How Equity is Valued in Chapter 7 Asset Case

[leonel9]

I recently filed a Chapter 7 asset case in California's Central District using Virginia exemptions. The only reason my case is considered an asset case is because there is approx. $18,000 of equity available in a rental property recently appraised at $310,000. My mother is a co-borrower and co-owner of this property. My mother put $60k down, so she'd like to keep it rented until she is able to recoup $60k (or get a lot closer to recouping it).

My question is: Is there guidance on how to "value" this equity? Although there is $18k in equity, the cost of a sale would be over $18,000, resulting in no funds for creditors. So I assumed this should now be a no-asset case. My attorney stated unless the property is sold I cannot use the cost of a sale for the purpose of calculating how much to pay the trustee to prevent a sale. She is suggesting I need to give the trustee either $9k (50% of equity) or $18k in order to retain the property. I asked her to offer $4k ($9k representing my half of the equity minus $5k VA wildcard exemption).

I'm hoping for to find a law, trustee handbook, case history, etc. that may provide clarity to this question.

If it helps:
- I initially asked for the intention to be listed as surrender, but my attorney suggested that it should be listed as retain & pay if I didn't want the house to actually be sold.
- I will be taking a 401(k) loan in order to pay the trustee.

Any thoughts?

[despritfreya]

First, I trust your attny told you that the rents (at least a portion of them) belong to the Trustee. If you are collecting rents you will either need to turn them over or get the Trustee to agree to allow you and your mom to keep them.

Second, your attny is right. In calculating value for the purpose of your schedules, your claimed exemptions (if any) and Chapter 7 Reconciliation, cost of sale is not considered. I could find you case law on this however, at the moment, I do not have the time.

Your Trustee will hire a realtor. The realtor will first determine if there is any equity and this determination will most likely include the cost of sale. No matter how small that margin may be, if there is any $$ to be had, the realtor will market the property. Whatever the market brings is what the property will be sold for. If the realtor cannot get the property sold with some margin of return to the bk estate, eventually the Trustee will abandon the asset. If the realtor is able to sell the property, from the net sale proceeds (after cost of sale), your mom should get her portion (1/2 of net I would imagine). Your wildcard exemption, if allowed, should protect some of the net for you. The rest, no matter how small, will be used to pay the Trustee and then creditors. If you do not want this to happen you must settle with the Trustee. I like your idea of attempting to persuade the Trustee that your deal is a better deal for the estate. Start low and go up in the offer. My guess is that you will settle around $7k if, as you indicate, the property is basically a break-even.

Des.

[Vandervecken]

I am going through exactly the same thing, keeping two rental properties. My divorce decree says they cannot be sold for less than payoff of the mortgage (my ex is on the mortgage with me) so I have to retain them. One house is seriously underwater for selling, but cash flows positive. The other has some equity.

Here are my numbers:

Appraised value: 156,000
Mortgages: 132,000
Wildcard exemption: 3,000
-------
Equity: 21,000

Against the equity we have the expenses to sell:
Agent commission: 9,300
Closing costs: 2,000
-------
12,300

Amount to trustee: 8,300

I'm hoping to settle for $5k, but I'll pay the $8,300 if necessary. And like you, I'm using a 401(k) loan to bridge it.

[leonel9]

Thank you both for your replies. Although I understand, I'm sad to have learned there's no way around this. By my own search, it seems that the following case has set the standard in the 9th Circuit for not using the cost of sale in instances when the debtor intends on retaining the property.

Taffi v. United States (In re Taffi), 96 F.3d 1190 (9th Cir. 1996)

Regarding the rental income the property generates, I did speak with my attorney before filing. She said the trustee should not go after rental income since if it is used to pay the mortgage(s).This was one factor that led me to proceed confidently with a chapter 7 case vs. a chapter 13. With that in mind, there's always a chance she's wrong and/or the trustee goes after it anyway.

[justbroke]

With that in mind, there's always a chance she's wrong and/or the trustee goes after it anyway.

Well, the Trustee should then pay the mortgage. If there's nothing extra (an actual profit), the trustee should be disinterested in managing the property and paying the mortgage.

[despritfreya]

Here's the problem with the rental income. . .

If the Deed of Trust does not contain an "assignment of rents" the mortgage lender is not entitled to the money and it goes to the Trustee - assuming the Trustee picks up on this issue. The questions become whether or not the Deed of Trust has an assignment of rents and, what if anything does, the lender need to do to exercise the assignment.

In the past I have advised my clients to instruct the renter to make payments directly to the mortgage company unless and until directed otherwise by the Trustee.

Took over a case years ago where this exact issue came up. Debtor took the money and serviced the lender. No assignment of rents. Trustee demanded the Debtor pay the estate back the money. Ended up settling the issue.

Des.

[justbroke]

Wow! I assumed that all mortgages on investment property contain an assignment of rents clause. Bad assumption, because a rental property may have been a primary residence at some point or simply the mortgage never included such a clause.

That would be rude, if you ask me, for the trustee to take the rents, not pay the mortgage, and leave the debtor hanging. Decorum and the law are not mutually exclusive, but certainly don't require each others company.

I like your remedy with the direct payments to the mortgage-holder (or servicer). (I learn everyday from Des!)

[leonel9]

Thought you might appreciate an update:

- Prior to filing I didn't want to spend the $400 for an appraisal. I figured the rental property was worth about $350k. Appraisal came in at $310k, resulting in $18k in equity. That may have saved me $40k.
- Prior to the 341 meeting, my attorney sent a letter to the trustee offering $600 -- deducting from my equity my exemption, my mother's exemption (she's not filling), and an escrow shortage.
- Prior to the 341 I prepared my 2016 taxes and noted I was getting a refund of ~$500.
- At my 341 meeting I shared with the trustee that my mother put down $60k toward the purchase, and now there's only $18k worth of equity.

Last week I got an update from my attorney and saw the trustee filed a Report of No Distribution. For weeks I was concerned about how this would play out. Would I have to request a hearing? How much would my attorney charge for the hearing? Should I try my luck at a surrender until the trustee gives up? Overnight my case went from an asset case with a potential $19k I'd have to come up with, to a no asset case.

It goes to show that not all trustees are solely focused on earning a commission.

[justbroke]

It goes to show that not all trustees are solely focused on earning a commission.

It's sometimes something a little more nuanced. Most tenured Chapter 7 Trustees are smart enough not to chase money where they could lose a lot or expense and money. This is why having a really good attorney that is willing to fight for you (and you're wiling to pay that attorney) is important when it comes to this scenario.