The 9th U.S. Circuit Court of Appeals, which has jurisdiction over all Sacramento area residents who file Chapter 7 or Chapter 13 bankruptcy, ruled yesterday that a Chapter 7 bankruptcy trustee may be able to sell a debtor’s house if its value increases during the bankruptcy, even though the debtor’s equity was fully exempt at the time of filing. The 9th Circuit consolidated two bankruptcy appeals within their jurisdiction in the case, In re Gebhart, No. 07-16769.
Debtors from Arizona and Washington each argued that the Chapter 7 trustee’s failure to object to a homestead exemption claim within the prescribed time frame permitted to contest the property’s value results in the property being withdrawn from the bankruptcy estate.
Gebhart focuses on a debtor who filed for Chapter 7 in Arizona in 2003 and claimed the full value of his home as exempt. The trustee assigned to the case did not object to the exemption when the debtor claimed it. However, the debtor’s case remained open and in 2006 the trustee attempted to sell the house as property values increased in order to reclaim the appreciated value for the debtor’s creditors. The debtor lost in the district court when he objected to the sale arguing the homestead exemption covered the full value of his home when he filed for Chapter 7. Oddly, a court in Washington with facts almost identical to the case filed in Arizona held that the original exemption did in fact cover the inceased value of the debtor’s home.