Trustee May Sell Your Home After Your Discharge

The Ninth Circuit Court rules that a Trustee may sell a Debtor’s home if the value increases above the exempt amount before the bankruptcy case closes.

At the time the Debtors filed bankruptcy, the combination of the exemptions and the encumbrances (mortgages) on their homes left no equity for the Trustee to distribute to the unsecured creditors.  The Debtors were discharged, however their cases were not closed.  After 18 and 21 months in the two cases consolidated for appeal, the homes had appreciated where there was sufficient equity for the Trustee to sell the homes, pay the debtors their exempt amount, pay the encumbrances, and distribute money to the unsecured creditors.  How could this be?  The Debtors filed bankruptcy in 2003 and the cases were open until 2006 when the Trustee moved for an order to sell the debtors homes.  The Trustee argued that the exemption was for a dollar amount because it was for “interest in real property” and did not exempt “Real Property.” The Court agreed with the Trustee, therefore the Debtors only received the dollar amount of their exemption.

The Debtors should have ensured that, since their case was not closed shortly after their discharge, that the property was abandoned.  This is possible by filing a motion under 11 U.S.C. § 554(b), requesting the Court to order the Trustee to abandon the property back to the Debtor as  burdensome to the estate or that is of inconsequential value and benefit to the estate.  A motion under this section forces the Trustee to make a decision without the benefit of appreciation of an asset.  This may seem to be inconsequential in the current Real Estate market, however the same issue may be applied to other property such as stock, business interests, or any other asset that may appreciate.  If a case is not dismissed shortly after discharge a 11 U.S.C. § 554(b) should be considered.

The consolidated cases are In Re Gebhart 07-16769 and In Re: Chappell 07-35704.   Read the entire case on the Ninth Circuit Court of Appeals web site at http://www.ca9.uscourts.gov/datastore/opinions/2010/09/14/07-16769.pdf

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