In the recent Chapter 7 bankruptcy case of a Texas debtor, creditors in the case successfully objected to the debtor’s bankruptcy exemptions due to a felony conviction.
Debtor has been convicted of felonies (as defined in 18 U.S.C. § 3156) in United States of American v. Clovis Prince, Case No. 4:09-CR-161, in the United States District Court for the Eastern District of Texas. In particular, on December 9, 2010, a jury found Debtor guilty of (1) bank fraud in connection with loans that Debtor or his companies obtained from various banks, including American Bank; (2) engaging in monetary transactions in property derived from unlawful activity; (3) making false declarations under oath in a proceeding in his bankruptcy; (4) making false declarations in the statement of financial affairs and bankruptcy schedules submitted in his bankruptcy and in the bankruptcies for companies he owns and controls; and (5) making false declarations in his Rule 2004 examination taken in his bankruptcy (the “Guilty Verdict”).
Because of the fraud conviction and false statements made during the bankruptcy case, the bankruptcy debtor was denied the right to fully use their Texas homestead exemption.
Section 522(q)(1)(A) of the Bankruptcy Code limits a debtor’s homestead exemption limit where “the debtor has been convicted of a felony … which under the circumstances, demonstrates that the filing of the case was an abuse of the provisions of this title.” Here, the Guilty Verdict demonstrates that the filing of Debtor’s bankruptcy was an abuse of the provisions of Title 11 of the Bankruptcy Code. Accordingly, in this case, § 522(q)(1)(A) of the Bankruptcy Code limits the amount of Debtor’s homestead exemption for the Covington Court Property to $146,450.00.
If the debtor’s homestead exemption exceeds the amount allowed, the bankruptcy trustee will have the right to sell off the property and distribute to creditors any funds above the exemption amount stated above. Under normal circumstances, a Texas debtor would have a virtually unlimited homestead exemption amount allowing them to protect all the equity in their primary residence. But because of the debtor’s dishonesty in the bankruptcy case and their fraudulent dealings in terms of getting bank loans, that homestead exemption was limited by the bankruptcy court.
It’s also important to note that other assets such as clothing and household goods became exposed to creditor seizure due to the bankruptcy debtor’s untruthful statements. Normally, Chapter 7 bankruptcy debtors don’t need to worry about losing ordinary household goods because of generous bankruptcy exemptions and the general lack of value that such goods have; but this case was an exception due to the debtor’s illegal behavior. In the end, engaging in unlawful activity, before or during bankruptcy does not pay off for the debtor and exposes them to losing more assets than they normally would lose.