Bankruptcy law doesn’t seem to get much attention from the Supreme Court. So on June 17, 2010 when the Supreme Court decided Schwab v. Reilly, bankruptcy attorneys, judges, and trustees paid close attention to the Court’s holding, which explained what debtors are protecting when they claim an exemption in bankruptcy. 130 S.Ct. 2652 (2010). In Schwab, the debtor exempted kitchen equipment valued at $10,718.00. The trustee was aware that the equipment had been appraised for $17,200.00 but did not file an objection to the debtor’s exemptions before the deadline to do so passed. After the deadline, the trustee moved the bankruptcy court for permission to auction the equipment so he could acquire the excess value for the bankruptcy estate. The bankruptcy court denied the trustee’s motion to auction the equipment. This decision was affirmed by both the district court and the court of appeals.
The Supreme Court reversed the lower courts’ decisions, holding that “in cases such as this, an interested party need not object to an exemption claimed in this manner in order to preserve the estate’s ability to recover value in the asset beyond the dollar value the debtor expressly declared exempt.” Id. at 2659. The Court explained that when choosing exemptions, the debtor is not exempting the property but rather is exempting the debtor’s interest in the property. The debtor in Schwab did not exempt her kitchen equipment. She exempted a $10,718.00 interest in the equipment. The additional value of the property was nonexempt and could be realized for the bankruptcy estate. Since the Trustee did not object to the exemption, whether or not the deadline to object to exemptions had passed was irrelevant.