Photo by Michael Mulligan

Transferring property to your children to avoid probate causes a multitude of legal problems.  See my recent post on Bankruptcy Law Network for a brief discussion on why this is such a bad idea.  http://www.bankruptcylawnetwork.com/2009/08/10/transferring-property-to-avoid-probate-like-getting-smacked-in-the-head/

Photo by Michael Mulligan

I recently discussed selling a home in Chapter 7.  To review, I explained that when a case is filed, all the debtor’s legal and equitable interests become property of the bankruptcy estate.  I also discussed how the home might be exempt property (that is, protected from the reach of creditors), and how the trustee had 30 days from the debtor’s First Meeting of Creditors to object to the debtor’s exemptions.  In sum, in Chapter 7, once the exemption process played out with no trustee objection, the house could be sold.

In this article I will discuss how the sale of a home works in Chapter 13.  The Bankruptcy Code is found in Title 11 of the United States Code.  Title 11 (the Bankruptcy Code) is divided into Chapters.  You may hear on the news that a company filed “Chapter 11,” for example.  Chapter 11, like Chapter 7 and Chapter 13 are part of Title 11, the Bankruptcy Code. 

When a Chapter 13 case is filed, the schedules are prepared just like in a Chapter 7 case.  Assets are listed and can be claimed as exempt up to the amount allowed under state law.  However, Chapter 13 is a “reorganization” bankruptcy or “payment plan” bankruptcy.   Therefore, in addition to the schedules, the debtor files a proposed plan of reorganization and requests that the plan be “confirmed” by the court.  As with church confirmation, plan confirmation is a good thing.  A confirmed plan is binding on the debtor and creditors.  The confirmed plan provides for the rights and duties of the parties to the Chapter 13 case.

Chapter 13 plans provide that the debtor will make regular payments to the Chapter 13 Trustee, usually on a monthly basis for a stated number of months, and that the Trustee will then make specific payments to creditors from those funds.  The Bankruptcy Code requires the debtor to pay to the Trustee all of his “disposable income” (all amounts remaining after payment of his necessary living expenses) for a minimum of three years. Generally, chapter 13 plans run from three to five years.  This means that, unlike a Chapter 7 case which may be open for a few months, Chapter 13 cases usually remain open for years. 

In addition, although property can be claimed as exempt just like in a Chapter 7 case, Chapter 13 is all about the Chapter 13 plan.  In South Carolina, we have a form plan like many other districts.  In dealing with property of the estate, the form plan provides as follows: 

“Upon confirmation of the plan, property of the estate will remain property of the estate, but possession of property of the estate shall remain with the debtor. The chapter 13 trustee shall have no responsibility regarding the use or maintenance of property of the estate. The debtor is responsible for protecting the non-exempt value of all property of the estate and for protecting the estate from any liability resulting from operation of a business by the debtor.”

This has the practical effect of undoing the Chapter 7 process whereby the exempt assets “revest” (once again become property of the debtor).  In Chapter 13, property of the estate, although it may be exempt, remains property of the estate.  What all this means is that the house is not the debtor’s house; it belongs to his bankruptcy estate.  His trustee will be interested in the sale, and the debtor must obtain a Bankruptcy Court order approving the sale.

It generally takes about 45 days or so from the filing of the motion to the time the court issues the order allowing the sale.  The motion requesting sale approval and proposed order must state the sales price, disclose the amounts of all liens and mortgages being paid off, and list payments to any professionals such as attorneys and real estate agents.  The motion must be served on all parties who may have an interest in the sale, and if anyone files an objection within the 20-day deadline, the court will schedule a hearing on the motion.  These motions are fairly common, and when they are done correctly, the court usually grants the motion without requiring a hearing. 

As an agent representing the seller/debtor, pay attention to the following: 

1. Let the buyer’s agent and prospective buyers know that the sale must be approved by the bankruptcy court;
2. Make sure the contract is contingent on the Bankruptcy Court approving the sale;
3. Follow up with the debtor/seller and his attorney, and get any necessary information to the bankruptcy attorney so that he can quickly draft and file the motion for approval to sell the home;
4. Ask the debtor/seller to obtain a copy of the motion and notice of right to object when the documents are filed so all of the parties can see that the motion has been filed and can also see the time frame involved in obtaining the court’s approval;
5. Review the order to make sure you understand what must occur at closing (for instance, the closing agent may be required to send any excess sale proceeds directly to the Chapter 13 Trustee); and
6. After the sale, send a copy of the HUD-1 Settlement Statement to the debtor’s attorney, which will demonstrate that that order has been followed. 

Selling a house in Chapter 13 can be done with minimal stress and delay, but it helps if you have an overview of the issues and procedures involved and communicate the requirements to prospective buyers and their agents.    

–Russ DeMott

Photo by Michael Mulligan

I can’t help but thinking back to that “M*A*S*H” episode when Hawkeye preps Radar on how to sound intellectual to Nurse Anderson.  Hawkeye instructs Radar that when Nurse Anderson mentions classical music, he should just look pensive and say “Ah! Bach!”  According to Hawkeye, once you’ve said that, you’ve said it all.

“Ah! It depends!”  Now, let’s now take a look at what your answer depends on.  First, some basics.  When a bankruptcy is filed, section 541 of the Bankruptcy Code (we’ll call it “the Code” from here on) provides that all the debtor’s legal and equitable interests become assets of the bankruptcy estate.  This happens instantly upon filing.  Put simply, the debtor’s stuff isn’t his anymore; it belongs to the bankruptcy estate.  However, under various parts of section 522 of the Code, the debtor is allowed to exempt certain assets.  “Exemptions” are a list of property the debtor gets to keep.  So much furniture, so much home equity, so much cash, and so on.  The bankruptcy trustee isn’t going to take the shirt off of the debtor’s back.  The policy is that the debtor needs a certain amount of property is for a “fresh start.” 

In some states, debtors are allowed to exempt assets based on the exemption schedule in the Code, and in others, like South Carolina, debtors exempt assets based on state law.  This happens when the state “opts out” of the Code’s exemptions.  There is also a third group of states in which the debtor may choose either federal or state exemptions.   The debtor, however, cannot claim some federal and some state exemptions (with a narrow exception or two).  Section 522(l) provides that the bankruptcy trustee (the officer appointed by the court to administer the case) is allowed 30 days from the bankruptcy hearing to object to the exemptions claimed by the debtor.  The hearing is called the “First Meeting of Creditors” or the “341 hearing” due to the fact that the hearing is mandated by section 341 of the Code.  Let’s just call it “the hearing” to make things easy to understand.

The hearing is scheduled immediately upon filing the case, which is done electronically.  The hearing is normally scheduled 30-45 days after the debtor files the bankruptcy.  While the Code allows the trustee 30 days from that date to object to the debtor’s exemptions, trustees almost always announce their decision at the hearing here in South Carolina.  Providing the trustee has no objections to the debtor’s exemptions, she will announce that she is abandoning “all scheduled assets.”  She then files the abandonment with the court which is immediately transmitted to the debtor’s attorney via email.  At that point, the abandoned assets are no longer property of the estate.  In other states, trustees simply close the hearing and do nothing.  By virtue of section 522(l), the abandonment occurs 30 days after the hearing due to the trustee’s inaction.   Obviously, the trustee’s approach in South Carolina wastes less time and is a benefit to those of us dealing with home sale issues in a Chapter 7 case. 

The bottom line is that a Chapter 7 bankruptcy only delays the home sale for four to six weeks unless the trustee believes the debtor has more equity in the home than scheduled by the debtor.  In the rare case in which the deal would fall through unless the sale were allowed immediately, the debtor’s attorney could file a motion seeking abandonment.  Given the tight time frame between the case filing and the hearing, however, such action would almost never be necessary. 

As noted above, this article applies only to a Chapter 7 bankruptcy, also called “liquidation bankruptcy” (a term I don’t use because it creates too much confusion) or “straight bankruptcy” (my preferred term).  In Selling a House in Bankruptcy (Part Two: Chapter 13), I’ll write about how selling a home would work in Chapter 13.

Russ DeMott