The homestead exemption in bankruptcy is one of the most well known exemptions in bankruptcy law.  The ability to file a bankruptcy case and not have creditors tamper with one’s real property is a major advantage to debtors seeking a fresh start.  The homestead exemption varies from state, and in Kansas it is one of the most generous in the country.  A recent Supreme Court decision reaffirmed the commitment of the courts to ensuring that this exemption will continue to be absolute and unqualified.  

At the same time, the decision restated the power that bankruptcy courts enjoy under Section 105(a) of the code.  This section has applicability in business bankruptcy cases, when it is used routinely by debtors in possession to facilitate their reorganization and for selling assets free and clear of liens under Section 363.

The decision in question is Law v. Siegel, Chapter 7 Trustee.  (The transcript of the oral argument can be found by clicking on the link here.  The slip opinion can be found by clicking here).  It was just decided (March 2014), and the slip opinion released on March 4.  In Siegel, the Chapter 7 Trustee attempted to surcharge the California debtor’s $75,000 homestead to pay for the trustee’s administrative expenses, which were incurred through the debtor’s malfeasance.  Section 522(k) of the Bankruptcy Code prohibits forcing a debtor to pay estate administrative expenses from his exempt assets, and this rules means exactly what it says.  Neither can the Bankruptcy Court use its general enforcement powers under Section 105(a) to get around the specific statutory language that creates an exemption.

The fact that the debtor’s malfeasance and misrepresentations had triggered the investigation was irrelevant, the Supreme Court said.  Exempt means exempt, and the bankruptcy court could not get around this fact.  Where express statutory language has created an exemption, the bankruptcy court cannot use its enforcement powers under Section 105(a) to get around that statutory language.  If there has been debtor misconduct, the trustee and the bankruptcy courts have a variety of other remedies available to them, rather than going after a debtor’s exempt assets.

The Supreme Court recognized that its ruling might place a financial burden on trustees seeking to undertake actions against dishonest debtors, but it had no sympathy for any attempt by the bankruptcy court to alter Congress’s intent in creating Section 522 to protect homesteads.  Other remedies were available, and should have been employed.  Although the Supreme Court’s ruling may have been focused on a narrow issue, it can be read as endorsing the broad authorities of bankruptcy courts to carry out provisions of the Bankruptcy Code, under Section 105.  In this sense, the ruling expands, rather than restricts, the power of bankruptcy courts.

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