The Tricks that the Bankruptcy Trustees Don’t Want You to Know!
How to Avoid the Sale of Your Property By a Chapter 7 Trustee
It may come as a surprise to many involved in bankruptcy that the Chapter 7 Trustee is in control of all assets of the bankruptcy estate. That estate include “all legal or equitable interests of the debtor in property as of the commencement of the case” as well as any community property of the debtor and their spouse (or even their ex-spouse if there is no division of community assets). 11 U.S.C. § 541(a)(1)-(2).
Perhaps the asset that debtors have the most connection with is their house. Unfortunately, a Chapter 7 trustee can, and most likely will, sell your home if they can derive value for creditors. Indeed, it is the duty of the trustee to “collect and reduce to money the property of the estate for which such trustee serves…..” 11 U.S.C. § 704(a)(1). The trustee does so by selling property under 11 U.S.C. § 363(b).
However, the good news is you might have a number of options to avoid this sale, discussed below. It is important to consult an experienced bankruptcy attorney to weigh the costs and benefits of these options.
When Exactly Will a Bankruptcy Trustee Choose to Sell a Debtor’s Property?
However, not all assets will be sold by a trustee. Specifically, a debtor is allowed to retain some assets up to a certain value, which are referred to as exemptions.
Accordingly, before a trustee decides to sell estate property, they will generally consider the value of the property less any costs of sale, less any encumbrances (mortgages, judgment liens, etc.) less any exemptions.
Usually, a debtor has claimed a homestead exemption of $75,000 to $175,000 under California law. There is an automatic homestead exemption under California state law which allows a debtor to claim up to a specific amount, determined by the debtor’s circumstances, of their equity as exempt. Cal. Code Civ. Proc. § 704.730(a)(1)-(3).
The trustee sells all other assets, which are nonexempt, for the purpose of paying unsecured creditors. 11 U.S.C. § 363(b). If, after the application of the proper homestead exemption, the remaining unencumbered equity in a debtor’s house exceeds the cost of selling the house, then the trustee will likely sell the property in order to pay the unsecured creditors. This means that the trustee may be able to sell your home by simply paying you the homestead.
What Are Your Options if the Trustee is Trying to Sell Your Home?
In this frightening situation, it is natural to seek ways to keep your home. When a trustee has determined that your nonexempt equity is large enough to warrant a sale, they will almost certainly begin the sale process, often by filing an application to employ a real estate brokerage. However, converting to Chapter 13 Bankruptcy or buying the property from the trustee may prevent you from losing your property.
1) Convert to Chapter 13 Bankruptcy
Some Chapter 7 debtors will have the right to convert their case to Chapter 13 bankruptcy, as permitted under 11 U.S.C. § 706(a).
However, while this statute’s Committee Reports state that “Subsection (a) of this section gives the debtor the one-time absolute right of conversion…,” the Supreme Court held in 2007 that: “The Committee Reports’ reference to an ‘absolute right’ of conversion is more equivocal,” and, thus, not completely available for anyone to use simply because they have not converted before. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 372 (2007) (discussing S.Rep. No. 95–989, p. 94 (1978)). Marrama held that a debtor’s right to convert may require that the debtor has acted in good faith. It is important to speak with a qualified bankruptcy attorney before pursuing this route to determine your eligibility.
Once a debtor is in Chapter 13 bankruptcy, they will have the option to keep all of their property and pay back a portion of their debts through some sort of repayment plan. This could allow a debtor to keep their property if the court allows the conversion.
However, it must be noted that this right to convert is not absolute and a court may not allow the conversion. It is important to speak with a qualified bankruptcy attorney before pursuing this route to determine your eligibility.
Buying the Equity in the Property from the Bankruptcy Trustee
If you find yourself in the unfortunate position where a Chapter 7 trustee is planning to sell your property, you can always offer to purchase it back. Selling a property is time intensive and costly. Many factors go into the decision making of a trustee, but in short, a trustee will likely be willing to sell the property back to you for the right price to avoid the efforts involved in a sale.
When it comes to the actually buying out the trustee, finding the necessary funding may be an issue. Of course, if you do have access to sufficient funds, using these could be a great option. Many times, parties interested in buying the property will seek funding from a family member or close friend.
But, if you do not have the funds, you may have to explore other options. One possibility is to refinance your home. Since most people in this situation will have a high amount of equity, you may be able to refinance the house to pay the trustee. Pulling the equity out in this manner may allow you to pay the trustee and keep your house. However, refinancing after filing for bankruptcy will likely not be straightforward and you should contact a professional to seek guidance on the procedures involved.
2) Pay Off the Trustee
Determining the Amount Owed to the Bankruptcy Trustee
One of the most vital parts of this buy-out process will be determining the price of the home, and this can depend on a number of factors. It is important to understand these factors so you can get the best price possible and, most importantly, avoid losing your home.
Buying a property from the trustee is often called an equity buy-back. Negotiating the right price requires the skill of an experienced bankruptcy creditor attorney. For example, a trustee may not be including in the equity buy-back price the costs of sale, or the time involved in selling a property. Even further, a trustee may not be including the costs of litigation and potential payouts to other owners. For example, the equity in a house during a divorce where the property has been deeded to one of the former marital parties a complex issue that requires a persuasive analysis of a skilled bankruptcy attorney.
Valuation of the Property by the Bankruptcy Trustee
Another important factor of the amount you will pay the trustee will largely turn on the valuation of the property, as this this will be the starting point in determining the price to gain back your property. It is very important that you find an accurate appraiser in this situation and perhaps even get a second opinion in the case the first appraisal seems inaccurate. Property valuation can be difficult to navigate and it is always best practice to have a professional advocate to ensures you do not get stuck with an inappropriate valuation.
Likelihood of Recovery by the Bankruptcy Trustee
Next, the settlement amount will turn on the likelihood of recovery for the trustee. This is fairly simple—if the trustee can sell your property quickly and easily with a surplus after paying out what needs to be paid, you will have to pay a closer figure to the valuation. If there are inherent difficulties in the sale of your property, perhaps if extensive repair is needed or there are economic circumstances that would frustrate a potential sale, you may be able to pay substantially less than you may think at first glance.
Are There Any Legal Issues Involved for the Bankruptcy Trustee?
In addition, one of the most important things to recognize is that there are likely to be a number of legal issues involved in the transaction. The facts in your case may have legal gray areas which the trustee may have overlooked, or unfortunately, may have just missed.
For example, sometimes there are issues to determine whether the trustee even owns the property such that they can sell it to derive any value to the estate. If the property is not held in the name of the debtor for various reasons, the cost and risk to the trustee of trying to bring the property back into the estate is an issue that should bring down the equity buy-back price.
Gaining a better understanding of your situation after consulting with an experienced bankruptcy attorney can help shed light on any potential legal issues residing in your situation. And, in turn, these can be used in a negotiation with the trustee to help you get a better, more accurate buy-out price to keep your property.
3) Another Option: Paying the Claims Directly to Avoid the Bankruptcy Trustee
One powerful tool to ensure a fair administration of the estate is to consider whether an interested party, such as an ex-spouse or co-owner, may wish to simply pay all unsecured claims filed in the case.
However, there is no legal prohibition known to this office that would prevent an interested party from taking the Chapter 7 trustee out of the process of administering the estate because there are no creditors that remain unpaid.
Note that this strategy, as well as a Chapter 13 conversion, may be difficult if the trustee has already hired professionals under 11 U.S.C. § 330. Most commonly, this unpaid administrative professional is the trustee’s counsel. However, a skilled attorney may be able to convince the trustee that the best course of action for all parties is to allow the interested party to pay a fixed sum that will satisfy the administrative professionals such that the case can be closed without assets being sold. See, e.g., In re Colburn, 231 B.R. 778, 786 (Bankr. D. Or. 1999).
Seek Professional Guidance if a Chapter 7 Bankruptcy Trustee is Trying to Sell Your Home
Given the complicated nature of a trustee’s sale of your property, and Chapter 7 bankruptcy in general, it is of utmost importance to seek professional guidance. If a trustee is attempting to sell your property in Chapter 7 bankruptcy, you may have options. If you are interested in keeping your house, you should connect with an experienced bankruptcy attorney. Scott Talkov is an experienced bankruptcy attorney serving the areas of Riverside, San Bernardino, Inland Empire, Orange County, Los Angeles and elsewhere in Southern California.