It is now clear states have the right to pass laws that make homes of the elderly and disabled off limits to creditors.
Washington, DC (PRWEB) February 20, 2013
When Michigan homeowner Steven Schafer became disabled as an adult, he had no idea he would one day be in a legal fight before the US Supreme Court to save his home. Unable to continue to work and living on a fixed monthly income from Social Security, he could not afford to repay his creditors. When medical debt forced him into bankruptcy in 2009, his only asset was his home in a middle class neighborhood in western Michigan.
The Bankruptcy Code creates a federal system of bankruptcy courts but allows individual states to determine what property their residents may keep (or exempt) after declaring bankruptcy. Under Michigan law, the homes of seniors and people with disabilities are given special protection when they file for bankruptcy.
Trustees are appointed in bankruptcy cases to find hidden and unprotected assets. They receive a commission for any property they liquidate. Although Mr. Schafer exempted his home under Michigan law, the trustee assigned to his case tried to sell the house and force Mr. Schafer out. The trustee refused to follow the Michigan law, claiming it was unconstitutional under the Supremacy Clause and the less well known Bankruptcy Clause of the US Constitution. The legal battle that followed lasted 4 years and went all the way to the US Supreme Court, after a federal appeals court upheld the law last year.
On appeal, the trustee named both the disabled homeowner and the State of Michigan as respondents to his legal challenge. The Michigan Attorney General, representing the State of Michigan, has argued that special protections are needed under state law to create a safety net for the state’s most fragile class of individuals. Under the Michigan exemption system, a bankrupt homeowner may exempt up to $35,300 of his or her interest in a residence. If the homeowner is age 65 or older or is disabled, a higher exemption amount, $52,925, applies.
At a court hearing on February 6, 2013, the trustee would not provide details about the amount of legal fees he has amassed. The trustee only confirmed on the record that “this is not a surplus case.” Scott Zochowski, the pro bono attorney who represents the homeowner, says in plain English that means that a sale of the home would have only covered the trustee’s legal bill.
"It is now clear states have the right to pass laws that make homes of the elderly and disabled off limits to creditors,” said Mr. Zochowski. “Before our case, bankruptcy trustees had bullied other senior and disabled homeowners into large settlements when faced with this sort of constitutional challenge. It’s a cash grab targeting a disadvantaged group, and we have put an end to it.”
The case went to a closed-door session of the Supreme Court on Friday February 15, 2013, and the Court entered an order denying the trustee’s petition on Monday February 19, 2013. The highest court having now ruled on this issue, Mr. Schafer’s home has been saved from auction. However, as bankruptcy trustees have seen their revenue drop in recent years due to falling rates of bankruptcy filings, similar challenges to state laws are being made by trustees across the country. Other federal courts have already begun to apply this case originating out of Michigan as precedent.
 In re Steven Schafer, Bankr. W.D. Mich. Case No. 09-03268
 11 USC 522, US Bankruptcy Code: Exemptions
 MCL 600.5451(1)(n), Michigan homestead exemption
 Richardson v. Schafer, US Court of Appeals for the Sixth Circuit Case No. 11-1340
 E.g., In re Pontius, Bankr. W.D. Mich. Case No. 08-04124; In re Dorothy Jones, B.A.P. 6th Cir. Case No. 10-8031(case settled on appeal); In re Wallace 347 B.R. 626 (Bankr. W.D. Mich. 2006); and In re Bratsburg, Bankr. W.D. Mich. Case No. 09-06721
 Richardson v. Schafer, US Supreme Court Case No.12-643
 In re Westby, US Bankruptcy Appellate Panel for the 10th Circuit Case No. 12-27