Supreme Court Ruling: Your Exempt Assets Remain Exempt in Bankruptcy; Cincinnati Lawyer Explains

In Law v. Siegel, the U.S. Supreme Court ruled that a Debtor could not be ordered to pay administrative expenses from his exempt assets in a bankruptcy action. Cincinnati and Northern Kentucky bankruptcy lawyer Eric Steiden comments on the ruling.
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CINCINNATI - May 12, 2014 - PRLog -- The U.S. Supreme Court unanimously ruled in a case last month, Law v. Siegel, that a Bankruptcy Court erred when it penalized a Debtor who lied to the court by requiring him to pay money received in a homestead exemption to the Trustee. In an opinion for the Court, Justice Antonin Scalia wrote that exempt assets are specifically not liable for administrative costs, and that the Court had no power to deny exemptions due to misconduct.

Eric Steiden, Cincinnati and Northern Kentucky bankruptcy lawyer, said the Court's ruling means that exemptions are untouchable even when the Debtor has behaved badly.

"As public policy, exemptions exist to ensure that people going through bankruptcy are able to hold on to some of the property they hold," Steiden said. "This ruling affirms how critical this issue is in bankruptcy law."

In the case, Law filed for Chapter 7 bankruptcy ( In a Chapter 7 bankruptcy, some of the Debtor's property falls under certain exemptions pursuant to state or federal law. Some non-exempt property might have liens, like a mortgage, and the property might be sold and the lienholders are paid off. Non-exempt property without liens could also be liquidated or sold, and the proceeds used to pay off  remaining creditors. Most remaining debts are discharged.

Law claimed the $75,000 homestead exemption allowed by California law on his $360,000 house. As exempt property, that portion of the value of his home could not be liquidated and he would be able to keep it after bankruptcy. Law reported a $150,000 mortgage on the house.

He also reported a second $160,000 mortgage on the house. As it turned out, the Trustee discovered (after spending nearly half a million dollars investigating), that the second mortgage was completely fabricated. Law had reported the fake lien because the two liens and the exemption added up to an amount greater than the value of the house, meaning Law's unsecured creditors would not be paid from the proceeds of a sale.

As a penalty, the Bankruptcy Court ordered Law to pay the $75,000 in proceeds from the exemption to the Trustee to compensate the Trustee for the cost of investigating the matter. In last month's ruling, the Supreme Court held that decision to have been made in error and remanded the case.

In Ohio, the homestead exemption is more generous at $132,900. Kentucky's state exemption is only $5,000. However, Kentucky Debtors are allowed to use federal exemptions and the federal homestead exemption is $22,975. While that amount may not seem like much compared to that of California, every penny can count in a bankruptcy, and holding on to these funds can be critical after discharge, Steiden said.

"I strongly advise clients against ever attempting to mislead their attorney or the Bankruptcy Court," Steiden said, “as the consequences may result in denial of discharge or criminal penalties. However, this ruling is important because it affirms that exemptions may not be touched by a Court, even for clear malfeasance. Exemptions are meant to be off-limits, and should remain so."

Eric Steiden, of Steiden Law Offices, is a Cincinnati and Northern Kentucky bankruptcy lawyer ( who assists clients with Chapter 7 and Chapter 13 bankruptcies in Northern Kentucky and Southern Ohio, with multiple offices in Cincinnati, Ohio, and also in Florence and Covington, Kentucky.

Eric Steiden
(513) 684-9900
Source:Steiden Law Firm
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