‘Wildcard’: Unused bankruptcy exemption OK even if not debtor’s principal residence

A Chapter 13 bankruptcy debtor may claim the unused portion of her exemption in personal property even though she did not use the property as her principal residence, the Western District of Virginia has held.

The trustee agreed that the debtor could claim property up to $6,499 if not used as her principal residence under Va. Code § 34-4, but disputed whether she could claim $1 in real property and claim the unused $24,999 as exempt under Virginia Code § 34-13.

U.S. Bankruptcy Judge Rebecca B. Connelly found no such limitation in § 34-13.

“By its terms, when the householder is entitled to an exemption under Virginia Code §§ 34-4 or 34.1, but has not exhausted it, then she may use Virginia Code § 34-13 to exempt any personal property up to the exemption value allowed under Virginia Code §§ 34-4 or 34-4.1,” the judge explained in In re: Nicole J. Poullath (VLW No. 024-4-012).

Appeal expected

Although this use of the § 34-13 exemption is novel, Lynchburg attorney Stephen Dunn was surprised the trustee has fought so hard against his client, a widowed, single mother of three.

“We believed this was the perfect case to qualify for the exemption,” he told Virginia Lawyers Weekly. “The legislators clearly did not change § 34-13 when they amended § 34-4 to increase the householder exemption.”

However, he noted the judge’s reference to the 2024 House Bill 1339, which amends § 34-13 to prevent this use of the exemption.

Adding to the uncertainty, Dunn said the trustee has moved to extend the time for appeal until April 11; Connelly will decide after an April 18 hearing whether to stay her order pending appeal.

“Debtors’ attorneys are afraid to file chapter 7 because, if this order is stayed and extended, the trustees will refuse to confirm any cases which claim the exemption, which basically breaks the bankruptcy process,” he cautioned.

Angela Scolforo, the trustee in this matter, declined to comment on ongoing litigation.

Exemption claim

During her Chapter 13 bankruptcy, Nicole Poullath claimed an exemption of $1 for her residential real estate under Va. Code § 34-4, as well as personal property she didn’t use as her residence in the combined amount of $6,262.67.

The bankruptcy trustee agreed that Poullath was entitled under § 34-4 to an exemption of $6,500 in any real and personal property because she had three dependents. The exemption grows to $25,000 if the property was her primary residence.

However, the trustee disputed whether Poullath could claim $24,999 — the unused portion of her personal property exemption under § 34-4 — as exempt under § 34-13 if it wasn’t used as her primary residence.

The trustee argued that § 34-13 wasn’t an exemption statute and said § 34-4 specifically limited the $25,000 exemption to property used as the debtor’s principal residence. Thus, any use of § 34-13, based on its cross-reference to § 34-4, similarly must be limited.

Poullath contended § 34-13 was indeed an exemption statute that plainly served as a “catchall (wildcard) to broaden the application of the exemptions referenced above not otherwise claimed and exhausted.”

Set apart

Connelly broke down § 34-13’s language, beginning with its reference to a householder who “does not set apart any real estate as before provided.”

“The phrase ‘set apart’ is the means of claiming an exemption in specific property,” she noted, adding that § 34-13’s placement in Title 34 indicated that “as before provided” would refer to the sections preceding the statute.

“And so, the sentence ‘if the householder does not set apart any real estate as before provided’ can be stated differently as ‘if the householder does not claim an exemption in real estate using Virginia Code §§ 34-4 and 34-4.1,” Connelly wrote.

If a householder sets apart an amount of real estate that doesn’t exceed the total amount he is entitled to hold exempt, “then ‘he may … select and set apart … personal estate, the value of which, when added to the value of the real estate set apart, does not exceed such total value,’” the judge said. “Putting it together, if the householder either has not claimed an exemption in real estate or has claimed an exemption in real estate but has not exhausted the amount he is entitled to claim (under §§ 34-4 and 34-4.1) as an exemption in real estate, then he may claim (by the means required under § 34-14 to exempt property under § 34-4) an exemption in personal property to the extent its value, when added to the value of his exemption in real estate does not exceed the total amount permitted under §§ 34-4 and 34-4.1.”

The terms of the statute entitled a householder to claim an exemption under §§ 34-4 or 34.1 and then use § 34-13 to exempt any personal property up to the unused exemption value allowed under §§ 34-4 or 34-4.1.

Exemption statute

Connelly found § 34-13 was an exemption statute.

The judge said the title of chapter 34 — “Homestead and Other Exemptions” — indicates that its sections pertain to exemptions, while § 34-13 dealt with means of claiming personal estate exemptions, which strongly suggested it was an exemption statute.

“More than simply these indicators, the statutory language found in other sections of Title 34 bolsters the conclusion,” she said.

Similarly, language in § 34-14 regarding how to set apart personal property exemptions suggested § 34-13 was an independent exemption basis.

“The last sentence of § 34-14 states: ‘[s]uch writing or deed shall not be required to secure any exemption under this Code except those exemptions created by §§ 34-4, 34-4.1 and 34-13,” Connelly wrote. “The reference to ‘exemption created by § … 34-13′ indicates Virginia Code § 34-13 is an exemption statute.”

The language of § 34-21 — entitled “When householder’s right to exemption is exhausted” — also suggested that § 34-13 was an independent exemption basis.

“When § 34-21 refers to ‘property … has to be set apart … as exempt under § … 34-13′ and ‘the householder is entitled to set apart as exempt under § … 34-13,’ the section is describing § 34-13 as an exemption statute,” the judge wrote.

$25,000 exemption

The trustee argued that none of the $25,000 exemption under § 34-4 was available to claim as personal property exempted by § 34-13 because neither Poullath nor her dependents used the property as a principal residence.

Accordingly, the trustee said Poullath’s inability to exempt $25,000 of personal property pursuant to § 34-4 meant that amount was unavailable to her under § 34-13.

Connelly said the trustee was correct that § 34-4 limited the $25,000 exemption to real or personal property used as the householder’s principal residence.

However, § 34-13 contains no such limitation.

“Although the General Assembly amended Virginia Code § 34-4 to add the $25,000 exemption for ‘real or personal property used as the principal residence of the householder or the householder’s dependents,’ it did not amend § 34-13,” the judge said. “As such, this court will not read into the statute language that is not present or enacted by the legislature.”

Finding that § 34-13 permitted a Virginia householder to claim an exemption in personal property up to the value of any unused portion of the exemption to which she was entitled to claim under § 34-4, Connelly overruled the trustee’s objection to Poullath claimed exemption.