The "Snapshot Rule" and Proceeds of Exempt Property in Chapter 7: Bringing a Doctrine Into Focus.

• Author: Bartell, Laura B.

Few bankruptcy doctrines are as universally accepted as the "snapshot rule," the idea that bankruptcy exemptions are fixed as of the moment the bankruptcy petition is filed. (1) But application of the rule is much more problematic than its expression, especially when the allegedly-exempt property constitutes proceeds of exempt property. In this article I suggest that courts have unduly complicated the application of the snapshot rule, becoming confused when applicable law provides for exemptions in proceeds that are of limited temporal duration.

In the first Part I will discuss the genesis of the snapshot rule, what it means, and how it operates (with certain limitations) in a bankruptcy case.

Then in Part II I will look at the state exemption statutes that impose limitations, especially temporal limitations, and how those exemptions are applied when the debtor has filed for bankruptcy protection and is applying state exemptions. In particular, I look at how courts differ in their understanding of how temporal limits on state exemptions covering proceeds of exempt property are applied when the exempt property is sold prior to the bankruptcy filing. I then proceed to critique their reasoning.

I conclude by advocating a return to basic principles and the policy behind the snapshot rule and exemptions. Because the trustee assumes the position of a lien creditor, the test for the applicability of an exemption should be a simple one-could a lien creditor reach the proceeds at issue at the moment of the filing of the petition. If not, the proceeds are exempt; if so, the proceeds are not exempt. And if proceeds are exempt, they are removed from the property of the estate and become property of the debtor, where they are either exempt or not from the claims of postpetition creditors under applicable state law.

1. THE SNAPSHOT RULE

   Courts trace the snapshot rule to language in the Supreme Court case of White v. Stump. (2) The debtor Stump submitted schedules upon his bankruptcy filing, which listed property on which he and his family resided, but failed to claim a homestead exemption for the property. Under the applicable law of Idaho, (3) a homestead exemption arose only after a formal declaration of homestead was executed, acknowledged and filed in the real estate records. (4) Those actions did not occur until a month after the bankruptcy filing. The Supreme Court concluded that the debtor could not claim the exemption:

   [T]he point of time which is to separate the old situation from the new in the bankrupt's affairs is the date when the petition is filed.... When the law speaks of property which is exempt and of rights to exemptions, it of course refers to some point of time. In our opinion this point of time is the one as of which the general estate passes out of the bankrupt's control and with respect to which the status and rights of the bankrupt, the creditors and the trustee in other particulars are fixed.... [O]ne common point of time is intended, and that [] is the date of the filing of the petition. The bankrupt's right to control and dispose of the estate terminates as of that time, save only as to 'property which is exempt.' Section 70a. The exception as its words and the context show, is not of property which would or might be exempt if some condition not performed were performed, but of property to which there is under the state law a present right of exemption-one which withdraws the property from levy and sale under judicial process. (5) The snapshot rule seems to focus on the time the petition is filed for two different purposes in claiming an exemption. First, it makes that moment the date at which applicable exemption law is determined. Second, the facts and circumstances of the debtor at the time the petition is filed also determine whether the exemptions are applicable. If the exemption is subsequently established by reference to the time the petition is filed, the exempt property is once again subject to "[t]he bankrupt's right to control and dispose" of it. (6)

   The first aspect of the snapshot rule is universally accepted. If the law by which the debtor's exempt property is determined is amended after the date the petition was filed, the amendments will not apply to the debtor. (7) The issue most frequently arises when the debtor filed a petition under one chapter and later converts to another after an amendment to the applicable state law exemptions. (8) If the debtor has elected to apply the federal exemptions, the Bankruptcy Code explicitly provides that adjustments to exemption amounts (among other adjustments), which are made at three-year intervals under Section 104(b), "shall not apply with respect to cases commenced before the date of such adjustment." (9)

   The second aspect of the snapshot rule would seem to be easy to apply. But as discussed in Part II, when the applicable exemption in effect when the petition is filed conditions the continued effectiveness of the exemption on future actions of the debtor, courts are uncertain whether the failure of the debtor to take those future actions destroys the exemption that existed on the petition date.

   Despite the common understanding of the snapshot rule, bankruptcy exemptions are not technically fixed on the filing date, because exemptions cannot become effective until they are properly claimed. At the date the bankruptcy petition is filed, "all legal or equitable interests of the debtor in property as of the commencement of the case" that are not statutorily excluded are included in the bankruptcy estate. (10) At that moment-the moment contemplated by the snapshot rule-property of the estate includes property that may subsequently be claimed as exempt by the debtor. (11) In fact, Section 522(b)(1) expressly permits an individual debtor to "exempt from property of the estate" the property specified in Section 522(d) (12) or property that is exempt under state or local law applicable on the date of the filing of the petition. (13) Under Section 522(1), the debtor is directed to "file a list of property that the debtor claims as exempt." (14) Under Fed. R. Bankr. P. 4003(a), that list is required to be provided "on the schedule of assets required to be filed by Rule 1007." (15) The schedule of assets (and the other schedules, statements and other documentation described by Rule 1007, with certain exceptions) must be filed in a voluntary case "with the petition or within 14 days thereafter." (16) If the debtor fails to claim exemptions within that time, "a dependent of the debtor may file the list within 30 days thereafter. (17)

   If no party in interest objects to the list of exempt property, "the property claimed as exempt on such list is exempt" from property of the estate. (18) But parties in interest have the right to file an objection to the list of claimed exemptions "within 30 days after the meeting of creditors held under [section] 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later." (19) In a chapter 7 case, the meeting of creditors must be held no fewer than 21 and no more than 40 days after filing. (20) A debtor may amend the list of exempt property "as a matter of course at any time before the case is closed." (21) If there is an objection to the list, the party seeking to deny an exemption must file a motion and serve the motion and notice of hearing not later than seven days before the time specified for the hearing. (22) At the hearing, the objecting party has the burden of proving that the exemption is not validly claimed. (23) The court then deter mines the issue. (24)

   Until these time periods expire, at least 51 days after the date the petition is filed (if the debtor files the list of exemptions with the petition, the meeting of creditors is held at the earliest possible date and no party in interest objects to the list), and potentially much longer, there is no exempt property. The date of the filing of the petition does not really reflect a time when property is no longer under the control of the trustee as property of the estate, but a time at which the facts establishing that the debtor may claim the exemption must be true under the applicable law, which will be weeks before the property is actually exempt.

   And these rules describe only the initial schedules generally filed by the debtor with the bankruptcy petition. The debtor has the right to amend the schedules filed with a voluntary petition in bankruptcy, including the schedule setting forth debtor's claimed exemptions, "as a matter of course at any time before the case is closed." (25) If the debtor amends the schedule of exemptions, a party in interest may object to the amended claimed exemptions "within 30 days after any amendment to the list, or supplemental schedules is filed," subject to extension by the court if a party in interest requests an extension before that time expires. (26)

   And that timetable applies only to property that becomes property of the estate at the date the petition is filed. Section 541 contemplates that certain interests in property that the debtor acquires after the filing date may also become property of the estate. These are interests acquired by the debtor within 180 days after the filing date "by bequest, devise, or inheritance" or "as a result of a property settlement agreement with the debtor's spouse" or a divorce decree, or "as a beneficiary of a life insurance policy or of a death benefit plan." (27) (Certain interests in property acquired by the trustee or the estate-as opposed to the debtor-after the bankruptcy filing are also included in property of the estate.) (28) These postpetition acquisitions of property may include property that the debtor asserts is exempt (29)

   The debtor is required to file a supplemental schedule of this property acquired by the debtor postpetition and, "[i]f any of the property required to be reported ... is...