Bankruptcy: Poor Debtor's Exemption - Objection in a Chapter 13 Plan

     In the case of In re Bonner, Judge Tice of the United States Bankruptcy Court, Eastern District of Virginia, Richmond Division, ruled that a credit union, which did not perfect its lien on a car the debtor purchased with a credit union loan, could not prevent confirmation of the debtor's Chapter 13 plan. The Court did, however, sustain the credit union's objection to the debtor's claim of a $2,000 "poor debtor's exemption" in the car under Virginia Code §34-5.

     In Bonner the credit union maintained that its purchase money security interest, though not perfected as to third parties, could be enforced in a Chapter 13 case notwithstanding Bankruptcy Code §544(a). The Court ruled, though, that the avoidance powers under §544 extend to trustees in Chapter 13. The Court cited the case of In re Freeman, where another court had held that a Chapter 13 debtor shares the trustee's status as a hypothetical lien creditor under §544. Accordingly, the Court ruled that since either the debtor or trustee is deemed to have exercised the hypothetical lien creditor's rights at the time of filing, the transfer of the security interest by the debtor to the credit union had been nullified. The claim filed by the credit union was therefore unsecured, and the debtor had properly provided for it under the plan.
     Nevertheless, the Court ruled that pursuant to Virginia Code §34-5, the poor debtor's exemption could not be claimed against a debt for the purchase of such property or any part thereof. Unlike the exception included in Virginia Code §34-26(8), which provides only a valid purchase money security interest with priority over the exemption, the restriction in §34-5 is not conditioned on the creditor possessing an enforceable lien. Therefore, the Court reasoned that the credit union's failure to perfect its security interest simply had no bearing. Accordingly, the Court sustained the credit union's objection to the poor debtor's exemption.