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Georgia Bankruptcy Exemptions

1. Introduction

1. Georgia’s Early History As A Debtor Colony

The original impetus for creation of the colony of Georgia was the abysmal state of English debtor prisons and the concept of creating a place for debtors incarcerated within these to receive a fresh start.1 James E. Oglethorpe, as a member of Parliament, was selected chair of a committee to investigate the deplorable state of England’s debtor prisons. Oglethorpe also lost a friend who died in debtor prison. Oglethorpe and like-minded thinkers served as trustees over the original colony. Despite the original intent, few debtors arrived at the initialization2 of the colony and few laws enacted in the history of Georgia reflect its initial origins as the “debtor colony.”3

2. Constitutional And Statutory Nonbankruptcy Exemptions V. Bankruptcy Exemptions

Under Georgia law, a person owing a debt to a creditor may exempt certain property from collection and application by that creditor to its debt. These exemptions of property from debts are divided into a general rule and a special category that encompasses debtors in bankruptcy and decedents’ insolvent estates. The general category can be broken down further into two subcategories based on origin of the exemption. The first is required by the state constitution and can be found in Ga. Code § 44-13-1 (and will be called the “constitutional exemption” in this paper). The second set of general exemptions consist of statutes found throughout the Georgia Code (and are referred to in this paper as “statutory exemptions”). Likewise, exemptions that are specifically authorized for bankrupt debtors and insolvent decedents’ estates are both constitutionally and statutorily based. (These exemptions will be called the “bankruptcy exemptions” in this paper.) A debtor who utilizes the bankruptcy exemptions may not also use the statutory exemptions of O.C.G.A. § 44-13-1.4

1 “Although debtor distress had earliest been identified with the plan to set up a new colony, this idea by the time the charter was granted had been broadened into including all unfortunates.” E. Merton Coulter, Georgia: A Short History (1960) p. 16.

2 The first transport to Georgia was made up primarily of small businessmen, tradesmen, and unemployed laborers drawn mainly from the London area. Surviving records indicate that few formerly imprisoned debtors came to Georgia during the entire trusteeship period. The colony’s original makeup was rather like a London microcosm, without the large debtor element. K. Coleman, A History of Georgia, 2nd Ed. (UGA Press), p.18.

3 By 1752 it was clear that the “early debtor-haven dream had not come to pass.” K. Coleman, A History of Georgia (2nd Ed.) p. 44. In a 1742 pamphlet titled “The Hard Case of the Distressed People of Georgia”, Thomas Stephens noted that the colony was designed as “a provision for numbers of the distressed industrious poor of Great Britain…” The Clamorous Malcontents: Criticisms & Defenses of the Colony of Georgia 1741-1743 (The Beehive Press, Savannah, GA 1973) p. 259. Arguing that the colony had failed its mission, Thomas Stephens asserted that “this Disappointment is owing to the particular circumstances in the Constitution and Government of the Colony, which have defeated all the Intents and Purposes of it…” Id at 260. For Mr. Stephens’ troubles and based upon a later grievance petition brought before the House of Commons on behalf of Georgia’s inhabitants, “the culprit was brought before the Bar of the House, where, on his knees, he was reprimanded by the Speaker and compelled to admit the errors of his ways.” Id at p. xv.

4 Ga. Code § 44-13-21; see also O.C.G.A. § 44-13-100 (providing for use of the exemptions “in lieu of the exemption provided in Code Section 44-13-1”).

2. Georgia’s Constitutional And Statutory Exemptions

1. Georgia’s Constitutional Basis For Exemptions

The Georgia Constitution of 1983 provides for an exemption of “not less than $1,600.00” and grants the authority to the legislature to define additional exemptions, the persons eligible to receive exemptions, and the procedure by which to claim these exemptions.5

2. The Statutory Implementation Of Constitutional Exemptions

Georgia Code § 44-13-16 provides for exemption from levy and sale “any real or personal property or both of a debtor in the amount of $5,000.00 or $21,500.00 for real or personal property that is the debtor’s primary residence.” The section also strips jurisdiction from all courts and ministerial officers in the state to enforce any “judgment, execution, or decree” against property that has been exempted under the section. However, this exemption does not apply if the debt is for taxes, the debt represents the purchase money of the property the debtor is seeking to exempt, or the debt is incurred in exchange for labor, materials or removal of encumbrances upon the property.

3. The Procedure To Claim A Constitutional Statutory Exemption

The Georgia Constitution provides that the legislature shall “provide for the manner of exempting such property” and this procedure can be found in Chapter 13 of Title 44 of the Georgia Code. In order to properly claim an exemption, the debtor must petition the judge of the probate court in which the debtor resides.7 The petition must include the name of the debtor, the name and ages of the minor children and dependents of the debtor, and the property on which the property exemptions are claimed.8 The debtor must also include a list of all real and personal property belonging to the person from whose estate the exemption is to be taken and a list of his creditors and their mailing addresses, if known.9

The statute provides that the probate court shall hold a hearing on approval of the exemptions claimed. The hearing must be set for a date between 20 and 30 days from the date the application and schedule were filed.10 The Georgia Code requires that the debtor give notice of the application for exemption to his creditors. The time required for adequate notice varies based on the creditor’s location. If the creditor resides in the county where the hearing will be held, the debtor must either serve that creditor personally or leave it at his home at least five days before the hearing. If the creditor resides outside of the county, the debtor must prepare a written notice of his application and the day of the hearing and deliver it, along with a stamped envelope, to the probate court judge, who shall mail it at least 15 days before the hearing.11

If the application is granted and the debtor has exempted real property, the clerk of the Superior Court shall record notice of the exempted real property in the real estate records. If the debtor has exempted real property outside of the clerk’s county, the judge shall transmit a certified copy of the notice of exempted real estate to the clerk of the Superior Court in the county where the real estate is located. The clerk of that court shall record notice of the exempted real property in the land records.12 If the debtor seeks to sell the exempted property, he must make an application for sale to the Superior Court judge.13

The legislature has also provided that the debtor can waive its right to a constitutional exemption on property valued above a certain minimum threshold. Specifically, a debtor may waive such exemptions except as to wearing apparel and $300.00 of “household and kitchen furniture and provisions.”14 There is no statutorily mandated language and the wavier may either be specific or general. The waiver may be in the contract of indebtedness or in another contract made either contemporaneously or subsequent to the execution of the contract of indebtedness.15

4. Specific Statutory “Exemptions” From Garnishment, Levy, & Attachment

As an alternative to the constitutional exemptions, the Georgia Code provides statutory exemptions which are scattered throughout the Georgia Code. Federal law also provides certain applicable exemptions.

1. Foreign Exemptions for Foreign Judgments (O.C.G.A. §44-13-120)

The first “exemption” is not actually an exemption, but rather an enabling provision. O.C.G.A. §44-13-12016 permits a person residing in Georgia who is subject to a judgment issued in another state (which has been domesticated in Georgia) to assert the exemptions from levy and sale which would be provided to the judgment debtor by the law of the sister state (which issued the judgment) as if the judgment debtor was a resident of the sister state from which the judgment originated. The debtor must be a resident of Georgia to utilize this provision.17

2. Life Insurance (O.C.G.A. § 33-25-11)

In 2006, Georgia enacted a statutory provision to protect the cash value of life insurance from the claims of creditors. Under O.C.G.A. §33-25-11, the cash surrender value of a life insurance policy is not liable to “attachment, garnishment, or legal process” in favor of any creditor of the debtor. A “fraud exception” does exist. Specifically, this section does not prevent a creditor’s attachment of the cash surrender value of a life insurance policy if “the purchase, sale, or transfer of the policy was made with the intent to defraud creditors.”18

If a court does find that the requisite intent to defraud creditors exists, only the cash surrender value is subject to attachment, garnishment, or legal process in favor of a creditor. McCrary v. Middle Georgia Management Services, Inc., 315 Ga. App. 247, 726 S.E.2d 740 (2012).

The statute only applies to attempts to collect through attachment, garnishment, or legal process and does not apply in bankruptcy. In re Dean, 470 B.R. 643 (Bankr. M.D. Ga. 2012) (J. Walker). See also Wallace v. McFarland (In re McFarland), 790 F.3d 1182 (11th Cir. 2015) (J. Baldock). Because this “exemption” from attachment applies outside of bankruptcy but does not apply within bankruptcy, an insolvent individual with a life insurance policy with cash surrender value substantially greater than the $2,000.00 exemption allowed in bankruptcy may seek to avoid bankruptcy court altogether. A debtor holding a life insurance policy which is “protected” by O.C.G.A. § 33-25-11 outside bankruptcy court does run the risk of an involuntary bankruptcy. Depending on the number of other creditors and the amount owed, a creditor may be able to file an involuntary bankruptcy against such a debtor holding a policy.

3. Annuities (O.C.G.A. § 33-28-7)

In 2006, when Georgia enacted the “protection” for life insurance policies as just discussed, it also enacted a similar provision regarding annuities. “The proceeds of annuity … contracts shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor…” O.C.G.A. § 33-28-7.19 There is a fraud exception which mirrors the fraud exception regarding insurance policies. As discussed in detail below regarding bankruptcy exemptions, a number of courts have held that this unlimited blanket exemption does not apply to a Georgia debtor in a bankruptcy case. See e.g. In re McFarland, 790 F.3d. 1182 (11th Cir. 2015) (decided June 22, 2015).

4. Workers’ Compensation Awards (O.C.G.A. § 34-9-84)

O.C.G.A. § 34-9-84 provides that “[n]o claim for compensation under this chapter shall be assignable, and all compensation and claims therefor shall be exempt from all claims of creditors.” So under Georgia law, a creditor may not attach a workers’ comp claim, and the proceeds thereof are likewise protected.

5. Wages (O.C.G.A. § 18-4-20)

A creditor may garnish the debtor’s nonexempt earnings20 under O.C.G.A. §18-4-20. Earnings subject to garnishment include all compensation paid or payable for personal services, including bonuses, commissions, and pension or retirement program payments, but only the amount remaining after deduction from those earnings of the amounts required by law to be withheld.21 The amount the creditor is allowed to garnish is the lesser of: (a) 25 percent of the disposable earnings for the week, or (b) the amount the disposable earnings for the period exceeds 30 times the federal hourly wage under 29 U.S.C. §206(a)(1).22 This debtor protection (in the nature of an exemption) applies even if the garnishee has received multiple summons of garnishment.23 However, if the debt is based on a judgment for alimony or for the support of a dependent, the limit is 50 percent of the disposable earnings.24

6. Social Security (42 U.S.C. § 407)

While there is no specific Georgia statute which addresses the ability of a creditor to reach a debtor’s Social Security benefits, federal law provides that Social Security benefits are “not transferable or assignable” and further shall not be “subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” See 42 U.S.C. § 407. Accordingly, the general rule is that Social Security benefits may not be attached or garnished by a creditor. However, there are two notable exceptions to this general rule: delinquent federal taxes and delinquent child support. First, the Federal Payment Levy Program (FPLP) which is authorized by Internal Revenue Code Section 6331(h), as prescribed by the Taxpayer Relief Act of 1997 Section 1024, authorizes the IRS to garnish up to 15 percent of each payment for payment of delinquent federal tax debt. Second, 26 U.S.C. 6305 permits the Social Security Administration to withhold certain benefits (up to the amount permitted from regular disposable income under each state’s law) upon receipt of a proper notice of delinquent child support payments. Finally, Social Security payments may also be subject to regular tax withholdings if the taxpayer voluntary requests that such withholdings occur. See 26 U.S.C. §3402(p)(1).25

7. ERISA Accounts (29 U.S.C. § 1056(d)(1))

Certain retirement funds are protected by federal law. Specifically, Congress has provided that there shall be no alienation or assignment of benefit from accounts that fall under the Employee Retirement Income Security Act of 1974 (“ERISA”). 29 U.S.C. §1056(d)(1); see also Citizens Bank of Ashburn v. Shingler, 173 Ga. App. 511, 326 S.E.2d 861 (Ga. App. 1985) (holding that federal law prohibits the alienation or assignment of benefits under an ERISA qualified account). Georgia law also specifically protects certain and provides that “funds or benefits from a pension or retirement program as defined in 29 U.S.C. §1002(A)26 or funds or benefits from an individual retirement account as defined in Section 40827 or 408(A)28 of the United States Internal Revenue Code of 1986, as amended shall be exempt from the process of garnishment…” See O.C.G.A. § 18-4-22. As such, funds in a qualified pension, retirement account, IRA, or Roth IRA are protected from garnishment in Georgia.

8. IRAs and Pension Benefit Proceeds

As detailed above, the corpus of a qualified pension, retirement program, IRA, or Roth IRA and any benefits that have not been paid out are exempt from garnishment. However, once payments are made from the corpus, such payments are treated as “disposable earnings” and subject to regular garnishment29 O.C.G.A. §18-2-22 specifically provides that “[s]uch funds or benefits, when paid or otherwise transferred to the member or beneficiary, shall be exempt from the process of garnishment only to the extent provided in Code Section 18-4-20 for other disposable earnings.” Federal law, while statutorily silent, also follows the general rule that once funds are distributed, they are no longer exempt. See Guidry v. Sheet Metal Workers Int’l Assoc., Local No. 9, 10 F.3d 700 (10th Cir. 1993); see also Trucking Employees of North Jersey Welfare Fund, Inc. v. Colville, 16 F.3d 52 (3rd Cir. 1994). Consequently, once a debtor reaches the age in which he must begin receiving regular distributions from a qualified retirement account, each distribution may be garnished at the regular rate just as if he was receiving a regular paycheck.

5. The Procedure To Claim A Statutory Exemption In A Garnishment Proceeding

As discussed, different assets are either “exempt” or otherwise protected from attachment or garnishment under Georgia law. Creditors often utilize Georgia’s garnishment statute order to enforce a money judgment. See generally, O.C.G.A. §18-4-20 et seq. However, the garnishment statute does not contain a specific procedure designed to allow a judgment debtor to claim an exemption. In lieu of such a provision, a judgment debtor may make a claim to funds as a “claimant” under the statute. Terrell v. Fuller, 160 Ga. App. 56 (1981). In Terrell, the Georgia Court of Appeals prescribed a two-step process under which a judgment debtor may make a claim to funds in a garnishment and thereby assert an exemption. First, the judgment debtor (defendant in the garnishment proceeding) must make a claim to the funds thereby becoming a claimant under O.C.G.A. §18-4-95. Second, the judgment debtor must traverse the garnishee’s answer under O.C.G.A. §18-4-86. A debtor has a very tight deadline in which to accomplish these tasks. The debtor must make the claim and traverse the garnishee’s answer within 15 days of the filing of the garnishee’s answer. If the debtor does not timely make the claim and file the traverse, then the debtor’s claim to the funds may be time-barred. Id. at 58. See also O.C.G.A. §18-4-65(a). This result may occur even though the funds at issue were clearly exempt from garnishment from the outset.

The U.S. District Court for the Northern District of Georgia recently held this procedure unconstitutional. Tony W. Strickland v. Richard T. Alexander, Civ. Axn. No. 1:12-CV-02735-MHS (J. Shoob) (Docket No. 105 entered on September 8, 2015). In a 48-page opinion, Judge Shoob states, “The court concludes that the Georgia [garnishment] statute violates due process because it does not provide for a prompt and expeditious procedure to resolve a debtor’s claim that seized property is exempt from garnishment.” Id. at p. 42. The district court’s order further notes:

Since the procedure for traversing the creditor’s affidavit is not available, a debtor who contends that garnished property is exempt from garnishment must follow the generic claims procedure set out in Code Section 18-4-95. As discussed above, in accordance with the Georgia Court of Appeal’s decision in Terrell, the debtor must first file a claim to the garnished funds and then file a traverse of the garnishee’s answer under Code Section 18-4-86. Terrell, 160 Ga. App. At 58 (“[A] defendant … who has a claim superior to that of the plaintiff to money or property in the hands of the garnishee … must … assert such a claim and then traverse the answer of the garnishee.”). Obviously, the debtor cannot traverse the garnishee’s answer until the answer has been filed, which the garnishee must do not less than 30 days, or more than 45 days, after service of the summons of garnishment. O.C.G.A. § 18-4-62(a). Thus, the debtor must wait at least 30 days, and perhaps as long as 45 days, after his or her property has been seized before he or she can even assert an exemption claim.

Once the garnishee files its answer and deposits the garnished funds with the court, the debtor has 15 days to file a claim of exemption and a traverse or the funds will be paid to the creditor and the garnishee will be discharged from further liability. O.C.G.A. §§ 18-4-85 & 18-4-89. Despite this limited time frame, there is no requirement in the statute that the debtor be served with the garnishee’s answer. Even if the debtor learns that the garnishee has filed its answer and manages to file a timely traverse and claim of exemption, there is no statutory requirement that the court conduct an expedited hearing. And even if the court ultimately upholds the debtor’s exemption claim after a hearing, there is no requirement that the garnished property or funds be promptly returned to the debtor. See O.C.G.A. § 18-4-94. Whatever the outer constitutional time limit may be to resolve exemption claims, the delay inherent in this procedure far exceeds it.

Based on its determination that the garnishment statute’s notice provisions were unconstitutional, the District Court enjoined Defendant Alexander (the Clerk of Court in Gwinnett County) from issuing summons of garnishment. Id. at p. 48. As of this writing, the scope of the impact of this decision is still to be determined.

6 Ga. Code § 44-13-1. “Except as otherwise provided in this article, there shall be exempt from levy and sale by virtue of any process whatever under the laws of this state any real or personal property or both of a debtor in the amount of $5,000.00 or $21,500.00 for real or personal property that is the debtor’s primary residence. No court or ministerial officer in this state shall ever have jurisdiction or authority to enforce any judgment, execution, or decree against property set apart under this Code Section, including such improvements as may be made thereon from time to time, except for taxes, for the purchase money of the property, for labor done on the property, for material furnished for the property, or for the removal of encumbrances on the property.”

7 O.C.G.A. § 44-13-4.

8 O.C.G.A. § 44-13-4.

9 O.C.G.A. § 44-13-4. Cash cannot be exempted, but can be used to purchase personal property, which can be exempted. O.C.G.A. § 44-13-15.

10 Ga. Code § 44-13-9.

11 O.C.G.A. § 44-13-8.

12 O.C.G.A. § 44-13-11.

13 O.C.G.A. § 44-13-16.

14 O.C.G.A. § 44-13-40.

15 The broad language in this section may require a debtor or his attorney to check each contract to ensure that the contract does not have language waiving the debtor’s exemptions.

16O.C.G.A. § 44-13-120 provides:
As against a domesticated judgment from another state, a judgment debtor resident in Georgia shall be entitled to assert, in addition to any other exemption under Georgia law, an exemption from levy and sale and any other process equal to the exemption which would be provided to the judgment debtor by the law of the state in which the judgment was entered if the judgment debtor were a resident of that state.

17 Determination of a debtor’s residence under this provision will be determined under Georgia law which is assuredly different from the bankruptcy concept of domicile for exemptions under the Bankruptcy Code.

18 O.C.G.A. § 33-25-11. The statute also does not bar a creditor who receives a voluntary collateral assignment of the policy from exercising its contractual rights to recover against the policy.

19 The entire provision reads as follows “The proceeds of annuity, reversionary annuity, or pure endowment contracts issued to citizens or residents of this state, upon whatever form, shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor of the person who is the beneficiary of such annuity contract unless the annuity contract was assigned to or was effected for the benefit of such creditor or unless the purchase, sale, or transfer of the policy is made with the intent to defraud creditors.”

20 The garnishment statute does not use the term “exemption” but the result is essentially the same.

21 O.C.G.A. § 18-4-20(a). Compare the exclusion of exemption of a portion of wages under Georgia law with the concept of “disposable earnings” under applicable bankruptcy law. See generally Bankruptcy Code § 1325(b)(2).

22 O.C.G.A. § 18-4-20(a). Compare the exclusion of exemption of a portion of wages under Georgia law with the concept of “disposable earnings” under applicable bankruptcy law. See generally Bankruptcy Code § 1325(b)(2).

23 O.C.G.A. § 18-4-20(e).

24 O.C.G.A. § 18-4-20(f).

25 Social Security payments are also exempt in bankruptcy under O.C.G.A. § 44-13-100(a)(2)(A).

26 29 U.S.C. §1002(A) provides that terms “employee pension benefit plan” and “pension plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program:
(i) Provides retirement income to employees, or
(ii) Results in a deferral of income by employees for periods extending to the termination of covered employment or beyond…

27 Individual Retirement Account

28 Roth IRA

29 Per the terms of Georgia’s garnishment statute O.C.G.A. §18-4-20.

3. Bankruptcy Exemptions: Georgia’s Statutory Exemptions In Bankruptcy And Insolvent Decedent’s Estate

1. Property Of The Bankruptcy Estate: Property Excluded From Estate V. Property Exempted From The Estate

As a starting proposition, property of the debtor’s estate is defined extremely broadly, and only with express exceptions, includes “all legal and equitable interests of the debtor in property as of the commencement of the case.” Bankruptcy Code § 541(a). A full discussion and analysis of property which is excluded from a debtor’s estate is outside the scope of these materials. However, one type of property (discussed below) which is excluded from estate property is certain types of retirement accounts.30 Once a determination is made that property constitutes estate property (i.e. property which is not excluded and therefore represents property of the bankruptcy estate), the next question becomes whether the debtor may claim a valid exemption of such property. Subject to objection by a creditor or trustee, a debtor may claim property as exempt. In the event no objection is filed, or any timely objection is resolved in the debtor’s favor, then the exempted property is removed from the bankruptcy estate.

2. Application Of Georgia’s Bankruptcy Exemption Statute: O.C.G.A. §44-13-100

Under 11 U.S.C. §522(b)(2), Congress permitted states to elect to “opt out” of the exemptions provided by the Bankruptcy Code and provide their own exemptions instead. Georgia has “opted out” and accordingly provides its own statutory exemptions for an individual in bankruptcy. See O.C.G.A. § 44-13-100. This Code Section provides exemptions to two classes of persons: (1) a bankruptcy debtor, and (2) all intestate insolvent estates as long as there is a living widow or child of the intestate. In short, a living person who is not a debtor in a bankruptcy case may not avail themselves of the exemptions contained in O.C.G.A. § 44-13-100. Rather, a nonbankrupt Georgia resident must rely upon the “hodge-podge” of statutory protections outlined above. Conversely, a bankruptcy debtor in Georgia is generally limited to the express exemptions set forth in O.C.G.A. §44-13-100.31

3. Recent Amendments To The Bankruptcy Exemptions Statute

The current format of Georgia’s bankruptcy exemption statute was enacted in 1980 in response to the 1979 enactment of the Bankruptcy Code. O.C.G.A. §44-13-100 has been amended several times. [See generally the 2001 Amendment to O.C.G.A. §44-13-100.] Georgia has enacted a spate of such amendments over the past four years in order to make slight modifications and increase the amount of certain exemptions. Specifically, the statute was amended in 2012, 2013, and 2015 (which represented the first substantive amendments since 2001).

The 2012 Amendment: This amendment increased the amount of exemption for a debtor’s residence from $10,000.00 to $21,500.00 and increased the amount of such exemption from $20,000.00 to $43,000.00 where title to the residence “is in one of two spouses who is a debtor.” O.C.G.A. §44-13-100(a)(1).

The 2013 Amendment: This amendment increased the amount of the exemption available on motor vehicles from $3,500.00 to $5,000.00. O.C.G.A. §44-13-100(a)(3).

The 2015 Amendment: This amendment increased the amount of the basic “wild card” exemption in “any property” from $600.00 to $1,200.00. It also increased the amount by which a debtor may convert (or carry-over) an unused residence exemption to a wild card exemption from $5,000.00 to $10,000.00. O.C.G.A. §44-13-100(a)(6).

4. Consideration Of Specific Property Exemptions Under Georgia’s Bankruptcy Exemption Statute

1. Residences

The first exemption under O.C.G.A. §44-13-100 is a debtor’s interest a “residence.” O.C.G.A. § 44-13-100(a)(1) (the “Homestead Exemption”) provides that one may exempt:

[t]he debtor’s aggregate interest, not to exceed $21,500.00 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. In the event title to property used for the exemption provided under this paragraph is in one of two spouses who is a debtor, the amount of the exemption hereunder shall be $43,000.00

1. Determination of debtor’s residence

To determine whether or not property is “used as a residence,” bankruptcy courts generally look to the intent of the debtor in purchasing the property and the debtor’s actual use of the property. In Goodman v. Vaughn, 2014 LEXIS 2189 (Bankr. N.D. Ga. 2014) (J. Drake), the court addressed the question of whether two contiguous parcels can be considered as a “residence” for purposes of claiming the homestead exemption. In Vaughn, the debtors purchased 7.5 acres (consisting of two tracts, one 2-acre tract and one 5.5-acre tract) as unimproved property. Subsequent to the purchase, debtors purchased a manufactured home and used the 2-acre tract as collateral for the purchase. In their Chapter 13 bankruptcy schedules, debtors listed the tracts separately on Schedule A, but used the homestead exemption to exempt the unencumbered 5.5-acre tract. The Chapter 13 trustee objected.

In holding in favor of the debtors, Judge Drake focused on the use of the property and relied on a holding from Judge Coleman out of the Southern District of Georgia, In re Mixon, 2014 Bankr. LEXIS 6 (Bankr. S.D. Ga. 2014) (J. Coleman). In Mixon, Judge Coleman found that a reasonable assessment of the law dictates that ‘residence’ does not include land bought separately from the land on which a home is located; separated by a fence; on which there are no structures; on which no family member parks or stores equipment; and on which activity occurs that is entirely separate from the day-to-day activities normally expected in a residence.

2014 Bankr. LEXIS 6 at *5-6 (citing Lanier v. Beaman, 294 B.R. 382, 384 (E.D.N.C. 2008)). In Vaughn, Judge Drake focused on the fact that the debtors: (1) acquired both tracts as one piece of property in a singular transaction to be used as their residence; (2) have a septic system with fill lines crossing both tracts; and (3) use both tracts for general enjoyment and recreation.

Judge Drake further differentiated the Vaughn case from the facts set forth in another Georgia case, In re Holt, 357 B.R. 917 (Bankr. M.D. Ga. 2006) (J. Laney). In Holt, the debtor sought to use the homestead exemption to exempt a rental property which was contiguous to the property on which his home was located. The rental property was subject to a different security deed than the property on which his home was located and was also leased to a tenant. In finding that the rental property was “separate and distinct,” from the residence, Judge Laney disallowed the exemption. In re Holt, 357 B.R.at 924.

2. Application of the “double exemption”

The last sentence of O.C.G.A. §44-13-100(a)(1) only applies in limited circumstances and has been the cause of some confusion. Specifically, it provides that “[i]n the event title to property used for the exemption … is in one of two spouses who is a debtor, the amount of the exemption hereunder shall be $43,000.00.” Thus, in order to take advantage of the so-called “double exemption”, title to the property must be solely titled in one spouse’s name. A married debtor may not use the double exemption if the residential property is jointly titled. In discussing this provision, Judge Mullins, Chief Judge for the Bankruptcy Court for the Northern District of Georgia, noted that the purpose of the double exemption “is to protect the nondebtor spouse’s equitable interest from the debtor’s creditors. If the nondebtor spouse has title to the property, he/she does not need such protection.” See Wright v. Taylor (In re Taylor), 2005 Bankr. LEXIS 269 (Bankr. N.D. Ga. 2005) (citing In re Hartley, 2002 Bankr. LEXIS 1884 at *3 (Bankr. N.D. Ga. 2002) (J. Drake)); see also In re Hiers, 2005 Bankr. LEXIS 3143 (S.D. Ga. 2005) (J. Walker). Moreover, because the courts have found that the purpose of the statute is to protect the nondebtor spouse’s equitable interest in the residence, courts have declined to extend the double exemption to a situation where the nondebtor spouse was separated from the debtor and no longer living in the residence. See In re Neary, 2004 Bankr. LEXIS 617 (Bankr. N.D.Ga. 2004) (J. Diehl).

In a recent case involving the double exemption, Judge Drake held that a debtor who owned 50 percent of his residence with the remaining 50 percent held by living trust (established for his spouse) was not entitled to double the homestead exemption per the last sentence of O.C.G.A. § 44-13-100(a)(1). Mann v. Burroughs (In re: Burroughs), 2015 Bankr. LEXIS 1167 (Bankr. N.D. Ga. 2015) (J. Drake). In so finding, the Burroughs court stated that “Bankruptcy courts in Georgia have consistently held that the last sentence of O.C.G.A. § 44-13-100(a)(1) permits a debtor to double the homestead exemption only in the circumstance where the debtor is married and the residence is solely titled in the filing spouse’s name.” 2015 Bankr. LEXIS 1167 at *5. As the Burroughs debtor owned the property jointly with the trust, the debtor was not permitted to double the exemption.

Finally, bankruptcy courts have extended the protection to include jointly filing debtors whose residence is solely titled in one spouse. In re Hartley, 2002 Bankr. LEXIS 1884 (Bankr. N.D. Ga. 2002) (J. Drake). This case was decided before the legislature increased the amounts available under the statute. The debtors, husband and wife, filed a joint petition for relief under Chapter 7 and claimed a double exemption (which was $20,000.00 at that time) in their residence despite the fact that the residence was solely titled in the name of the debtor husband. The trustee objected and argued that the statute did not apply to the Hartley debtors as both debtors were in bankruptcy. In holding that the Hartley debtors were entitled to take the full double exemption, Judge Drake looked to the legislative intent and history of the statute and “found no logical conclusion to treat jointly filing debtors differently than a debtor/nondebtor couple.” Id. at *4.

2. Motor Vehicles

A debtor may exempt $5,000.00 in value of a motor vehicle. Georgia courts have been required to resolve disputes over what might have been considered a “vanilla” exemption. Questions have been raised regarding whether a debtor can use the Georgia motor vehicle exemption under § 44-13-100(a)(3) to exempt cash proceeds from the prepetition loss of a motor vehicle. The question has also been raised whether a tractor is a motor vehicle under § 44-13-100(a)(3).

The Bankruptcy Court for the Southern District of Georgia has held that cash proceeds from the prepetition loss of a motor vehicle are not protected by the exemption statute either as a motor vehicle or as proceeds of a motor vehicle. In re Carelock, 2006 Bankr. LEXIS 3415, 2006 WL 3708688 (Bankr. S.D. Ga. Jan. 13, 2006) (J. Walker). In Carelock, the debtor received a property damage settlement that resulted from a car accident in which her vehicle was destroyed. The debtor was compensated solely for the value of her car. The court determined the statute specifies that the exemption lies in the debtor’s interest in a motor vehicle but that it does not provide for the exemption to follow proceeds of a motor vehicle. Id. at 3. The court recognized that the statute effectively punished debtors who suffered a prepetition involuntary loss of property that could have been exempt. However, the court stated it was the province of the Georgia General Assembly to provide a remedy in such circumstances.32 Id.

Another Georgia Bankruptcy Court held that tractors are not motor vehicles. In re Matthews, 449 B.R. 833 (Bankr. M.D. Ga. 2011) (J. Smith). In Matthews, the trustee relied on the case of Harris v. State, 686 S.E.2d 777 (Ga. 2009) where the Georgia Supreme Court noted that a “motor vehicle” is commonly understood to mean a “self-propelled vehicle with wheels that is designed to be used, or is ordinarily used, to transport people or property on roads.” The debtors, on the other hand, relied on the definition of motor vehicles found in O.C.G.A. § 40-1-1(33). This statute defines “motor vehicle” as “every vehicle which is self-propelled other than an electric personal assistance mobile device (EPAMD).” In Harris, the Georgia Supreme Court noted that under § 40-1-1(59) tractors were included in the definition of “special mobile equipment” and were thus excluded from the more general category of “motor vehicles” under § 44-13-100(a)(3). The bankruptcy court adopted the Harris definition of a motor vehicle and found that a tractor was not designed to be used or ordinarily used to transport people or property on roads. Accordingly, the court disallowed the motor vehicle exemption.33

3. ERISA Qualified Retirement Accounts:

1. Individual Retirement Accounts (the “IRA”)

IRA’s may be protected by a bankrupt Georgian because a traditional IRA does not become property of the estate in the first place. 11 U.S.C. §541(c) provides that property of the debtor becomes property of the bankruptcy estate “notwithstanding any provision in an agreement, transfer instrument, or nonbankruptcy law” unless the property is a trust. The 11th Circuit has concluded that IRAs are trusts under § 541(c)(2). In re Meehan, 102 F.3d 1209, 1211 n.4 (11th Cir. 1997) (“[B]y definition, an IRA is a trust”). More specifically, the 11th Circuit concluded that IRAs are excluded from property of the estate under §541(c)(2) because O.C.G.A. §18-4-22(a)34 imposes a restriction on transfer by garnishment. The 11th Circuit also found that it made no difference whether the restriction on transfer of the beneficial interest occurred in the IRA documents or by statute. Thus it held that the IRA was not part of the bankruptcy estate. Id. at 1211.

Even if the IRA did constitute property of the bankruptcy estate, it can still be exempted. Section §44-13-100(2.1) (D) allows a debtor to exempt “the debtor’s aggregate interest in any funds or property held on behalf of the debtor, and not yet distributed to the debtor, under any retirement or pension plan or system [including] … an individual retirement account within the meaning of 26 U.S.C. §408.”

A self-directed IRA presents different questions altogether. A self-directed IRA may lose its exempt protection if the beneficiary engages in transactions prohibited with respect to IRA’s. Specifically, an account may not be exempt if the debtor holding the account has engaged in “prohibited transactions” as defined by 26 U.S.C. §4975.35 In re Cherwenka, 508 B.R. 228 (Bankr. N.D. Ga. 2014) (J. Diehl). In Cherwenka, a creditor objected to debtor’s exemption under O.C.G.A. §44-13-100(2.1) (D). The creditor asserted that the debtor had engaged in “transactions” with his IRA. The court held that a “transaction” must involve “an exchange of goods and services.” Id. at 236. The court overruled the objection because she found that the debtor did not engage in any such unauthorized transactions with his IRA because there was no evidence that the debtor “received anything for his alleged services.36” Id. But the case is a cautionary tale for debtors holding self-directed IRAs (and their attorneys).37

2. Simplified Employee Pensions (SEP Accounts)

A simplified employee pension (“SEP”) is an individual retirement account established according to 26 U.S.C. §408(k). As the Internal Revenue Service explains, a SEP allows an employer to provide a source of income at retirement by allowing them to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan.38

At least one bankruptcy court in Georgia has held that SEPs were excluded from the bankruptcy estate under §541(c)(2). In re Hipple, 225 B.R. 808 (Bankr. N.D. Ga. 1996) (J. Cotton). The court in Hipple used analysis identical to the 11th Circuit’s analysis in Meehan even though Meehan was not decided until a year following Hipple. The Hipple court first analyzed the requirements necessary to characterize the account as a SEP under 26 U.S.C. §408. The court found that the account met the requirements of 26 U.S.C. §408(a); a financial institution was employed as trustee under §408(a)(2). Therefore, the account was a valid SEP and a trust under federal law. The statute creating a SEP, 26 U.S.C. § 408, specifically requires that no prohibition be imposed on the beneficiary’s right to withdraw from the SEP. 26 U.S.C. § 408(k)(4). In Hipple, the instrument creating the SEP included this provision. O.C.G.A. §53-12-28(d) provided that a spendthrift provision in a bona fide pension or retirement trust is enforceable with respect to the principal and income even if the beneficiary is the settlor of the trust. Judge Cotton found that this was a restriction sufficient to satisfy §541(c)(2). Because the SEP account constituted a trust subject to an anti-alienation restriction that was enforceable under applicable nonbankruptcy law (here O.C.G.A. §53-12-28(d)), the court found that the debtor’s SEP was excluded from the estate under §541(c)(2).

However, in 2010 and after the Hipple decision, Georgia abrogated O.C.G.A. §53-12-28(d). So the Hipple court’s reliance on this section may be no longer appropriate. However, to the extent that the SEP’s vesting instruments create an anti-alienation provision, a debtor may base its position on the 11th Circuit’s Meehan decision and analogize the SEP provisions to those of an IRA as in Meehan. Again, the determination under Hipple is that the SEP account did not constitute property of the bankruptcy estate in the first place. Assuming that a SEP account did constitute property of the bankruptcy estate, then a debtor may seek to exempt it under O.C.G.A. §44-13-100.

3. Roth IRA

At least one Georgia court held that a Roth IRA is exempt. Goodman v. Bramlette (In re Bramlette), 333 B.R. 911 (Bankr. N.D. Ga. 2005) (J. Bonapfel). In Bramlette, the court first ruled that a Roth IRA does constitute property of the estate (unlike a traditional IRA which does not). However the court then found that a Roth IRA can be exempted under O.C.G.A. §44-13-100(a)(2)(E).

The court in Bramlette first considered whether the Roth IRA was property of the estate. As discussed earlier, §541(c)(2) excludes from property of the estate a debtor’s beneficial interest in a trust if there is a restriction on its transfer that “in enforceable under applicable nonbankruptcy law.” Judge Bonapfel considered Rousey v. Jacoway, 544 U.S. 320, 125 S. Ct. 1561, 161 L. Ed. 2d 563 (2005). In Rousey, the U.S. Supreme Court concluded that under federal exemptions law, the tax penalty on IRAs imposed a sufficient restriction on withdrawal, such that the payments under the plan were properly considered as being on account of the debtor’s age. However, the court in Rousey did not address whether the tax consequences imposed a restriction on transfer within the meaning of § 541(c)(2). The 541(c)(2) issue was entirely different from the issue of whether the IRA qualified for exemption under §522(d) (10) (E), which was the question answered in Rousey. Since the issues presented in Bramlette and Rousey were entirely different, the Bramlette court determined the Rousey holding was not “transportable” to the 541(c)(2) issue. Id. at p. 914.

The Bramlette court also considered the 11th Circuit’s decision in Meehan and its conclusion that a traditional IRA is excluded from property of the estate under §541(c)(2) because it is exempt from garnishment under O.C.G.A. §18-4-22(a). Judge Bonapfel noted that §18-4-22(a) only applies to an IRA as defined by 26 U.S.C. §408 (which establishes traditional IRAs) and makes no mention of 26 U.S.C. §408A (which establishes Roth IRAs). Accordingly, the court in Bramlette held that Roth IRAs are not excluded from property of the estate under §541(c)(2).

Next, the court in Bramlette considered whether the Roth IRA can be exempted. The court acknowledged that a Roth IRA differs from a traditional IRA because, unlike a traditional IRA: (1) there is no requirement under a Roth IRA that distributions begin at age 70 ½, and (2) there is no tax on qualified distributions from a Roth IRA. However, the Roth and traditional IRAs are both retirement vehicles and impose tax penalties if withdrawals are made before age 59 1/2. O.C.G.A. §44-13-100(a)(2)(E) provides that a debtor may exempt a payment under a pension or “similar plan or contract on account of disability, death, age, or length of service… ” (emphasis added). Judge Bonapfel concluded that Roth IRA plan distributions are made on “account of age.” Accordingly, a Roth IRA may be exempted under O.C.G.A. §44-13-100(a)(2)(E) because it is a plan “on account of age.” The Bramlette court considered the United States Supreme Court’s decision in Rousey v. Jacoway, 544 U.S. 320 (2005). The Supreme Court noted in Rousey that income from an IRA substitutes for wages lost upon retirement. In Bramlette, Judge Bonapfel found that “the essential purposes and effects of the two types of what are, after all, retirement accounts, are identical.” Bramlette, 333 B.R. at 922 (emphasis in original).

A debtor’s ability to retain a Roth IRA has actually been enhanced since the ruling in Bramlette. Georgia has expanded the scope of the exemption in the garnishment statute. The amended current version of O.C.G.A. §18-4-22(a) does cover IRAs under both 26 U.S.C. §408 and § 408A. The statute was changed effective April 17, 2006, the year after the holding in Bramlette. Therefore, it is likely that a Roth IRA, because it is exempted from garnishment under O.C.G.A. §18-4-22(a), can be excluded from the estate under the 11th Circuit’s analysis in Meehan.

The “takeaway” on Roth IRAs is that there is a convincing argument that they can be excluded from the bankruptcy estate under Meehan and §541(c)(2), but in any event can be exempted under §§44-13-100(a)(2)(E). However, in the event that a Roth IRA were to constitute property of the estate despite Meehan, and therefore only be exempt under O.C.G.A. § 44-13-100(a)(2)(E), then the Roth IRA would only be exempt to the extent “reasonably necessary for the support of the debtor and any dependent of the debtor”.39 O.C.G.A. § 44-13-100(a)(2)(E).

4. Annuities

As may be seen from the discussions above regarding IRA and Roth IRA accounts, one of the most knotty subsections in O.C.G.A. §44-13-100 is (a)(2)(E). It exempts “a payment under a pension annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” The language of subsection (a)(2)(E) becomes particularly troublesome when considering retirement vehicles other than federally approved vehicles such as IRAs, Roth IRAs, and 401(k) accounts. This is exemplified by a series of cases considering whether annuities (a common form of retirement vehicle) are exempt from a bankruptcy estate in Georgia.

All investment products named “annuity” are certainly not exempt in Georgia. In re Michael, 339 B.R. 798, 805 (Bankr. N.D. Ga. 2005) (interpreting similar federal exemption in 11 U.S.C. §522(d) (10) (E)). The case law has developed through a series of cases included and a certified question from the 11th Circuit to the Georgia Supreme Court. Interpreting this exemption has focused on (1) whether the “plan” is sufficiently similar to a pension or annuity, (2) whether the payment is “on account of illness, disability, death, age, or length of service” and (3) whether the payment is reasonably necessary for the support of the debtor or any dependent of the debtor. Silliman v. Cassell, 292 Ga. 464, 466, 738 S.E. 2d 606 (2013).

1. An “early look” at exemption of annuities in Georgia: the Bramlette case

The Bramlette decision discussed at length above regarding a Roth IRA account also involved consideration of an annuity. In Bramlette, the court found that the annuity was not intended to substitute for wages or a salary and could not be exempted under O.C.G.A. §44-13-100(a)(2)(E). Goodman v. Bramlette (In re Bramlette), 333 B.R. 911 (Bankr. N.D. Ga. 2005). Under the terms of the annuity contract at issue in Bramlette, the debtor was allowed to choose the date on which income payments were to commence. During the first six years of the contract, the debtor could make one withdrawal of up to 10 percent of the annuity value from the account each year without penalty and withdraw the entire fund with penalty. After six years, there were no withdrawal charges. Furthermore, the debtor had funded the entire annuity with one contribution shortly before the filing of her bankruptcy. In short, the debtor did not fund the annuity from her earnings over time. Based on these factors, the court concluded that the annuity was not exempt because “it was not a contract to provide benefits in lieu of earnings after retirement or a plan created to fill or supplement a wage or salary void.” Id.

2. A bankruptcy court’s second look at exemption of annuities in Georgia: the Cassell case

Since Bramlette, another dispute between a debtor and a trustee over an annuity generated a series of published opinions. The case was originally decided by the bankruptcy court but the case was appealed to the 11th Circuit which certified the question to the Georgia Supreme Court. The bankruptcy court was confronted with the question of whether a debtor may exempt an annuity purchased with inherited funds. See In re Cassell, 443 B.R. 200 (Bankr. N.D. Ga. 2010) (J. Hagenau). The bankruptcy court, in applying the Georgia exemption statute, examined case law applicable to similar provisions contained in the federal exemptions (which of course generally are not applicable in Georgia.) See 11 U.S.C. §522(d) (10) (E). Based on the case law regarding federal exemptions, the court applied a multiprong test and held that determination of whether an annuity is exempt requires review of the following factors: (1) Were the payments funding the annuity designed or intended as a wage substitute? (2) Were the contributions made over time? (3) Do multiple contributions exist? (4) What is the return on investment? (5) What control may the debtor exercise over the asset? (6) Was the investment a pre-bankruptcy planning measure?

The bankruptcy court first considered whether the annuity was intended to be a substitute for wages. The court identified the debtor’s choice of a fixed annuity as an important factor that demonstrated that debtor intended to have funds over her entire life, and further, have funds available for nursing home care. Thus this factor weighed in favor of the annuity being held “on behalf of age.”

The bankruptcy court considered but ultimately discounted whether multiple contributions were made over time. The debtor had worked for small retail establishments and nowhere where she could have invested in a retirement plan. Therefore, the fact that the debtor only made a single contribution the year before bankruptcy was given little weight. [Implicitly, if it had been shown that the debtor had the opportunity to invest over time and through multiple payments and instead made a lump sum payment through an inheritance, the court may have applied this factor against the debtor.]

Next, the court considered the return on investment which the annuity provided to debtor Cassell.

An investment which returns only the initial contribution with earned interest or income is more likely to be a nonexempt investment. In contrast, investments which compute payments based on the participant’s estimated life span, but which terminate upon the participant’s death or the actual life span, are akin to a retirement investment plan.

Id. at 207 (quoting In re Andersen, 259 B.R. 687, 691 (8th Cir. BAP 2001)). In Cassell, the investment was guaranteed for the life of the debtor. Therefore, this factor weighed in favor of debtor.

Finally, the bankruptcy court considered whether the annuity represented a pre-bankruptcy planning measure. The trustee argued that because the annuity was purchased within a year of the bankruptcy from an inheritance, it was pre-bankruptcy planning. The court noted that the mere fact of conversion of an asset from a nonexempt one to an exempt one is not sufficient to disallow the exemption. Based on consideration of all these factors, the bankruptcy court held that the annuity qualified for an exemption as an initial matter, but reserved the issue regarding the extent of the exemption. [As discussed above, an asset exempt under O.C.G.A. § 44-13-100(a)(2)(E) is only exempt to the extent “reasonably necessary for the support of the debtor and any dependent of the debtor.”]

3. The Cassell decision continued: certification of annuity exemption to the Georgia Supreme Court

The trustee appealed to the district court, which affirmed, and then to the 11th Circuit. The 11th Circuit certified the following two questions to the Georgia Supreme Court:

· Is a single premium fixed annuity purchased with inherited funds an “annuity” for the purposes of Ga. Code Ann. §44-13-100(a)(2)(E)?

· Is a debtor’s right to receive a payment from an annuity “on account of … age” for the purposes of Ga. Code Ann. §44-13-100(a)(2)(E) if the annuity payments are subject to age-based federal tax treatment, if the annuitant purchased the annuity because of her age, or if the annuity payments are calculated based on the age of the annuitant at the time the annuity was purchased?

Upon consideration of the 11th Circuit’s certified questions, the Georgia Supreme Court adopted a multiprong test. The Georgia Supreme Court found that the determination of whether a right to receive payment from an annuity can be exempted under O.C.G.A. §44-13-100(a)(2)(E) “required consideration of a variety of factors pointing to the existence of a causal connection between the payee’s age and right of payment.” Silliman v. Cassell, 292 Ga. 464 (2013). The court stated three factors necessary to exempt an annuity:

  • The plan must be an annuity;
  • Whether the payment is “on account of illness, disability, death, age, or length of service;” and
  • Whether the payment is reasonably necessary for the support of the debtor or any dependent of the debtor.

The first step in the Supreme Court’s three-part approach required determination of whether the asset was an annuity, and the court looked first at the plain meaning of the term “annuity.” After considering the definitions in O.C.G.A. §33-28-1(1), O.C.G.A. §47-2-1(3), and the United States Supreme Court’s analysis in Rousey v. Jacoway, 544 U.S. 320, 330 (2005), the Georgia Supreme Court defined an annuity as “an obligation to pay an amount at regular intervals for a certain or uncertain period of time.” Id. at 467.

The Georgia Supreme Court then considered the placement of the annuity exemption within §44-13-100 and noted that the theme of the exemptions found within §44-13-100(a)(2) is to protect income substitutes for wages earned. Thus, when deciding whether a particular annuity falls within the exemption provided in §44-13-100(a)(2)(E), “the pertinent question is whether it provides income as a substitute for wages.” Id. at 468. In making this determination, courts must consider “the nature of the contract giving rise to the annuity, as well as the facts and circumstances surrounding the purchase of the annuity.” Id. The Georgia Supreme Court noted that that debtor Cassell’s purchase of the annuity gave her the right to immediate monthly payments but at the same time divested her of the right to withdraw the corpus of the annuity. Another factor in the Georgia Supreme Court’s decision, as it was in the bankruptcy court’s decision, was the fact that the debtor did not have access to an employer-funded retirement or pension plan. Thus the court identified as important factors: (1) the debtor’s intent in purchasing the annuity, and (2) the amount of control the debtor exercises over the annuity.

The court rejected the trustee’s contention that the annuity could not be an exempt annuity because it was funded by an inheritance. The court discounted this fact and stated that the United States Supreme Court “acknowledged that the enumerated exempt plans may be established or funded by different sources, but that the source of funds constituted a nondisqualifying difference.” Id. at 469 citing Rousey v. Jacoway, 544 U.S. 320 (2005).

The Georgia Supreme Court then turned to the second prong of its tri-part test: whether the right to receive payment under the annuity was on account of age. The court stated that “the requisite connection may be established in a myriad of ways, proof of which is limited only by the circumstances under which the annuity is created and the terms and conditions of the annuity itself.” Id. at 471. With respect to the facts of Cassell’s annuity, the Georgia Supreme Court agreed that the fact that the annuity contained penalties for withdrawal prior to a specific age and that the fixed periodic payment was calculated based, in part, on the debtor’s age at the time she purchased it lead to the conclusion that the right to receive payment was on account of age. In conclusion, the Georgia Supreme Court emphasized that courts should focus on whether the right to payment is causally connected to the payee’s age and not on the payee’s intent in purchasing the annuity.

As a result of the statement of Georgia law by the Georgia Supreme Court in Cassell, the factors necessary to determine whether an annuity is exempt are now established, but the result is not an easily applied bright line test.

4. Post-Cassell: Application of the Georgia Supreme Court’s tri-part test for exemption of annuities

The continuing problems with application of the Georgia exemption statute to an annuity are evidenced by the fact that a Georgia Bankruptcy Court had to resolve another such dispute by published decision mere months after the Georgia Supreme Court issued its opinion in Cassell. See Wallace v. McFarland, 500 B.R. 279 (Bankr. S.D. Ga. 2013) (J. Barrett) (annuity not exempt). In McFarland, the debtor had retired from the military and purchased the annuity with a single payment from a mutual fund account that the debtor had built up while on military duty. Debtor testified that he was the annuitant and the contract owner, but that his wife was the beneficiary. Debtor had deferred payment the maximum number of years (until his 90th birthday) in order to increase the death benefits to his wife. Thus, the annuity did not provide fixed, regular payments. Further, the debtor had the ability to access the money at any time subject to withdrawal charges.

The bankruptcy court in McFarland found that the annuity was not intended to be a wage substitute. The court pointed to the debtor’s election to defer payment the maximum number of years, the debtor’s testimony that payments from the annuity were not necessary for his support, and testimony from debtor’s son and financial advisor that the annuity was not intended to provide wage replacement.

The court found several other reasons why this annuity was nonexempt. First, the annuity was not an obligation to pay an amount at regular intervals for a certain or uncertain period of time, as required by Cassell. Either the debtor or his wife after his death could receive fixed payments or a lump sum. The nature of the annuity, a variable annuity that adjusted to the market, was more in line with an investment rather than a wage replacement. Id. at 285. Finally, the debtor’s ability to control the payment under the annuity was also relevant. The debtor retained the authority to withdraw any amount from the annuity, to terminate the contract and receive the surrender value, or change the beneficiary at any time.

The breadth of the analysis required and undertaken by the bankruptcy court (including an evidentiary hearing) demonstrates the efforts which parties and courts may be required to make even after Cassell. Determination of whether a particular debtor’s annuity product is an exempt annuity remains highly fact-specific. And the facts will invariably vary in each case given the myriad types of annuities on the market and the fact that the circumstances of each debtor are different. This reality makes representation of a debtor difficult where an annuity product exists.

5. Post-Cassell: The 11th Circuit’s consideration of McFarland

The debtor in McFarland appealed the case to the district court which affirmed the bankruptcy court’s order. The debtor subsequently appealed the case to the 11th Circuit. The 11th Circuit affirmed the decisions of the lower courts. McFarland v. Wallace (In re McFarland), 790 F.3d 1182 (11th Cir. 2015). The 11th Circuit noted that the debtor conceded he had “never drawn money from the account” and that “it was mainly for his wife when he passed.” The debtor argued that the 11th Circuit should not look beyond the plain language of his annuity contract. The 11th Circuit explained that Cassell indicated courts should look to the “nature of the contract”. Id. at 1188. The 11th Circuit found that the plain language of the debtor’s contract clearly stated he would not receive payments until 2032 when he would be 90. This supported the court’s belief that the annuity was not intended to be and was not operating as a wage replacement. Id. The 11th Circuit distinguished McFarland from Cassell because the debtor in McFarland never withdrew money from his annuity and did not intend for it to operate as a wage replacement. On the other hand, the debtor in Cassell purchased the annuity to replace her income and had already begun receiving payments when she filed for bankruptcy. Id. Debtor McFarland also argued that even if his annuity did not qualify as an “annuity” under the statute, it should at least qualify as a “similar plan or contract.” The 11th Circuit held that regardless of how the annuity is qualified, “the common factor among exempt plans is that they provide a substitute for wages.” Id. at 1189 (citing Silliman v. Cassell, 292 Ga. 464).

5. Life Insurance

A debtor may exempt a life insurance policy under the bankruptcy exemptions statute. O.C.G.A. § 44-13-100(a)(8) (exempting any unmatured life insurance policy owned by the debtor except a credit life insurance policy.) However, the debtor’s loan or cash value of a life insurance policy which may be exempted is capped at $2,000.00. O.C.G.A. § 44-13-100(a)(9); In re Waggoner, 244 B.R. 492 (U.S. Bankr. Ct. M.D. Ga. 2000) (J. Hershner). As discussed above, outside of bankruptcy, the cash value of a life insurance policy which a debtor may retain is unlimited. (See O.C.G.A. § 33-25-11). In a number of cases, debtors have argued unsuccessfully that the unlimited “exemption” of cash value under O.C.G.A. § 33-25-11 should apply in a bankruptcy case. See In re Sapp, 2012 Bankr. LEXIS 2773 (Bankr. S.D. Ga. 2012) (J. Barrett); In re Ryan, 2012 Bankr. LEXIS 784, 2012 WL 423854 (Bankr. S.D. Ga. 2012) (J. Davis); McFarland v. Wallace (In re Wallace) 516 B.R. 665 (U.S. D. Ct. S.D.Ga. 2014) (J. Hall); In re Dean, 470 B.R. 643 (Bankr. M.D. Ga. 2012) (J. Walker).

In Dean, the debtors held two life insurance policies with cash surrender values of $8,854.00 and $17,776.32 respectively. The debtors first exempted $15,200.00 under O.C.G.A. §§44-13-100(a)(6) and (9). The debtors then claimed an exemption on the remaining $11,530.61 under O.C.G.A. §33-25-11. The trustee objected, and the bankruptcy court sustained the objection. The Dean Court found that O.C.G.A. §44-13-100 is a “self-contained unit” through which the legislature intended to provide a list of exemptions to be used in bankruptcy. The court ruled that O.C.G.A. § 33-25-11, on the other hand, was a more general statute that limits the remedies of creditors outside of bankruptcy. The court in Dean found nothing in the history or language of O.C.G.A. § 33-25-11 which indicated that it applied in bankruptcy. See also In re Ryan 2012 Bankr. LEXIS 784, 2012 WL 423854 (J. Davis) (§33-25-11 does not function as a bankruptcy exemption statute).

Since Dean, other disputes between a debtor and a trustee over the cash surrender value of a life insurance policy have raised substantial questions regarding the validity of Georgia’s life insurance exemption statute. The United States District Court for the Southern District of Georgia was confronted with the question of whether O.C.G.A. § 44-13-100 violates: (a) the Supremacy Clause of the U.S. Constitution, (b) the Bankruptcy Clause of the United States Constitution, and (c) the Equal Protection Clause of the Georgia Constitution. The debtor argued that the cash surrender value of the life insurance policy could be exempted under O.C.G.A. § 33-25-11. See McFarland v. Wallace, 516 B.R. 665 (Bankr. S.D. Ga, 2014) (J. Hall). In McFarland, the debtor attempted to exempt the full cash surrender value of a whole life insurance policy under O.C.G.A. § 44-13-100(a)(9) and O.C.G.A. § 33-25-11. The trustee sought to have the exemption disallowed entirely or limited to the $2,000 exemption amount provided in § 44-13-100(a)(9).

The district court first considered whether the statute violated the Supremacy Clause of the United States Constitution. The court determined that pursuant to O.C.G.A. § 44-13-100(b), Georgia “opted out” of the federal bankruptcy exemptions provided in 11 U.S.C. § 522(d) and thus a Georgia bankruptcy debtor is limited to the exemptions found in O.C.G.A. § 44-13-100. Id. The court held that Georgia law and federal law were not in conflict because Congress, through 11 U.S.C. § 522(b), expressly granted states the power to opt out of the federal exemptions and provide exemptions under state law. Id. at 668.

Secondly, the district court considered whether the statute violated the bankruptcy clause. The court stated that “the bankruptcy clause only requires that bankruptcy laws apply uniformly among classes of debtors.” Id. (quoting United States v. Wood, 866 F.2d 1367, 1372 (11th Cir. 1989)). The district court determined that although Georgia law treats bankruptcy debtors different from nonbankruptcy debtors, the statute was not in conflict with the bankruptcy clause because it applies uniformly to all debtors in bankruptcy. Id.

Next, the court considered whether the exemption statute violated the Equal Protection Clause of the Georgia Constitution. The district court applied the same rationale used in the bankruptcy clause analysis.

The rational basis for providing separate exemptions for purposes of bankruptcy is to serve the overriding purposes of the bankruptcy laws: “to collect all of the assets and liabilities of an entity, to pay the creditors of the bankrupt to the fullest extent possible, and to give the debtor a fresh start.”

Id. at 669 (quoting Menchise v. Akerman Senterfitt, 532 F.3d 1146, 1151 (11th Cir. 2008)). The court found that Georgia’s classification served those purposes. Furthermore, the court held that the Georgia Constitution does not require that nonbankruptcy debtors and bankruptcy debtors receive the same treatment since they are not in similar circumstances. Id. As a result, the exemption did not violate the Equal Protection Clause of the Georgia Constitution. Id.

Lastly, the court considered whether the debtor could exempt the full cash surrender value of a life insurance policy under O.C.G.A. § 35-25-11. The court’s analysis mirrored the reasoning of the court in In re Dean, supra, where the court ruled that § 33-25-11 was a more general statute that limits the remedies of creditors outside bankruptcy and nothing in the statutory history or language indicated that it applied in bankruptcy. Id. at 670.

The case was appealed to the 11th Circuit. See In Re McFarland, 290 F.3d 1182 (11th Cir. 2015). The 11th Circuit performed a statutory analysis to determine whether the debtor was “stuck” with § 44-13-100(a)(9) or whether he could use the provision protecting debtors more generally (O.C.G.A. § 35-25-11). In addition, the court performed a constitutional analysis to determine whether restricting bankruptcy debtors to § 44-13-100(a)(9) violated: (1) the Georgia Constitution’s Equal Protection Clause or (2) the United States Constitution’s Bankruptcy Clause.

The debtor argued that federal law, specifically 11 U.S.C. §§ 522(b)(3)(B) & 541(c)(2) allowed him to exempt property beyond that which is covered by O.C.G.A. § 44-13-100. In response, the 11th Circuit noted that a specific statute would prevail over a general statute absent any indication of contrary legislative intent. In re McFarland, 790 F.3d 1182 (11th Cir. 2015). Therefore, regardless of the lack of limiting language in § 33-25-11, the debtor could only use § 44-13-100(a)(9) because that statute specifically restricted bankruptcy debtors to a cash value life insurance exemption of $2,000. Id. at 1191. The court further stated that “in liberally construing exemption statutes, it could not ignore a statute’s plain language.” Id. at 1191 (quoting Carter v. Progressive Mountain Ins., 761 S.E.2d 261, 264 (Ga. 2014)). The 11th Circuit noted that Georgia has explicitly declared that bankruptcy debtors may exempt $2,000.00 at most and no more.

Next, the 11th Circuit addressed the debtor’s remaining arguments that restricting debtors to § 44-13-100(a)(9) violated: (1) the Georgia Constitution’s Equal Protection Clause and (2) the United States Constitution’s Bankruptcy Clause. The 11th Circuit denied the argument based on Georgia’s Equal Protection Clause. In Georgia, “where no fundamental right or suspect class is involved … statutory classifications are permitted when the classification is based on rational distinctions and bears a direct relationship to the purpose of the legislation.” Id. at 1192 (quoting Grissom v. Gleason, 418 S.E.2d 27, 30 (Ga. 1992)). The 11th Circuit found that bankruptcy is designed to give debtors a “fresh start”, collect all the assets and liabilities of an entity, and pay creditors of the bankrupt to the fullest extent possible. “Because bankruptcy allows debtors to wipe their financial slate entirely clean, it is plausible that Georgia requires bankruptcy debtors to sacrifice more of their penumbral property (e.g., a life insurance policy) in order to obtain greater relief on property more central to a “fresh start” (e.g., a homestead exemption).” Id. The court held that because Georgia had at least “rationally balanced” the needs of creditors and bankruptcy debtors, it had not transgressed equal protection by treating bankruptcy debtors differently from nonbankruptcy debtors. Id.

Finally, in regards to the bankruptcy clause, the 11th Circuit determined that Congress permitted states to implement bankruptcy exemptions and to restrict bankruptcy debtors to those exemptions without any explicit restrictions indicating that states must treat all debtors alike. Id. at 1194 (quoting In re Wood, 866 F.2d 1367 and Labor Execs.’ Ass’n v. Gibbons, 455 U.S. 457, 469). The court stated that the bankruptcy clause “only requires that bankruptcy laws apply uniformly to classes of debtors.” Id.

[The] Bankruptcy Code allows the states to define what property a debtor may exempt from the bankruptcy estate…Nothing in [11 U.S.C. § 522(b)] (or elsewhere in the Code) limits a state’s power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.

Id. Thus, the boundaries of the bankruptcy clause were not overstepped by Georgia’s election to limit the exemption available to bankruptcy debtors but not nonbankruptcy debtors.

6. Workers’ Compensation (O.C.G.A. § 44-13-100(a) (11) (E))

As discussed above, workers’ compensation awards are exempt outside bankruptcy pursuant to a specific statutory exemption. O.C.G.A. § 34-9-84. The workers’ compensation statute provides: “[n]o claim for compensation under this chapter shall be assignable, and all compensation and claims therefor shall be exempt from all claims of creditors.” Id. (emphasis added) The Bankruptcy Court in the Southern District has held that this statute exempts workers’ compensation awards in bankruptcy. The court held that the language of §34-9-84 applies regardless of whether the person receiving the benefit is a debtor in bankruptcy. The creditor argued that O.C.G.A. § 44-13-100 represented the exclusive basis for a bankruptcy exemption in Georgia and therefore that O.C.G.A. § 34-9-84 does not apply in a bankruptcy case. In re Fullwood, 446 B.R. 634 (Bankr. S.D. Ga. 2010) (J. Davis). In Fullwood, Judge Davis rejected the creditor’s argument that the Georgia statute was pre-empted by the federal statute enabling exemptions, 11 U.S.C. §522. Judge Davis noted that the Georgia’s workers’ compensation statute and the exemption of any award under the statute had been in existence for 60 years prior to the passage of §44-13-100. Thus, the Georgia legislature passed §44-13-100 within a framework that had completely exempted workers’ compensation awards from creditors. Judge Davis found that to expressly include a provision exempting workers’ compensation awards under §44-13-100 would have been unnecessary. However, another bankruptcy judge could have reached a different result.

As noted, Fullwood allows application of a “nonbankruptcy” exemption within a bankruptcy case. However, Georgia’s bankruptcy exemption statute does contain a provision which should cover workers’ compensation payments. Under O.C.G.A. §44-13-100(a) (11) (E), a debtor may exempt a debtor’s right to receive “a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” Id. Like certain other bankruptcy exemptions, the value (or amount) of the exemption is qualified or otherwise limited by a “reasonable support” standard. However, if the exemption provided by O.C.G.A. § 34-9-84 does apply in a bankruptcy case, then the exemption may not be limited to the amount “reasonably necessary” for support.

7. Health Savings Accounts

Another area of contention is whether health savings accounts may be exempted. At least one Georgia Bankruptcy Court has held that a health savings account (an HSA) was not exempt. In re Mooney, 2014 Bankr. LEXIS 29, 2014 WL 32388 (Bankr. M.D. Ga. Jan. 3, 2014) (J. Walker). The debtor argued that her HSA represented a right to receive an “illness benefit” under O.C.G.A. § 44-13-100(a)(2)(C). The debtor argued alternatively that a HSA distribution represented a payment under a plan respecting illness under O.C.G.A. §44-13-100(a)(2)(E).40 HSA proceeds may be used to pay expenses “for the diagnosis, cure mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” 26 U.S.C. §§213(d)(1)(A) and 223(d)(2). The court in Mooney applied the cases decided in the annuity disputes. Specifically, the court noted that the Georgia Supreme Court in Cassell stated that “the common feature” of all plans under §44-13-100(a)(2) “is that they provide income that substitutes for wages.” Id. at 610. Judge Walker reviewed the factors from Cassell that determine whether a plan serves as a substitute for wages: (1) the nature of the plan or contract, (2) the circumstances surrounding the purchase of the plan or contract, (3) whether contributions to the plan were made over time, (4) the extent of the debtor’s control over the asset, (5) whether the asset is part of a pre-bankruptcy planning scheme. Id. at 12 (citing Cassell v. Silliman, 738 S.E.2d at 610). In Mooney, the court found that nothing about the HSA indicated that it was intended as a substitute for wages. The court in Mooney noted that while HSAs are tax exempt, they are intended as a means to plan for and manage an individual’s medical expenses and not income replacement. Hence the court in Mooney held that the debtor’s HSA was not exempt.

In reaching its decision in Mooney, the court used the approach established by the Georgia Supreme Court in Cassell which concerned annuities and application of subsection 100(a)(2)(E) [exempting a payment under a pension, annuity, or similar plan on account of illness …] The court in Mooney saw no distinction between a savings plan for income loss (such as an annuity) and a savings plan for illness (such as an HSA).

The debtor appealed the Mooney decision to the district court. On appeal, the district court affirmed the bankruptcy court’s order. The district court reviewed Rousey, where the United States Supreme Court found that a particular debtor’s individual retirement account was exempt under 11 U.S.C. § 522(d) (10) (E) because the IRA was a “right to receive … a payment … on account of … age.” Mooney v. Webster (In re Mooney), 2015 U.S. Dist. LEXIS 22964 (M.D. Ga. Feb. 26, 2015). Applying the principles in Rousey and Cassell, the district court found that the debtor’s HSA in Mooney was not subject to an exemption under O.C.G.A. § 44-13-100(a)(2)(E) because it was not a substitute for wages. Id. at 7. Instead, the district court determined the debtor’s HSA was “a place to park wages that, if used for qualified health care expenses, allows favorable tax treatment.” Id. The district court further held that because the HSA was not a substitute for wages, it was not exempt from the debtor’s bankruptcy estate under § 44-13-100(a)(2)(C). Id. at 8. The district court found that HSA funds are not “specifically or clearly set out as exempt under the Georgia Code and are not clearly identified with or clearly analogous to the exempted fund.” Accordingly, the district court held that the HSA was not exempt. The debtor has appealed the district court’s order to the 11th Circuit. The appeal remains pending.

5. Bankruptcy Procedure Regarding Exemptions And Objections

1. Objections To Exemptions

A debtor is required to file a list of the property claimed as exempt. 11 U.S.C. §522(l).41 Bankruptcy Rule 1007(c) requires that this be done within 14 days of the bankruptcy filing unless the court grants an extension. The exemptions are filed (or claimed) on Schedule C. If the debtor fails to claim exempt property timely, a dependent of the debtor may do so within 30 days of the expiration date. Bankruptcy Rule 4003(a). Once a debtor or his dependent claims an exemption, that exemption is allowed as a matter of law unless a timely objection is made. Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). As a general rule, an objection to a claimed exemption must be made within 30 days after the 341 meeting is concluded. However, if a debtor files an amendment to Schedule C, an objection may be filed within 30 days of such amendment. Bankruptcy Rule 4003(b)(1).

This rule is subject to two exceptions contained in Bankruptcy Rule 4003(b)(2) and (3). Under Rule 4003(b)(2), if the trustee is alleging that the debtor fraudulently asserted the claim of exemption, the trustee may bring the action within one year of the close of the case. Under Rule 4003(b)(3), an objection based on 522(q) may be filed up to the closing of the case. §522(q). Bankruptcy Code § 522(q) prohibits the debtor from exempting more than $155,675.0042 in property used as a residence, homestead, or burial ground and acquired within 1215 days prior to the petition under certain circumstances such as (a) where the debtor has been convicted of a securities-related crime or violation, or (b) where a “criminal act, intentional tort, or willful or reckless misconduct … caused serious physical injury or death to another individual” in the five years prepetition. 11 U.S.C. § 522(q)(1).

2. Valuation Of Property Claimed As Exempt: Schwab V. Reilly (U.S.S.C. 2010)

Another contested issue exists regarding the procedure for exempting assets exists where the debtor seeks to exempt all of an asset for which the debtor is allocated a limited amount of exemption but the debtor is unsure of the market value of that asset. On one hand, it seems unwise to claim an exemption in the asset for more than the asset is worth (thereby losing exemption dollars that could be used on another asset). On the other hand, the consequences could be a loss of the asset if it turns out to be worth more than the amount exempted. The United States Supreme Court addressed the issue in Schwab v. Reilly, 560 U.S. 770, 130 S. Ct. 2652 (2010).

In Schwab, the court held that when a debtor exempts an amount within the limits of the exemption provisions, that the debtor is limited to that amount and the estate can recover any value in the asset beyond the dollar value the debtor declared exempt. The facts of Schwab are as follows: In April 2005, Reilly filed Chapter 7 bankruptcy and listed equipment related to her catering business with a value of $10,718.00. Reilly also claimed two exemptions in the equipment which equaled the $10,718.00 value. The Chapter 7 trustee did not object to the exemptions. Subsequently, the trustee had the equipment appraised, discovered the actual market value of the same to be $17,000.00, and filed a motion to sell the equipment with the proceeds, less the $10,718.00 exemption, going to the bankruptcy estate. The debtor objected to the sale motion, arguing that: (a) the equipment was fully exempt based upon her schedules listing the value and the exemptions at the same amount, i.e. she intended to fully exempt the equipment’s full value, and (b) that no objection was filed to those exemptions. The bankruptcy court denied the sale motion. The district court in Pennsylvania affirmed the bankruptcy court’s order. On appeal the 3rd Circuit further affirmed. The 3rd Circuit held that the trustee’s failure to file a timely objection to debtor’s exemption barred him from moving to sell the property stating that “a debtor who exempts the entire reported value of an asset is claiming the “full amount” whatever it turns out to be”. In re Reilly, 534 F.3d 173 at 178-9 (3rd Cir. 2008). The trustee then appealed to the Supreme Court.

In reversing the lower court’s decision, the Supreme Court focused on the fact that the claimed exemptions were within the limits allowed by the Bankruptcy Code. As such, the Supreme Court found that the trustee “had no duty to object to the property Reilly claimed as exempt … because the stated value of each interest, and thus of the “property claimed as exempt” was within the limits the Code allows.” Schwab v. Reilly, 560 U.S. 770, 782 (2010). The court further differentiated the Reilly holding from its decision in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). In Taylor, the debtor listed an “unknown” value of a potential lawsuit recovery and the trustee failed to timely object to the exemption. In holding that the Taylor debtor was entitled to exempt 100 percent of the lawsuit proceeds due to such failure, the Supreme Court focused on the fact that the “unknown” valuation should have been a red flag for the trustee to object.43 The Schwab Court reiterated such “red flag” language. The Schwab court further stated that “[w]here, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed to exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as “full fair market value (FMV)” or “100 percent of FMV.”

3. Surcharging Exemptions: Law V. Siegel (U.S.S.C. 2014)

In 2014, the U.S. Supreme Court held that the trustee may not surcharge a debtor’s exemptions even in a case of fraud. Law v. Siegel, 134 S. Ct. 1188, 188 L. Ed. 2d 146 (2014). As found by the bankruptcy court, the debtor’s acts in Siegel were egregious. In Siegel, a Chapter 7 debtor valued his home and exempted $75,000 of the scheduled amount. The debtor also scheduled two secured debts which exceeded the nonexempt value from the home which appeared to leave no equity. The Chapter 7 trustee initiated an adversary proceeding alleging that one of the two liens was fraudulent because no one actually made a loan to the debtor for the disputed deed. The bankruptcy court determined that the loan was fiction and meant to preserve the debtor’s equity in his residence beyond what he could legally claim as exempt. The court found that the Chapter 7 trustee had incurred more than $500,000 in legal fees uncovering the debtor’s fraudulent misrepresentations. As a result, the bankruptcy court granted the Chapter 7 trustee’s motion to surcharge the entirety of the debtor’s $75,000 homestead exemption to defray the legal fees incurred uncovering the fraudulent conduct.

The debtor appealed the bankruptcy court’s ruling, and the 9th Circuit Bankruptcy Appellate Panel affirmed the decision.44 On appeal, the Supreme Court considered whether a bankruptcy court may order that a debtor’s exempt assets be used to pay administrative expenses incurred as a result of the debtor’s misconduct. The Supreme Court began its analysis by reviewing Bankruptcy Code § 105 noting that the bankruptcy court has statutory authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code.” Id. at 1195. The Supreme Court also acknowledged a bankruptcy court’s “inherent power … to sanction “abusive litigation practices.” However, the court further stated that in exercising those statutory and inherent powers, a bankruptcy court may not contravene specific statutory provisions.

The court concluded that Bankruptcy Code § 522 entitled the debtor to a homestead exemption which was “not liable for payment of any administrative expense.” Id. Specifically, Bankruptcy Code § 522(k) provides that “property that the debtor exempts under [§ 522] is not liable for payment of any expense” except certain delineated exceptions.45 The Chapter 7 trustee’s claim for administrative expenses for reimbursement under Section 503(b) was not a delineated exception under § 522(k). The Supreme Court applied the “normal rule of statutory construction” that words repeated in different parts of the same statute generally have the same meaning. The Supreme Court found that the bankruptcy court’s order (which ordered the debtor’s homestead exemption be made available to pay administrative expenses) violated Bankruptcy Code § 522’s express provisions. Id.

The Chapter 7 trustee also argued that Bankruptcy Code § 522 establishes the procedure by which a debtor may seek to claim exemptions but contains no directive requiring bankruptcy courts to allow the exemption regardless of the circumstances.46 In other words, the trustee argued that because § 522(b) says the debtor “may exempt” certain property, rather than “shall be entitled” to exempt, the court retains discretion to grant or deny exemptions even where the statutory criteria are met. The Supreme Court ruled that the subject of “may exempt” in § 522(b) is the debtor, not the court. The court therefore held that the discretion afforded in § 522 is to the debtor not the court. Id.

The Supreme Court acknowledged that its ruling forced the Chapter 7 trustee to shoulder the financial burden resulting from uncovering the debtor’s fraudulent misconduct and would likely produce inequitable results in other cases. Yet, because “Congress balanced the difficult choices that exemption limits impose on debtors with the economic harm that exemptions visit on creditors” in crafting the provisions of Section 522, the court determined that Congress should also alter the balance struck by the statute. Id. at 1198. Thus, the Supreme Court held that whatever other sanctions a bankruptcy court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the Bankruptcy Code. Id.

4. Conclusion

While the original impetus for the founding of Georgia was to provide a fresh start for English debtors, the actual settlement was a microcosm of English society. Likewise, the current state of Georgia’s exemption statute is more analogous to the colony itself rather than its promise at inception. Georgia’s promise of a comprehensive, inclusive statutory exemption scheme in reality resulted in a mix of statutory exemptions which are pockmarked with questions. The Georgia statutes providing exemptions and the case law interpreting them are currently working through several issues, including annuities, IRAs and Health Savings Accounts. The statutory exemptions (effective outside bankruptcy) often provide a different result than the bankruptcy exemptions. For example, determination of whether an annuity is exempt under the bankruptcy exemptions statute is very fact intensive and creates uncertainty for a prospective bankruptcy debtor. But at the same time, the statutory protection for an annuity outside bankruptcy seems much broader. Health Savings Accounts are vehicles recently created and perhaps not sufficiently addressed by Georgia’s current exemption provisions. The current state of Georgia law does provide for exemption (or other protection) of certain debtor assets from claims of creditors. Nonetheless, questions, ambiguities, and potentially dichotomous results continue to exist in this area of the law.

30 A restriction on transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a bankruptcy case. Bankruptcy Code § 541(c)(2). As discussed below, courts have applied this provision to certain types of retirement accounts.

31 One possible exception exists. At least one Georgia bankruptcy judge has applied an exemption (which is not contained in O.C.G.A. § 44-13-100) in a bankruptcy case. The exemption of workers’ compensation provided for in O.C.G.A. § 34-9-84 was allowed in a bankruptcy case. In re Fullwood, 446 B.R. 634 (Bankr. S.D. Ga. 2010) (J. Davis). See below for discussion.

32 The court further stated that the Georgia Code provides for an exemption in certain proceeds but automobile insurance proceeds are not among the exemptions provided for under § 44-13-100(a) (11). “The grouping of these particular statutory exemptions suggests that the common thread among the exemptions is not to protect repayments made to compensate a debtor for direct pecuniary loss or other damage to property.” In re Carelock, 2006 Bankr. LEXIS 3415 (2006) (quoting In re Seymour, 285 B.R. 57, 59 (Bankr. N.D. Ga. 2002)). The court determined the exemptions “are all intended to protect a debtor’s right to payments that would either replace a loss of the debtor’s future source of support or would serve to compensate the debtor for an injury to his person.” Id.

33 In regards to whether the debtor’s wife could exempt the tractor as a “tool of trade”, the debtor-wife admitted that she did not personally farm. In addition, she stated she had never driven or used the tractor and there was no evidence that the tractor was necessary for any of the work she performed or that she made essential contributions to the operation of the farm. As a result, the court concluded that the tractor was not a tool of the trade as to the debtor-wife. The court allowed the debtor-husband to use his tool of trade exemption under § 44-13-100(a)(7).

34 “Funds or benefits from an individual retirement account as defined in Section 408 of the United States Internal Revenue Code of 1983, as amended, [are] exempt from the process of garnishment until paid or otherwise transferred to a member of such program or beneficiary thereof.” O.C.G.A. § 18-4-22(a).

3526 U.S.C. § 4975(c)(1) provides:
For purposes of this section, the term “prohibited transaction” means any direct or indirect —
(A) Sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) Lending of money or other extension of credit between a plan and a disqualified person;
(C) Furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
In Cherwenka, the debtor, as fiduciary, represented a “disqualified person.”

36 The “recognition of self-directed IRAs as qualified IRAs, necessarily implies that a disqualified person (the owner as fiduciary) will make investment decisions regarding the plan.” Id. at 237.

37 In the same case, Judge Diehl found that an annuity was not exempted under (2.1) (D) because the debtor funded the annuity with premiums beyond that allowed for IRAs. In re Cherwenka, 508 B.R. 228 (Bankr. N.D. Ga. 2014).

38 For a general discussion of SEP plans, see the IRS website. Choosing a retirement plan: http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SEP.

39 For example, in Bramlette, the court allowed the trustee 10 days to request an evidentiary hearing on whether the Roth IRA was “reasonably necessary” for support.

40These sections exempt:
(2) The debtor’s right to receive:
(C) A disability, illness, or unemployment benefit.
(E) A payment under a pension, annuity, or similar plan on account of illness … to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”
O.C.G.A. § 44-14-100(a)(2)(C) and (E).

41 O.C.G.A. § 44-13-101 requires notice of exemptions under § 44-13-100 to be filed in the probate court. However, this provision is pre-empted by 11 U.S.C. § 522(l). Caruthers v. Fleet Finance, Inc. (In re Caruthers), 87 B.R. 723, 729 (Bankr. N.D. Ga. 1988).

42 This is not a static number but rather is adjusted periodically, the same as, for example, Chapter 13 debt limits.

43 The Supreme Court suggested that in cases of uncertainty about the value of an asset that the debtor seeks to exempt, the trustee can ask for a valuation hearing or can seek an extension of time to object to the exemption. Id. at 644.

44 The 9th Circuit determined that the bankruptcy court’s findings regarding the debtor were not clearly erroneous and that the court had not abused its discretion by surcharging the debtor’s exempt assets. Law, 134 S. Ct. at 1194 (Citing Latman v. Burdette, 366 F. 3d 774 (2004)). The 9th Circuit determined that a bankruptcy court had power to “equitably surcharge a debtor’s statutory exemptions” in exceptional circumstances. Id. The 9th Circuit held that the surcharge was proper because it was “calculated to compensate the estate for the actual monetary costs imposed by the debtor’s misconduct, and as warranted to protect the integrity of the bankruptcy process.”

45 The court went on to list some of the exemptions related to debtor misconduct provided for by the Bankruptcy Code to support the position that the detailed list of exemptions and exceptions confirmed that bankruptcy courts are not authorized to create additional exceptions. Id.

46 The Supreme Court did note that Bankruptcy Code § 522 does not give debtors an absolute right to retain exempt property. Id. In Siegel, there was no timely objection to the debtor’s claim of exemptions. The court quoted the Bankruptcy Appellate Panel stating that “because no one timely oppose[d] [Law]’s homestead exemption claim,” the exemption “became final” before the bankruptcy court imposed the surcharge. The court also quoted a previous holding from Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644 (1992), stating that “a trustee’s failure to make a timely objection prevents him from challenging an exemption.” Id. at 1196.

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