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 (7th 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.
[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 (. . . ).”