Bankruptcy Exemption Law – In re Yonikus and Law v. Siegel

Bankruptcy can be a scary thing, especially if someone goes in with the wrong intentions or attempts to conceal something from the bankruptcy court.

In re Yonikus, 996 F.2d 866 (7^th Cir. 1993) is a prime example of why concealing things in bankruptcy is a bad thing.  Daniel Yonikus was injured on the job and had a worker’s compensation claim.  Under Illinois law, 820 ILCS 305/21[1], worker’s compensation benefits are exempt from civil attachment and creditor collections efforts.

While his claim was pending, Yonikus filed for bankruptcy and was granted a discharge.  He did not disclose his workers’ compensation claim, and did not report receipt of the benefits to the bankruptcy trustee.  The bankruptcy trustee later learned of the claim and payment, and filed an adversary proceeding to revoke Yonkius’s bankruptcy discharge, on the grounds that he knowingly and fraudulently failed to report the asset.  The Court ultimately denied Yonikus his exemption and revoked his bankruptcy discharge – which means he lost his money and still owed his creditors.

In short, by failing to disclose his worker’s compensation claim, Yonikus lost both his bankruptcy discharge and his exemption to the claim.

Yonikus is not a debtor to emulate, by any means.  As the bankruptcy court found, he “has proven himself to be a dishonest debtor.”  However, as the truism goes, bad facts make bad law – and the bankruptcy court’s denial of his state law exemptions was, in my mind, bad law.  Whether he was dishonest or not doesn't alter the fact that Illinois law exempts the claim from claims of creditors.

That brings me to the U.S. Supreme Court and a recent case hot off the presses.  In Law v. Siegel, the Supreme Court found that a bankruptcy court “may not contravene express provisions of the Bankruptcy Code by ordering that the debtor’s exempt property be used to pay debts and expenses for which that property is not liable under the code.”  Law v. Siegel, U.S. 3/4/2014, pp.9. 

In discussing Yonikus, the Court stated:  

"A handful of courts have claimed authority to disallow an exemption (or to bar a debtor from amending his schedules to claim an exemption, which is much the same thing) based on the debtor’s fraudulent concealment of the asset alleged to be exempt.  He suggests that those decisions reflect a general, equitable power in bankruptcy courts to deny exemptions based on a debtor’s bad-faith conduct.  For the reasons we have given, the Bankruptcy Code admits no such power.”  Law v. Siegel, U.S. 3/4/2014, pp.9.  “Federal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code.”  Id.at pp.10.

In short, Yonikus has now been reversed, and a bankruptcy court no longer has authority to override a debtor’s exemptions beyond what is spelled out in the bankruptcy code.  It’s too late for Mr. Yonikus, and the moral of the story is to properly disclose everything, but at least some bad law has been reversed.

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[1] 820 ILCS 305/21:  “No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages (. . . ).”