This is a Countdown of the Top 12 Malpractice Mistakes Made by California Bankruptcy Attorneys
Mistake #2: Not making a “Motion to Compel the Trustee to Abandon Real Property” to remove the exempt home from the bankruptcy estate.
Note: This article focuses on California bankruptcy attorneys and may reference California and 9th Circuit law. However, most of the concepts presented here are applicable to bankruptcy attorneys everywhere. The 12 issues presented are not necessarily in order of importance.
To put the following into perspective, you have to understand that in California, the so-called “California Homestead Exemption” does not protect the home. It protects a dollar amount of equity in the home. This is true in many other States but some have much greater protections for the home than in California where many homes are at the top limits of the exemption amounts.
Often bankruptcy attorneys are very pleased with themselves when they file a Chapter 7 bankruptcy and they have been able to exempt most if not all of the client’s assets. That happens to include the client’s home. The clients, of course, are pleased with this. Their home, the most important thing they have, is safe from the Bankruptcy Trustee and their creditors… or it seems that way.
For whatever reason, the case drags on and the home increases in value. Suddenly the bankruptcy attorney gets a call from their client. The client tells the bankruptcy attorney that the Bankruptcy Trustee just told them that the Trustee is going to sell their home to pay creditors. “No way!” the bankruptcy attorney says. “We exempted it.” “The Trustee can’t touch it.”
Why a Motion to Compel the Trustee to Abandon Real Property is Needed
“Yes way! “ In any bankruptcy, no matter where what state you are in, the “exempt assets” are assets of the bankruptcy estate. It stays that way until the Bankruptcy Trustee abandons the assets and the case is closed.
The problem with this is that the home may well increase in value while the bankruptcy estate is open. This is happening in many states and cities in the United States nowadays. Unless the home is removed from the bankruptcy estate, the equity in the home can rapidly exceed the available homestead exemption.
Since Bankruptcy Trustees make more money if they have non-exempt assets to administer, many are finding excuses to keep the bankruptcy case open as long as possible. The Bankruptcy Trustee hopes the home will increase in value. If it does, then the Bankruptcy Trustee can reach the non-exempt equity. Equity that was not there when the case was filed. The most common excuse for doing so is that they have to keep the case open to see if the debtor might be entitled to a tax refund. Of course, the tax returns are not going to be prepared until next year.
I have seen at least one case where the Bankruptcy Trustee was going to keep the case open and administer a bankruptcy estate for $86 in non-exempt cash. Really? I doubt it was the cash that interested the Bankruptcy Trustee. It was the increasing home equity that had the Bankruptcy Trustee’s eye.
Fortunately, you can avoid this happening to you or your client. You can file a “Motion to Compel the Trustee to Abandon the Real Property.” If the Bankruptcy Court grants it, the motion “compels” the Bankruptcy Trustee to give the exempt house back to the Debtor. Once the home is no longer part of the Bankruptcy Estate, if the value goes up above the exempt amount it does not matter. The increase in value belongs to your client.
What Judges Think About Motion to Compel the Trustee to Abandon Real Property
I was at a Bankruptcy seminar where there was a question and answer session with several Bankruptcy Judges. One of the questions for the panel was “What was the most common malpractice mistake bankruptcy attorneys make?” The Judges agreed that it was bankruptcy attorney’s failure to file a Motion to Compel Abandonment to remove the home from the bankruptcy estate.
One Judge said he was sick to his stomach when he had to tell a husband and wife in their 80’s that the Bankruptcy Trustee did have the right to sell their home and kick them out. The Bankruptcy Judge explained to them that, because their home had increased in value, there was now equity above what the homestead exemption protected. Because of that, the Bankruptcy Trustee could sell their home.
Would you want to be that bankruptcy attorney? Probably not. Especially when the clients find out they could have kept their home, had the bankruptcy attorney just filed a Motion to Compel the Trustee to abandon the home at the beginning of the case.
Some bankruptcy attorneys like the one I described, simply do not know about the issue. Other bankruptcy attorneys know the issue, but are afraid they will lose the potential client if they charge more than the bankruptcy attorney down the street charges for the added services.
Not filing a Motion to Compel Abandonment for your clients may be fine in clearly “no asset” cases if the home is upside down in value and there is no chance of any reachable non-exempt equity in the foreseeable future. In many cases however, you put your client at great risk if you do not file a Motion to Compel Abandonment of the home. I have found that, once explained, clients are generally willing to pay for the extra services involved to protect their most important asset, their home.
I see many bankruptcy attorneys miss the boat on this issue. The Bankruptcy Trustee’s sure know about it. You should too.