One of the most important decisions ever issued by the United States Supreme Court involving consumer bankruptcy is Law v. Siegel. Although the facts of the case were unusual, the Court’s message could not have been clearer: bankruptcy courts must follow the Bankruptcy Code as written, but debtors must also be completely honest when they file their bankruptcy schedules.

As I tell every client who walks into my office, the bankruptcy system exists to give an honest but unfortunate debtor a fresh financial start. It is not a refuge for people who attempt to hide assets, conceal lawsuits, or mislead the bankruptcy trustee.

The Facts Behind Law v. Siegel

In Law v. Siegel, the debtor claimed a homestead exemption on his California residence. During the bankruptcy case, the trustee discovered that the debtor had engaged in an elaborate scheme to fabricate a nonexistent second mortgage against his home. The trustee spent hundreds of thousands of dollars uncovering the fraud and successfully proved that the lien was completely fictitious.

Understandably frustrated, the bankruptcy court attempted to punish the debtor by eliminating his homestead exemption so that the trustee could recover the money spent exposing the fraud.

The Supreme Court unanimously reversed that decision.

Why the Supreme Court Ruled for the Debtor

Many people are surprised by the outcome. After all, the debtor had clearly acted dishonestly.

The Supreme Court explained that bankruptcy judges do not have unlimited equitable powers. Even when a debtor behaves badly, a bankruptcy court cannot ignore or rewrite the Bankruptcy Code. If the Code gives a debtor an exemption, the court cannot simply take it away as punishment unless the Code itself authorizes that result.

Justice Scalia, writing for a unanimous Court, explained that courts may not use their equitable powers to override specific provisions of the Bankruptcy Code.

That does not mean the debtor escaped the consequences of his conduct.

Dishonesty Still Has Serious Consequences

Some people mistakenly read Law v. Siegel as giving debtors permission to play games with the bankruptcy system.

Nothing could be further from the truth.

The Bankruptcy Code contains numerous remedies for dishonest conduct, including:

• Denial of a bankruptcy discharge.
• Dismissal of the bankruptcy case.
• Criminal prosecution for bankruptcy fraud.
• Monetary sanctions.
• Contempt proceedings.
• Loss of credibility before the bankruptcy court.
• Referral to federal prosecutors.

In other words, while the Court protected the debtor’s statutory exemption, it made clear that dishonest debtors remain subject to severe penalties.

What This Means for My Clients

Every bankruptcy petition requires debtors to sign their schedules under penalty of perjury.

That means you must disclose:

• Every bank account.
• Every vehicle.
• Every piece of real estate.
• Every lawsuit or potential lawsuit.
• Every inheritance you are entitled to receive.
• Every business interest.
• Every significant asset.
• Every debt.

One of the biggest mistakes I continue to see involves personal injury claims, employment lawsuits, or other legal claims that debtors fail to disclose.

Many people think:

“The case hasn’t settled yet, so I don’t need to list it.”

That is wrong.

If you have a claim—even one that has not yet been filed—it is generally considered an asset of your bankruptcy estate and must be disclosed. Failing to do so can create enormous problems later. Defense attorneys routinely review bankruptcy filings looking for undisclosed claims and may argue that a plaintiff should be barred from pursuing the lawsuit because it was concealed from the bankruptcy court. Although recent Supreme Court decisions have clarified some of these issues, the safest—and legally required—approach is complete disclosure from the beginning.

Honesty Makes Bankruptcy Easier

One thing I have learned after filing more than 25,000 consumer bankruptcy cases is that almost every problem in bankruptcy can be solved when clients are honest from the start.

Forgot about an asset?

We can usually amend the schedules.

Didn’t realize you had to disclose a potential lawsuit?

We can correct the filing.

Received an inheritance after filing?

Tell your attorney immediately.

The bankruptcy system recognizes that honest mistakes happen. What creates problems is attempting to hide information after you know it should have been disclosed.

The Bottom Line

The lesson of Law v. Siegel is not that dishonest debtors win.

The real lesson is that Congress—not the courts—writes the Bankruptcy Code. Bankruptcy judges must follow the law, even when dealing with dishonest debtors.

For consumers considering bankruptcy, however, the takeaway is much simpler:

Be completely honest.

Disclose everything.

If you are unsure whether something should be listed, tell your bankruptcy attorney and let them make that determination. It is always better to disclose too much than too little.

Bankruptcy is designed to give honest people a fresh start. Trying to hide assets or omit information from your schedules only places that fresh start at risk.

If you are considering filing Chapter 7 or Chapter 13 bankruptcy, an experienced bankruptcy attorney can help ensure your schedules are complete, accurate, and fully compliant with the Bankruptcy Code from day one.