Can a Chapter 7 Bankruptcy Trustee Sell my House after my Discharge? Lack of Equity Is Not an Obstacle!
Will the Chapter 7 Bankruptcy Trustee Sell My House? If You’re Not Current on Your Mortgage Payments or Are Surrendering, Count on It.
“Really? Can the Chapter 7 bankruptcy Trustee sell my house even after my discharge?” You bet.
The practice of a Chapter 7 bankruptcy Trustee seizing and selling real estate after it is surrendered in bankruptcy and then sold at foreclosure sheriff’s sale is a phenomenon that may have originated in the bankruptcy courts of southeastern Michigan as the brainchild of a local realtor who conceived of means by which, as part of the Chapter 7 bankruptcy Trustee’s asset liquidation duties and powers, a piece of real estate that is underwater with otherwise no equity value may be sold off by the Trustee (utilizing the realtor’s services, naturally) for a profit to the bankruptcy estate, the realtor, the Trustee, and (sometimes) your creditors. The practice has now made its way to jurisdictions in other parts of the US.
How is this possible?
Typically, when a home is surrendered in bankruptcy (returned to the bank and allowed to proceed into foreclosure with no chance of collectability or tax liability for the debt afterward), it is being surrendered because there is no “equity” in the property. That is, when the home’s potential sale value is compared to the mortgage debt attached to it, there is no positive balance. In such a situation, there is traditionally no “property” interest to be protected in the bankruptcy and the debtor’s attorney does not bother to apply an “exemption” protecting the property from the Chapter 7 Trustee’s liquidation of assets power as there is no need to do so.
In Detroit, Trustees have, however, discovered a way to make equity, so to speak, from a home in this situation.
When a property is “surrendered” in bankruptcy, the homeowner’s liability for making payments according to the terms of the mortgage note is discharged. The bank holding the mortgage cannot afterward pursue the homeowner for collections. The bankruptcy does not, however, remove the homeowner’s name from the title to the property. For that to occur, in Michigan, a traditional foreclosure process must occur in order for the bank to become the new owner of the house. In Michigan, this involves a series of noticing letters and offers to mediate, etc., followed by a sheriff’s sale or auction of the property to the highest bidder, followed by a 6-month “redemption period” if the property is under 3 acres and has not been abandoned.
Typically, after a bankruptcy, the homeowner may remain in the property for that entire timeframe, including the 6-month redemption period. This is a period of time that many post-bankruptcy homeowners count on to save up a nest-egg so that they may better make their next move, to a rental or other home.
Chapter 7 Trustees have discovered that, on some occasions, the banks that own the mortgages are purchasing the properties back at the sheriff’s sale, post-bankruptcy, for less than fair-market value. These “underbids” offer an opportunity for the Trustee: they have the ability to “undo” the sheriff’s sale, recover the property from the purchasing bank free of the pre-bankruptcy liens (extinguished by the bankruptcy and the foreclosure sheriff’s sale), and re-sell the property for fair-market value, repaying the bank its sheriff’s sale purchase price and retaining the balance to distribute to creditors. This can happen at any time during the 6-month redemption period, further, and may result in a homeowner being obliged to leave the home earlier than anticipated.
Don’t kick yourself, if so: this is a process that, for the past year or more, has had local bankruptcy attorneys scratching their heads as well. The important point to take away is that, after surrendering your home in bankruptcy, you cannot be guaranteed to have a full 6-month redemption period before you need to vacate the property.
Can a Chapter 7 Bankruptcy Trustee Sell My House? What To Do About It
There is, further, not much that bankruptcy attorneys can do to prevent the Trustees from exercising this power, unfortunately. The best your attorney can do for you is what I have been doing of late in my own bankruptcy petition filings: if using the Federal exemptions as opposed to Michigan’s state exemptions, apply the $10,000 or so available “homestead” exemption (read “exemption” as meaning the same thing as “protection”) that is typically used to protect equity in a primary residence in a bankruptcy regardless of whether there is any actual equity in the property at the time of filing. That done, if the Trustee re-sells the house, the Trustee must pay off the exemption amount—the full $10,000 or so, whatever it happens to be in any individual case—to the surrendering homeowner prior to paying any creditors anything after the sale. If nothing else, you get $10,000 for your trouble having to move in a hurry.
However, some Trustees are exploring a “carve-out” process in which the funds that they receive are paid by the bank holding the mortgage as a “carve-out” from their proceeds. Thus, the funds received by the Trustee are characterized as a sort of sales commission rather than liquidation proceeds. This being the case, some argue, they need not pay out the homeowner’s $10,000 exemption.
The question from the debtor’s point-of-view is, “Is this something that Chapter 7 Trustees are allowed to do under the specific provisions of the US Bankruptcy Code?” which governs the nature of the bankruptcy estate, the satisfaction of creditors’ claims, and the powers and role of the Chapter 7 bankruptcy Trustee.
Can a Chapter 7 Bankruptcy Trustee Sell my House? The Bottom-Line.
Nothing is uncomplicated in bankruptcy, and nothing underscores the need to hire not only an experienced bankruptcy attorney but a knowledgeable and up-to-date attorney. An attorney with 20 years experience will have 20 years of not-very-useful experience if he or she is not up-to-speed on these latest Trustee maneuvers. A professional “dabbler” who advertises “expertise” in 6 or 7 different practice areas, only one of which is bankruptcy, may not be an attorney likely to have the required focus upon this specialty practice area required to deal with issues of this nature.
Prior to hiring an attorney, if you are planning to surrender your home, ensure that the attorney you hire is giving you up-to-date advice. Michigan bankruptcy lawyers used to be able to tell potential clients that, even if they were surrendering their home in the bankruptcy, they would still have 6 months to a year or more to remain in the home without any need to make a mortgage or other payment. An attorney who “guarantees” you this now is not giving you up-to-date advice.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.