Court: Exempt funds protected in bankruptcy

WASHINGTON — The U.S. Supreme Court said a bankruptcy court may not go after property or funds that are legally exempt from creditors.

The justices in a unanimous opinion ruled Tuesday in favor of a California man who declared Chapter 7 bankruptcy. The man claimed $75,000 of the value of his home was covered by California’s homestead exemption and was therefore exempt from the bankruptcy estate.

The man was later found to have fraudulently shielded some of his assets from creditors. A federal bankruptcy court said the exempt funds could be used to defray the attorney fees associated with uncovering the fraud, and a federal appeals court agreed.

But the Supreme Court reversed. It ruled that a bankruptcy court may not tap into exempt money to punish debtor misconduct.