What Happens If I Have a Rising Home Value in Chapter 7 Bankruptcy?
I recently answered a bankruptcy question on Avvo.com, in which I had to, for the first time, explain why all the attorneys who had answered the question before me were wrong! The question was whether a Chapter 7 bankruptcy Trustee could take and sell the Debtor’s home if it went up in value above the amount that was exempt while the case was still open. The issue came up because the Trustee had the case staying open to deal with non-exempt funds the Trustee received from other assets.
My answer was yes. The bankruptcy trustee can sell the home as long as the trustee gives the bankrupt homeowner the dollar amount of the homestead exemption.
Doesn’t the California Homestead Exemption Protect the Rising Home Value in Chapter 7 Bankruptcy?
Most people and many attorneys think the “homestead exemption” protects the home. After all, isn’t that why they call it a “homestead exemption?” It would make sense. Only the problem is that the homestead exemption does not protect the home!!
What does the homestead exemption protect then if not the home? It protects a set dollar amount of equity in the home.
What is the difference? The difference is that, if at any time while the bankruptcy case is still open, the equity in the home exceeds the dollar amount of the available exemption, the Trustee can sell the home. All the Trustee has to do is pay the dollar amount of the homestead exemption to the Debtor (former owner!) after the home is sold. In simple terms, it is the money that can be reached from the sale of the home that is protected up to the dollar amount of the homestead exemption, not the home itself.
What is the Trustee’s Interest in Rising Home Value in Chapter 7?
Trustees’ role in bankruptcy is to find assets, sell the assets of the debtor above the relevant exemptions and distribute the bulk of any monies received to the debtor’s creditors. The bulk of the monies? Yes, the Trustee gets to keep a percentage as his fees, which is why Trustees do this job. The $60 per case they get where there is no assets is not worth the job. They do it for the purpose of collecting non-exempt assets for both the creditors and their own pocket.
Coming off the massive depreciation in real estate that started in 2008, enterprising Trustees noticed that many homes were rising in value between the time a case was filed and when that case was closed. The case being “closed” and a Debtor being “discharged” are not the same thing. Many times the Debtor may receive a discharge and be done with the Bankruptcy but the case may still be open.
There are many reasons that a case may take a long time to close. One of the most common was the one that the Avvo questioner brought up. The closing of his case was going to be prolonged by many months while the Trustee “administered” the money the Debtor who paid the Trustee money to buy back the non-exempt equity in his car. He was, rightly, concerned about the fact that his home had increased in value over that period of time to the point that it now was close to exceeding his homestead exemption.
in drawing the case out. The equity in some homes are rapidly exceeding the amount of the exemption the Debtor was allowed to use when the Chapter 7 bankruptcy petition was filed. If the case was still not closed the Trustee gets the benefit of that increase in home value.
Being good at their job (which is to protect creditors, after all) they began filing Motions to Approve Sale of Estate Property (the Debtor’s home) on cases and having them granted! Debtors who were assured by the paralegal or their attorney that they were going to keep their home are suddenly finding themselves losing their home to the Chapter 7 Bankruptcy Trustee.
What Can I Do to Protect Myself From Rising Home Value in Chapter 7 Bankruptcy if My Case is Still Open?
If you file a bankruptcy that looks like it will be open for any length of time, your attorney should immediately file a “Motion to Compel the Trustee to Abandon Property of the Estate.”
This means that you are requesting the Bankruptcy Court to determine that the home has no equity above the exemption at that time and force the Trustee to abandon the home back to you. Once the Court orders the home abandoned back to you, the Trustee has no further interest or rights in your home. It is yours and any increase in equity is also yours no matter how much that increase exceeds the homestead exemption.
As long as the value does not exceed the homestead exemption at the time the motion is heard by the Bankruptcy Court, the Chapter 7 Bankruptcy Trustees in our region (Sacramento, California) are readily agreeing to not oppose these Motions.
I was recently at a Bankruptcy law seminar where there was a panel of Bankruptcy Law Judges who were discussing problems they were seeing in the Courts. One made a point of how he was forced by bankruptcy law to grant the Bankruptcy Trustee’s motion to sell an elderly couple’s home. It frustrated him because it was totally avoidable simply by their bankruptcy attorney filing the Motion to compel abandonment before it went up in value beyond what was exempt. He said it was simply malpractice for an attorney to not filing the motion to abandon the home if there was any risk of the value going up beyond the exempt equity.
Right now, cases where the Bankruptcy Trustee has no assets to administer are being closed about 4 months after filing. In that situation if there is no possibility of the value exceeding the homestead exemption amount, it may not be worth doing the motion.
You may still want to file the motion if you are at all concerned about the possibility of the equity exceeding the protected amount. Compare this to buying homeowners insurance. It may turn out not to be necessary but it is good to protect yourself from the risk.
If you find that an issue arises in your case that will cause it to not close promptly, your attorney should immediately file the Motion to Abandon Property of the Estate.
What if my Attorney Doesn’t Know How to Protect my Rising Home Value in Chapter 7 Bankruptcy?
If your attorney does not know about this information (and obviously, the 3 attorneys who answered this person’s question before me did not know) you have hired the wrong attorney!
Look for an attorney who is a Certified Specialist in your state. If one isn’t available, look for one who does nothing but bankruptcy and consumer protection law. If the attorney does bankruptcy along with other fields such as family law, criminal law, or other such very different fields, they simply cannot keep up with all of the changing factors in the complicated field of Bankruptcy Law.
This is a specialized field and you should go with an attorney who practices solely in that specialty. Never hire a veterinarian’s assistant to do brain surgery on you and never hire a non-specialist to do a specialists job. Get an attorney who understands rising home value in Chapter 7 to begin with.