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U.S. Supreme Court Rules to Protect Debtor's Exemption

Published March 6, 2014 by Sasser Law Firm

A recent case before the Supreme Court addressed the fear of many debtors contemplating bankruptcy: what if all my property is taken away from me and I have nothing left to live on?

Personal bankruptcy offers debtors the opportunity to exempt some of their qualified property from the reach of creditors. When you file a bankruptcy petition, everything you own, with a few exceptions, becomes part of the bankruptcy estate. Think of an exemption as the trustee giving you back certain property to use in your new like post-bankruptcy. Examples of standard exemptions are: retirement accounts, a certain amount of equity in a home or car, household goods and furnishings, tools of trade etc.

The case of Law v Siegel I asked the Supreme Court the question of whether an exemption, once granted, can be taken away. On March 4th in a unanimous decision, the Supreme Court held that the courts did not have the power to confiscate exempted property even to punish a debtor for the misconduct during bankruptcy.

The facts of Law v Siegel find the bankrupt Stephen Law filing a Chapter 7 bankruptcy. The only asset of value in the bankruptcy estate was his mortgaged home. Mr. Law legitimately used California’s homestead exemption to protect $75,000 of equity in his home. Then, in an underhanded effort to avoid giving money to his creditors, Mr. Law concocted a fictitious second lien that consumed the remaining non-exempt value in the home preventing the trustee from selling the home to disperse the proceeds to creditors. Spiegel, the trustee assigned to Mr. Law’s case, smelled a rat and filed a law suit in an effort to prove Mr. Law invented the second lien to defraud his creditors.

Mr. Law’s deceit escalates at this point as he continues to defend his fabrication to the extent of filing forged pleadings on behalf of a fictitious lien holder from China who “didn’t speak English”. Spiegel spent the next five years in litigation to expose Law’s fraud, incurring overwhelming expenses on behalf of the estate

When faced with Mr. Law’s egregious misconduct and the ludicrously expensive attorney’s fees Trustee Siegel accumulated in the pursuit of justice (almost half a million dollars), the bankruptcy court confiscated Mr. Law’s exempted property (the equity in his home) and used the amount of the exemption (taken from the proceeds on the sale of the house) to defray the costs of the hero-of-truth-and-justice lawyer Siegel.

In reviewing the decision, the Supreme Court ruled that Congress did not grant courts the power to revoke an exemption once granted. Justice Scalia, writing on behalf of the court, gave a well-reasoned, straight forward opinion based firmly on the plain meaning of the bankruptcy code that can be eloquently summed up as “no backsies”.

Despite the frustration that Mr. Law did not receive his just comeuppance and lawyer Siegel getting stuck with the bill, at the end of the day this decision is a win for debtors worried about what they will have left after bankruptcy.

The majority of debtors are hardworking, honest individuals who face the panic of unrelenting debt because of job loss, illness or injury, divorce, or sometimes garden variety bad judgment. In the wake of Law v Siegel, bankruptcy debtors can sleep easier knowing that even the “bad debtors” don’t get their exemptions taken away, reassuring them that exempted property will remain theirs to help fund their new financial start post-bankruptcy.

Read the Supreme Court decision here.

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