I am starting this thread due to the numerous posts relating to collecting rents post petition. As I have said before, once you file Chapter 7 you do not have the right to collect AND keep post petition rents. A number of you have questioned this. Others have stated that they feel obligated to collect rents and pay the lender. In response I have indicated that unless there is a clear “assignment of rents” in the mortgage or deed of trust, the lender has no more right to the money than the debtor.
There is a ton of case law ranging from the simplest Chapter 7 to the very complex Chapter 11 that supports this. Below are only three such cases.
In Re Lockbaum (Bankr. N.D. Ill., 2010) - not published
This matter came before the court on two motions:1) Chapter 7 trustee's motion to compel the debtor to render an accounting and turnover property, and 2) Debtor’s motion to determine property abandoned and close the case, or in the alternative compel abandonment. The Trustee's Motion was granted the Debtor's was denied.
The debtor disclosed in Schedule A that he owned a residential condominium to which the property was leased and he was collecting rents. The trustee filed a Motion for Turnover asserting in his motion that the rent is property of the estate pursuant to § 541(a)(6) and should be turned over to him.
“The general rule contained in § 541(a)(6), includes within property of the estate "proceeds, product, offspring, rents or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. § 541(a)(6). Under this provision, money received by a debtor after the case was filed is property of the estate if it was generated as proceeds from property of the estate. ( See United States v. Messner, 107 F.3d 1448 (10th Cir. 1997)). For example, if a debtor owns real property on the day the case is filed and he receives post-petition rent from tenants living in the property, the rent is also considered to be property of the estate.” (See In re Amaravathi Ltd. P’ship, 416 B.R. 618 (Bankr. S.D.Tex. 2009))
In re Davis, Case No. 07-11795-MAM-7 (Bankr.S.D.Ala., 2007) - not published.
The Court initially ruled that the rental proceeds collected by the debtor post-petition on nonexempt real estate were properly exempted under Ala. Code § 6-10-6. However, upon further review of the case law, the Court changed its decision and stated that its conclusion was erroneous.
"What is property of the estate of a debtor is determined first by reference to 11 U.S.C. § 541(a)(1). It provides that the trustee succeeds to all legal and equitable rights of a debtor in property as of the date the debtor files bankruptcy. Section 541(a)(6) states that property of the estate includes "proceeds, product, offspring, rents or profits" from property of the estate as well. Therefore, unless the rents claimed by Ms. Davis are exempt on their own merits (since the real estate is not exempt), it is clear the rents are property of the bankruptcy estate" and must be turned over to the Trustee.
In re Moody, 241 B.R. 238 (Bankr.M.D.Fla., 1999)
"On March 19, 1999 Trustee filed a Motion for Turnover of Property seeking the turnover of post-petition rents on a townhouse in Stirling Virginia owned by Debtors. . . Debtors collected approximately $3,000.00 in post-petition rents on a townhouse they own in Stirling, Virginia. . . On July 2, 1999 the Court entered Order Granting Relief from the Automatic Stay to Charter One Mortgage, mortgagee on the townhouse. Debtor wife testified that Debtors have not turned the rents over to Trustee because Debtors believed the rents belong to Charter One.
Trustee seeks turnover of post-petition rental income as well as any accrued interest thereon from a townhouse in Stirling, Virginia owned by Debtors. Trustee points out that Debtors' only justification for their failure to turn over the rental income is that the automatic stay has been lifted and the property will be foreclosed. Debtor wife testified that the rental income has been set aside in a bank account in Virginia, and that she believes it should be paid to Charter One, the mortgagee. Rents from property of the estate are themselves property of the estate. 11 U.S.C. § 541(a)(6). Therefore, the rental income is property of the estate. Trustee's contention that the lifting of the stay has no effect on whether or not Debtors are entitled to keep the post-petition rental income is correct. As Charter One has not claimed an interest in the rental income, the only issue before the Court is whether the rents are subject to turnover to Trustee. Based on the foregoing, the Court concludes that they are and will grant Trustee's Motion for Turnover of post-petition rents."
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Bottom line folks. . . if you take it upon yourself to collect rents after the day you file a Chapter 7 and fail to turnover those rents to the Trustee (when asked to) you can get into big trouble. I have seen this issue time and time again. The debtor always states either 1) I did not know I had to turnover the $$ or 2) but if I turn it over I cannot pay the mortgage, insurance, taxes etc. or 3) I need the money to live. My response. . .
If you want to keep control over the property and the proceeds it generates, do not file a Chapter 7.
Des.
PS - maybe the moderators want to make this a “sticky”?
There is a ton of case law ranging from the simplest Chapter 7 to the very complex Chapter 11 that supports this. Below are only three such cases.
In Re Lockbaum (Bankr. N.D. Ill., 2010) - not published
This matter came before the court on two motions:1) Chapter 7 trustee's motion to compel the debtor to render an accounting and turnover property, and 2) Debtor’s motion to determine property abandoned and close the case, or in the alternative compel abandonment. The Trustee's Motion was granted the Debtor's was denied.
The debtor disclosed in Schedule A that he owned a residential condominium to which the property was leased and he was collecting rents. The trustee filed a Motion for Turnover asserting in his motion that the rent is property of the estate pursuant to § 541(a)(6) and should be turned over to him.
“The general rule contained in § 541(a)(6), includes within property of the estate "proceeds, product, offspring, rents or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. § 541(a)(6). Under this provision, money received by a debtor after the case was filed is property of the estate if it was generated as proceeds from property of the estate. ( See United States v. Messner, 107 F.3d 1448 (10th Cir. 1997)). For example, if a debtor owns real property on the day the case is filed and he receives post-petition rent from tenants living in the property, the rent is also considered to be property of the estate.” (See In re Amaravathi Ltd. P’ship, 416 B.R. 618 (Bankr. S.D.Tex. 2009))
In re Davis, Case No. 07-11795-MAM-7 (Bankr.S.D.Ala., 2007) - not published.
The Court initially ruled that the rental proceeds collected by the debtor post-petition on nonexempt real estate were properly exempted under Ala. Code § 6-10-6. However, upon further review of the case law, the Court changed its decision and stated that its conclusion was erroneous.
"What is property of the estate of a debtor is determined first by reference to 11 U.S.C. § 541(a)(1). It provides that the trustee succeeds to all legal and equitable rights of a debtor in property as of the date the debtor files bankruptcy. Section 541(a)(6) states that property of the estate includes "proceeds, product, offspring, rents or profits" from property of the estate as well. Therefore, unless the rents claimed by Ms. Davis are exempt on their own merits (since the real estate is not exempt), it is clear the rents are property of the bankruptcy estate" and must be turned over to the Trustee.
In re Moody, 241 B.R. 238 (Bankr.M.D.Fla., 1999)
"On March 19, 1999 Trustee filed a Motion for Turnover of Property seeking the turnover of post-petition rents on a townhouse in Stirling Virginia owned by Debtors. . . Debtors collected approximately $3,000.00 in post-petition rents on a townhouse they own in Stirling, Virginia. . . On July 2, 1999 the Court entered Order Granting Relief from the Automatic Stay to Charter One Mortgage, mortgagee on the townhouse. Debtor wife testified that Debtors have not turned the rents over to Trustee because Debtors believed the rents belong to Charter One.
Trustee seeks turnover of post-petition rental income as well as any accrued interest thereon from a townhouse in Stirling, Virginia owned by Debtors. Trustee points out that Debtors' only justification for their failure to turn over the rental income is that the automatic stay has been lifted and the property will be foreclosed. Debtor wife testified that the rental income has been set aside in a bank account in Virginia, and that she believes it should be paid to Charter One, the mortgagee. Rents from property of the estate are themselves property of the estate. 11 U.S.C. § 541(a)(6). Therefore, the rental income is property of the estate. Trustee's contention that the lifting of the stay has no effect on whether or not Debtors are entitled to keep the post-petition rental income is correct. As Charter One has not claimed an interest in the rental income, the only issue before the Court is whether the rents are subject to turnover to Trustee. Based on the foregoing, the Court concludes that they are and will grant Trustee's Motion for Turnover of post-petition rents."
____________________________________
Bottom line folks. . . if you take it upon yourself to collect rents after the day you file a Chapter 7 and fail to turnover those rents to the Trustee (when asked to) you can get into big trouble. I have seen this issue time and time again. The debtor always states either 1) I did not know I had to turnover the $$ or 2) but if I turn it over I cannot pay the mortgage, insurance, taxes etc. or 3) I need the money to live. My response. . .
If you want to keep control over the property and the proceeds it generates, do not file a Chapter 7.
Des.
PS - maybe the moderators want to make this a “sticky”?
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