J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization

In this case from the Western District of Texas, the debtors filed chapter 13 and listed a worker's compensation retaliation claim as exempt property. The exemption was allowed.

But before confirmation, the chapter 13 trustee objected to confirmation of the plan on the grounds that the worker's comp recovery was "projected disposable income" that was not being devoted to pay creditors. In re Ortiz-Peredo, 17-50814 (Bankr. W.D. Tex. July 18, 2017)

Also, the debtors put on no evidence that the money was reasonably necessary for their maintenance and support. Section 1325(b) of the Bankruptcy Code states that if the trustee or an unsecured creditor objects, the court may not approve the plan unless.." 

(b)(1)..(B). the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditorsunder the plan.

The court ruled for the trustee, finding that the worker's comp recovery, even though it was claimed and allowed as exempt, must be paid to creditors. 

The court...noted that the majority of courts find under a plain reading of § 1325(b) that disposable income is not limited by its exempt status. Id. Therefore, the disposable income requirement is not limited by § 522(c) because § 1325(b) does not reference or state that it is limited by § 522(c). (citation omitted)

So if you are in chapter 13, the fact that an asset is exempt does not necessarily mean that it will not have to go to pay creditors. The best defense is to show the trustee (or the court if necessary) what you intend to use the money for, and that it is reasonably necessary for the maintenance and support of the debtors. 

Do you think this decision was correct? Or should debtors be able to keep all exempt property? Please leave your questions or comments below!

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