By Ryan C. Wood

Filing for bankruptcy protection is a way to obtain a fresh start. But what if after bankruptcy you are left penny less and barefoot. How can you start over at all? Exemptions protect some or all of your assets when filing for bankruptcy. Whether the exemptions protect all your stuff really depends upon what you have and how much it is worth. There are Federal Exemptions and each state can choose not to follow the Federal Exemptions and create their own. California Exemptions are pursuant to California Civil Procedure 703 and California Civil Procedure 704. In the Law case recently decided by the Supreme Court of the United States the Homestead Exemption pursuant to CCP §704.730(a)(1) is the focus of the case and the debtor’s conduct.

The bankruptcy filer, Stephen Law, filed for Chapter 7 bankruptcy in the Bankruptcy Court for the Central District of California. Alfred H. Siegel was appointed as the Chapter 7 bankruptcy trustee to administer the bankruptcy estate. Mr. Law and his bankruptcy lawyers properly listed his primary residence as an asset in Schedule “A” and that the primary residence had to mortgages or liens recorded against it as listed in Schedule “D”. Mr. Law valued the house at $363,348.00. Schedule D listed the first deed of trust of $147,156.52 and the second Lin deed of trust of $156,929.04. So the alleged secured debt recorded against Mr. Law’s house at the time of filing was $304,085.56. If the house is worth $363,348.00 then there is in theory $59,262.44 in equity Mr. Law can protect with the CCP 704 homestead exemption totaling $75,000. That is exactly what Mr. Law did. In his Schedule “C” Mr. Law applied the $75,000 exemption to the equity in his home and therefore there is allegedly no value to the bankruptcy estate for the benefit of creditors.

See Law vs. Siegel regarding how powerful bankruptcy exemptions are.

But wait a second. The Chapter 7 trustee, Alfred H. Siegel, for whatever reason believed the second deed of trust was a fraud. If that were true, the bankruptcy estate would be entitled to around $140,000 in equity in Mr. Law’s home after applying the homestead exemption. Turns out Mr. Siegel was right and to prove the second mortgage was a fraud in a lengthy legal battle. The bankruptcy court then surcharged Mr. Law’s $75,000 homestead exemption to pay for attorney’s fees and costs of the Chapter 7 trustee. This is where things went wrong according to the Supreme Court of the United States. SCOTUS held that surcharging an exemption to pay for administrative fees and costs is not allowed pursuant to the Bankruptcy Code. Even though Mr. Law committed fraud and it was proven at great expense, the Bankruptcy Court could not try and help remedy this wrong in this way. Bankruptcy exemptions are very powerful and once applied and not objected to in a timely manner prevent assets from being available to the Chapter 7 trustee and creditors for payment.

What could have happened is the Chapter 7 trustees’ bankruptcy attorney could have objected to Mr. Law’s use of the CCP 704 homestead exemption before the deadline passed. What the outcome of that fight would be is for further speculation. What we do know is that the bankruptcy court may have been able to penalize Mr. Law for his conduct within the grant of power the Bankruptcy Code provides. Bankruptcy exemptions are very powerful as provided in Supreme Court case Law. Vs. Siegel, Chapter 7 Trustee.