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No exceptions to bankruptcy exemptions

When you file bankruptcy in Kentucky, you are entitled to certain exemptions in the bankruptcy code. These exemptions are designed to allow you to continue to live a somewhat normal life, albeit at a reduced level. There are federal and state exemptions, and you generally must pick one. Most states offer a homestead exemption, which protects equity in a home, and prevents a trustee from forcing a person to sell their home to pay their other debts.

A man in California created an elaborate fraud after he filed bankruptcy, to make it appear that his home was under a lien, and that the debt combined with the homestead exemption, exceeded the value of the property. This would give the trustee no reason to attempt to sell the property and distribute the profit from the sale.

However, one of the liens on the property was a sham, designed to protect his equity from the creditors. The trustee sued the debtor and when the court finally agreed that the lien was a fiction, the trustee attempted to collect his considerable legal expenses from the debtor.

The court allowed a surcharge against the $75,000 homestead exemption, and the debtor appealed to the Supreme Court. This week, that Court ruled that the exemptions are what Congress says they are, and the bankruptcy court lacks the authority to override those exemptions, even when the results are distasteful.

For the average debtor filling a Chapter 7 or Chapter 13, the important lesson here is that courts are to very strictly interpret the explicit exemptions of the bankruptcy code. This means that you should ask your bankruptcy attorney to carefully explain how Kentucky's exemptions can affect your bankruptcy estate.

Source: SCOTUSblog.com, "Opinion analysis: Justices stick with Bankruptcy Code text, rejecting Ninth Circuit’s creative punishment of lying bankrupt," Ronald Mann, March 4, 2014

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