Selling a House in Bankruptcy (Part Two: Ch. 13)
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
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I found your blog on MSN Search. Nice writing. I will check back to read more.
Eric Hundin