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Supreme Court Rules Fraudulent Debtor Can Still Use Homestead Exemption – Glass & Goldberg | Financing, Property & Bankruptcy Law
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Supreme Court Rules Fraudulent Debtor Can Still Use Homestead Exemption

Federal law permits individuals (debtors) who file for bankruptcy to receive a homestead exemption. Debtors may exempt a portion of the equity in their home from being used to pay creditors. Federal bankruptcy law provides a debtor an exemption of up to $22,975 of such equity. But states can authorize even larger exemptions. California, for instance, grants debtors exemptions of $75,000. (California also authorizes larger exemptions as follows for those who fit these categories: $100,000 if you live with a family member; $175,000 if you are 65 or older, or physically or mentally disabled; or $175,000 if 55 or older, single, and earn a gross annual income under $25,000 or are married and earn a gross annual income under $35,000.) A recent decision by the United States Supreme Court addressed whether a bankrupt homeowner can lose the benefit of the exemption if the homeowner acts fraudulently in presenting evidence in his bankruptcy case.

In the case of Law v. Siegel, No. 12-5196. (S. Ct. 2014), the debtor, Mr. Law, sought to use his $75,000 homestead exemption. The trustee, Mr. Siegel, did not object to Mr. Law’s invocation. But he did find that one of the two liens to which his house was subject was fraudulent. Law claimed that the first lien in favor of Washington Mutual amounted to $147,156.52 and the second lien in favor of Lin’s Mortgage and Associates amounted to $156,929.04. Considering that the sum of these liens exceeded the non-exempt equity Law had in his home, as he was claiming California’s $75,000 exemption, creditors of Mr. Law could not rely on his home equity as a source from which they could receive any payments on their claims.

The trustee found, after a substantial investigation, that no company known as Lin’s Mortgage and Associates ever lent money to Mr. Law. A woman in California with the name “Lili Lin” denied ever having loaned him money and described his repeated efforts to involve her in various sham transactions relating to the disputed deed of trust. Meanwhile, a second “Lili Lin” from China spent five years contesting the avoidance of the deed of trust and the sale by Siegel of the residence. In 2009, five years after the debtor filed for Chapter 7 bankruptcy, the court determined that no such lien was ever made to Mr. Law and that the lien was fictitious. In response the trustee requested, and the court agreed, that the homestead exemption should be used to pay the costs of his investigation and legal action to find out there was no such loan and/or lien. After the Ninth Circuit Court of Appeals affirmed this ruling, the Supreme Court reversed that decision. It held that the bankruptcy court had no authority to apply the exemption to pay such expenses. The Court recognized that principles of equity may commend such a fair outcome but, as the bankruptcy code does not expressly specify that the exemption can be re-applied to defray costs caused by debtor’s own fraud, the bankruptcy court lacked the authority to deprive Mr. Law of the benefit of the state homestead exemption.

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