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A Debtor’s Property Is Not Safe Until The Bankruptcy Case Is Closed
The Ninth Circuit Court of Appeals case of In Re Gebhart illustrates just how high the stakes can be in bankruptcy and why it is so important that you have experienced bankruptcy counsel representing you. As an experienced Oakland bankruptcy attorney, the case of In re Gebhart is one I take very seriously. The Gebhart appeal came from two consolidated bankruptcy cases which had the following basic fact pattern: a debtor filed for chapter 7 bankruptcy. The debtor at the time they filed bankruptcy owned a home with some equity above the mortgage liens. In each case, the debtor protected the equity in their home from the bankruptcy estate and their creditors by claiming the homestead exemption provided for by their State. In each case, the debtor received a discharge of their debt but for reasons unknown, their bankruptcy case was left open for more than a year. At some point after the debtor received their discharge, the chapter 7 trustee assigned to their case revisited the value of their home and finding that it had increased, moved the bankruptcy court for an order allowing the Trustee to sell the property for the benefit of the creditors.
The issue the Ninth Circuit Court of Appeals was charged with deciding was whether the bankruptcy trustee may force a sale of the homestead property in order to recover the excess equity, or whether instead the debtor should be allowed to retain any post-petition increase in the fair market value of their home. Unfortunately for the debtors’ in this case, and for all debtors, the court decided that the trustee had the right to sell the property. The court reasoned that the homestead exemptions available to the debtors in both of these cases did not permit the exemption of their entire property, but instead only specific dollar amounts. Once the equity in the home exceeded the exemption amount, the home was up for grabs.
The court made it clear that even though the value of the claimed exemption plus the mortgage liens on the property was equal to the market value of the property at the time the case was filed, this fact alone did not remove the entire asset from the estate. The exemption amount only protected the dollar amount allowed by the exemption, not the home itself.
This case highlights how dire the consequences can be if you enter into bankruptcy lightly or with counsel that is not keeping an eye on the details of your case. What this cases teaches us is that if a debtor owns a home with equity and there is a chance that that equity may grow in the near future, it is important for the debtor’s counsel to stay on top of the trustee and bankruptcy court and make sure that the case is closed in a timely manner. The discharge of the debtor’s debt is not the event that provides safety from having the debtor’s property taken for the benefit of the estate at a later date; it is the closing of the bankruptcy case.
There are some things a debtor’s attorney can do to protect their client’s home. The first is to really do their due diligence in finding out the true equity in the property. The second is to monitor the bankruptcy case from beginning to end, and to make sure the case is being administered in a timely manner. As the Ninth Circuit point out, a chapter 7 trustee has a duty under 11 U.S.C. § 704(a)(1) to administer the case quickly and expeditiously. If for some reason, the trustee is dragging their feet and the debtor’s attorney is concerned, they can file a motion to abandon the property under 11 U.S.C. § 554. In order to succeed on the motion, debtor’s counsel must show that the estate has no interest in the asset above the exemption amount and that abandoning the asset will not harm the estate. This should be easy to do if the debtor listed the accurate fair market value of the property and protected their homestead with the exemptions available to them.
Bankruptcy planning is always important, but when the debtor has something to lose the stakes are even higher.
The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code
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