What's the end game? The proceeds to the insurance policy can be exempted provided the case had not closed. This issue was dealt with in the matter of In Re Burton, case no. 15-31915-dof 2017 in the Eastern Dist. Southern Div.-Flint.
Always keep your attorney informed!
It's important to note that the Debtor has a duty to report to your attorney and the Trustee any interest in property that would have been property of the estate if that interest had been an interest of the debtor on the date your case was filed, and that the debtor acquires it or becomes entitled to acquire it within 180 days from your case filing date. So, bequest, devise, inheritance, property settlement agreement via divorce, or beneficiary of a life insurance policy or death benefit plan etc., can suddenly become property of the estate. So if this happens, let your attorney know asap so that you can be properly advised and make sure the Trustee is informed as well.
Always go with the experienced skilled bankruptcy Attorney!
Most importantly, bankruptcy law can be very challenging and fraught with potential issues, which may impact your case and your assets. Moreover, bankruptcy law is constantly changing with recent case decisions, and procedural amendments etc. Thus, for those reasons and many more it is always sound advice to choose an experienced and skilled consumer bankruptcy attorney to guide you safely through a personal bankruptcy. With an experienced, skilled consumer bankruptcy attorney, issues like the one I just described in this blog just saved that debtor an interest in life insurance proceeds up to the allowable amount of exemptions available.