Bad Faith and Power of Homestead Exemption Under Bankruptcy Laws

One of the benefits of the federal bankruptcy laws is a well known exemption to the liquidation of assets. This exemption is known as the homestead exemption, and under California law can help someone struggling through a bankruptcy emerge from the process with a small win.

Under the law, those filing for bankruptcy under Chapter 7 of the Bankruptcy Code can exempt part of their home’s equity from being lost in the bankruptcy. For Californians, this means they can expect to keep one of the following (if applicable):

• $75,0000 for single people;
• $100,000 for a head of a household;
• $150,000 for a physically disabled person, senior, and others who make less than $15,000 in annual salary.

These exemptions are an important part of the bankruptcy system, and allow those filing for bankruptcy to leave with some hope for starting over better than before.

Exemptions and the Law

These exemptions are found in the statutory language of the Bankruptcy Code and are very powerful under the law. This point was underscored by the Supreme Court in 2014 when they issued an opinion, overruling the 9th Circuit Court of Appeals who had denied a petitioner their right to a $75,000 exemption in the bankruptcy case.

In that case, Law v. Siegel, a man had filed for Chapter 7 bankruptcy, and claimed a $75,000 exemption for his home. At the same time, he claimed that a fictitious company (he invented), held over $100,000 in notes on his house, in addition to the mortgage owed to a bank. As his home was his only real asset, it left nothing for the trustee to liquidate for his estate.

Upon investigation, however, the trustee found out that this fictitious company did not exist, and therefore much of the home could be liquidated. It took several years of litigation and over $500,000 in litigation costs to find this out. When the bankruptcy finished the trustee asked the court to surcharge the man’s $75,000 home exemption, and apply that to the cost the case, and the bankruptcy court complied.

Supreme Court Overturns

This case went to the Supreme Court and they overturned the bankruptcy court and 9th Circuit Court of Appeals. They ruled that while the man’s conduct was fraudulent, and he should have been punished in a number of different ways, they could not just surcharge his home exemption when it is written into the statute, particularly where no other part of the code allows a judge to do this.

This case exemplifies how power the home exemption is in California bankruptcy cases, and why it is important to take advantage of this provision in the law. To do so you need the right legal team handling your case, and ensuring you get the best result possible for you bankruptcy case. These and other provisions can either help, or hurt you, depending on many factors.

If you are contemplating a bankruptcy in California, contact us for more information. At The Bankruptcy Law Center our legal professionals will guide you through the process, and help you understand what your options are regarding a Chapter 7 bankruptcy.

(image courtesy of Christopher Harris)