Bankruptcy Trustee Finds New Way to Increase Estate: California stunner!

[tobee43]

well if this isn't just the cat's meow!!

i follow a blog and this was written by atty's on an experience in a California court, this is how it went:

"The bankruptcy trustee, at last week’s meeting of creditors, came up with a new way of making money for the bankruptcy estate and annoying debtors.

Here’s what happened:

The debtor owns a house and a rental property that she would like to keep. Both properties are completely up-side down (she owes more than they are worth).

The holder of the first mortgage on the rental showed up at the meeting to ask questions. After a few minutes, the bankruptcy trustee suggested that they simply speak on the phone in a day or two. I wondered why.

The trustee’s plan is to “sell” the property from the bankruptcy estate to the holder of the mortgage for $5,000 to $10,000. NO, the house hasn’t suddenly gone up in value, but the bankruptcy trustee figures that buying the property from the bankruptcy estate would be a lot quicker and less expensive for the mortgage holder than foreclosing.

In California, a foreclosure can take about 4 months. And that can’t even be started until the property is released from the bankruptcy estate – either by bringing a motion in court or waiting for the case to close. In an asset case, closing can take 6 months to a year (or longer).

Buying the property, however, can be done fairly quickly. A motion to sell must be filed, but under these circumstances, with no one else likely to bid on the property, the process goes pretty smoothly.

For the bankruptcy trustee – he gets some funds to distribute to unsecured creditors (and receives a percentage for doing that).

For the mortgage holder – she gets the house quickly, and without the hassle and expense of going through a formal foreclosure.

For the unsecured creditors – they get a payout from the bankruptcy estate where there would have been nothing.

And for the debtor – she loses the house with no chance to stop the foreclosure or get caught up in payments. (Certainly, that was probably unlikely to happen anyway, but at least she would have had a chance.)"

[justbroke]

This isn't new. Apparently, this has been a practice in Florida for quite some time. It's easier for the mortgage holder to buy from the Estate than going through the foreclosure process. Of course, this only works if there is only one mortgage holder. The Trustee is able to earn a small commission ($1,250 on $5K... $1,750 on $10K) while returning value to the Estate.

This may actually be a GOOD thing for those in Florida. Imagine waiting 2-3 years to have the foreclosure go through and you're in limbo -- trying to move on. Yes, there are folks that have been waiting 3 years for a foreclosure with no movement by the bank.

justbroke's study guide: Entering a Chapter 7 when you are behind in payments on any real or personal property... is a roll of the dice! Chapter 7s do not have the same protection that a Chapter 13 provides. In a Chapter 13, the term "necessary for the reorganization of the debtor" is a catch-all phrase which allows the Chapter 13 debtor to keep any property (so long as their plan is feasible). In a Chapter 7, you do not have those protections. I personally tried to stop a Motion for Relief From the Automatic Stay (RFS) on the grounds that my mortgage payments were current (and insurance up to date). That didn't stop the Judge granting the RFS on the grounds that it was not necessary for my reorganization. Big difference from a Chapter 13.

If the debtor really wants to keep investment properties, they may need to file a Chapter 13. Of course, a great lawyer would have known all this and explained the risks.

[mountanddo]

So if you find out they are going to do this do you have a chance to convert to a Chapter 13 to save it or are you basically stuck giving up the property?

[tobee43]

nothing surprises me in florida jb! apparently, it was new for this poor atty and he was upset as one can tell for his client who wanted to stay and maybe, at least attempt to work something out. although, as he pointed out that was mostly likely a moot point for her.

actually, i can see how it would be helpful so someone, lets say like us. however, many people want to stay and NOT pay until the foreclosure process hits them in their faces. for some it's there only breathing time to save some money and move on with their lives. NOT saying that's right or wrong, it has just been a source for many to be able to gather their thoughts and save for there transition.

justbroke's study guide: Entering a Chapter 7 when you are behind in payments on any real or personal property... is a roll of the dice! Chapter 7s do not have the same protection that a Chapter 13 provides. In a Chapter 13, the term "necessary for the reorganization of the debtor" is a catch-all phrase which allows the Chapter 13 debtor to keep any property (so long as their plan is feasible). In a Chapter 7, you do not have those protections. I personally tried to stop a Motion for Relief From the Automatic Stay (RFS) on the grounds that my mortgage payments were current (and insurance up to date). That didn't stop the Judge granting the RFS on the grounds that it was not necessary for my reorganization. Big difference from a Chapter 13.

certainly is a big difference. when's the book hitting the shelves! i'd buy one

[justbroke]

So if you find out they are going to do this do you have a chance to convert to a Chapter 13 to save it or are you basically stuck giving up the property?

Yes you can always convert to save property. However, a Chapter 13 isn't necessarily for most people. It is certainly not for the person who cannot, will not, or otherwise refuses to budget and live within the Chapter 13 Plan. The other issue is coming up with a feasible plan. It may not be feasible to keep all your property in a Chapter 13... to the detriment of unsecured creditors and yourself.

In the end, you want to come out of bankruptcy with your head above water. In fact, you should come out of bankruptcy with no water even at your feet! There is nothing useful gained by going through bankruptcy and still being neck-deep in water. Most judges understand this and is specifically why they don't like reaffirmation agreements in Chapter 7s.

[HHM]

That is the risk in a chapter 7. There is no mechanism for keeping the house.

Sounds like the trustee is only selling the rental property. I don't think the trustee has this option with a primary residence if the debtor is current on payments.

Plus, I think you can throw out some arguments that this sort of action is not contemplated or allowed in the code. e.g. the action is not what creditors would have received, it is a windfall, the trustee is not allowed to leverage his role as trustee to get a deal the debtor would not have received, etc. But the attorney needs to be willing and creative enough to fight it.

[justbroke]

HHM, even in the Florida situation, the good attorneys are fighting back. There have been some recent decisions in this area. The Trustees are grasping at straws these days. (See Iuliano v. Brook, 2011 U.S. Dist. LEXIS 47156 (M.D. Fla. Apr. 29, 2011).)

I think it was somewhere else on BKforum where one debtor complained that the Trustees were forcing debtors out of the home (forced abandonment). Then the Trustee would make a deal with the bank to obtain possession. It always seemed real shady to me, but it appears that some attorneys are going after the Trustee(s) in these cases.

... the bankruptcy provision upon which Trustee relies to demand surrender of the property, 11 U.S.C. § 542(a), requires a debtor to deliver to a trustee the property of the estate, “unless such property is of inconsequential value or benefit to the estate.” Where the estate has no equity in an asset, so that unsecured creditors are unlikely to benefit from a sale of the property, it is generally recognized that abandonment is the appropriate method of dealing with the asset, not liquidation. In Re: Feinstein Family Partnership, 247 B.R. 502. Where there is no equity, it makes no sense for a Bankruptcy Court to order the surrender of possession of property to the Trustee.

Iuliano v. Brook, 2011 U.S. Dist. LEXIS 47156 (M.D. Fla. Apr. 29, 2011) (emphasis added)

Yes, these Panel Trustees sometimes get creative!

[tobee43]

Yes, these Panel Trustees sometimes get creative!

creative...well, that's one perspective and very one sided. i hope the atty's do start to fight back on situations such as these. we shall see. once again, and, although this is happening in different court rooms through out the country, we are in uncharted waters, basically.

[ValleYum]

Okay - but my question is - does this mechanism of title transfer still allow the mortgage holder to file a claim for the PMI or VA or FHA funds they typically receive? Or is this case about a private owner-financed or land contract property?

I have offered on 3 separate occasions post-discharge to do a DIL and they said no all 3 times. I think a DIL would be really easy and cheap for them compared to a trustee sale but they claim it is because I must either attempt a short sale of the home or go through the complete process of a trustee sale in order for them to get their VA guarantee. I told them I would not sell a house I am no longer financially responsible for when they wanted my financial records in order to attempt a short sale. They could not give me an answer as to *why* my financial info mattered since my mortgage was discharged and not reaffirmed.

Meanwhile, back at ValleYum Manor... we wait.

[nohoneymoney]

What people will think to do!!!

This seems to be a blatant attempt to circumvent the foreclosure process. Once someone gets really offended by this or feels they have nothing more to lose, they will go after the trustee through the courts. If it involves a primary residence, I suspect they will win given the way judges and legislatures are siding with homeowners (IMO). As I understand it, the banks will not get reimbursed by Fannie Mae or Freddy Mac without going through a formal foreclosure process or short sale. They may not get mortgage insurance either. This must mean that these mortgages are owned by investors?!?

If the bank had not offered a homeowner a similar deal of buying back the mortgage on a primary residence in the recent past, the debtor could tie up the bank, investor and the trustee in court for years. While I don’t know the details of the law, the debtor would win in the court of public opinion. How many people on this forum are waiting for the banks to foreclose but the banks are buying back properties from trustees? I suspect, and hope, that once sufficient case law is developed on this practice, it will end or be extended to homeowners.

As for rental property, again if you are current I believe you can make the same case as a homeowner but you won't have public opinion behind you. The sleaze slumlord syndrome. We have significant number of rental properties and so far the trustee is not taking any action on them. Hope he doesn't read this forum.

Filing for relief from stay makes sense in some cases so the bank can get the property away from the trustee and take action, as appropriate. However, once the property is out of the trustee’s hands the bank (or an investor) will not be able to foreclose if payments are current and insurance is paid. Given the scenario of selling the mortgage and title back to the bank by the trustee, a relief from stay would be a benefit for the homeowner that wants to keep the property.

[tobee43]

OT....TOO funny nomoremoney honey avatar!!!!!!!!! cracked me up...

and YOU ValleYum.......back at ValleYum Manor!! too much!

it appears of late, the trustees are not accountable to most anyone doesn't it?

[keepsmiling]

HHM, even in the Florida situation, the good attorneys are fighting back. There have been some recent decisions in this area. The Trustees are grasping at straws these days. (See Iuliano v. Brook, 2011 U.S. Dist. LEXIS 47156 (M.D. Fla. Apr. 29, 2011).)

I think it was somewhere else on BKforum where one debtor complained that the Trustees were forcing debtors out of the home (forced abandonment). Then the Trustee would make a deal with the bank to obtain possession. It always seemed real shady to me, but it appears that some attorneys are going after the Trustee(s) in these cases.



Yes, these Panel Trustees sometimes get creative!

How well I remember that terrifying discussion! I think it was back in the late spring- I tried to find it but can only go back 12 pages of my posts. It would have given tt's vitually unlimited power and re-created the entire BK world. Fortunately that "creative thinker" aka smarta$$ wound up getting shot down.

[justbroke]

This seems to be a blatant attempt to circumvent the foreclosure process.

Remember, a lender is not required to foreclose, and there are actually alternate methods to otherwise "foreclose" upon the property. I don't think this is a technical way to circumvent foreclosure. It's an alternate foreclosure route... just like a deed-in-lieu of foreclosure (DIL). Foreclosure and this process still cost the lender $5K-$10K anyhow no matter which route. Using the bankruptcy court to order the sale (free and clear of liens) is much quicker.

What this does for the lender is that they spend the $5-10K on getting the home as an REO (real-estate owned) property and then turn it over to a real-estate agent to sell it. This is a lot quicker than the foreclosure process fore sure.

Having wrote that, I personally feel that the Trustees, in these cases, have overstepped their authority in seeking to force abandonment under these circumstances.

For me... this is all exciting because it shows that bankruptcy law is still not well settled despite what we may think! Imagine if they revamp the bankruptcy code again -- as they did in 2005. The litigation will never cease!

[IamOld]

Guys I hate to say it but there is one easy way to end all of this...behavior...if the President/Administration in power wishes to do so.

The Justice Dept could issue an interpretation/ruling that would "interpret" the law for Panel Trustees to stop this behavior...instantly.

[justbroke]

Guys I hate to say it but there is one easy way to end all of this...behavior...if the President/Administration in power wishes to do so.

The Justice Dept could issue an interpretation/ruling that would "interpret" the law for Panel Trustees to stop this behavior...instantly.

It doesn't even need to go that far. The Office of the United States Trustee could do this with a mere memo.

I think the OUST could easily just refer to Iuliano v. Brook, 2011 U.S. Dist. LEXIS 47156 (M.D. Fla. Apr. 29, 2011) which was Judge Moody's decision in Tampa (Middle District of Florida).