Selling a House in Bankruptcy (Part One: Ch. 7)
Sooner or later it will happen with one of your listings, or to a listing your client wants to put an offer on: Bankruptcy. You know to proceed with caution, but you’re not sure exactly how to deal with this bankruptcy thing. Can the seller sell the house? Do you need to get an order from the Bankruptcy Court? The answer is: It depends. In fact, that’s the initial answer to most bankruptcy questions. So if you’re ever asked a bankruptcy question and want to sound like you know something about it, just answer “well, it depends” while looking very serious. Stroke your chin a bit as you answer. Rest assured, “it depends” is the correct answer.
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
Related posts:
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Russ,
I really like your new blog. This particular post contains an excellent overview of the Chapter 7 process in general. Very informative and easy to understand. Good work.
Dan Nunley
Broken Arrow, OK
http://www.oklahoma-bankruptcy-attorney.com