Chapter 7 Bankruptcy Debtors Face Eviction From Upside Down Homestea...

As the real estate market begins its recovery some real estate investors are showing an interest in acquiring houses involved in bankruptcy. One of my clients filed a joint Chapter 7 bankruptcy and indicated he would surrender his interest in his upside down homestead. They did not claim the homestead exemption on his bankruptcy schedules, and therefore, they qualified for two $4,000 wildcard exemptions. The home mortgage was several months in arrears. The bank was threatening foreclosure at the time they filed bankruptcy.

After the trustee meeting the trustee called and said a group of investors wanted to buy the trustee’s interests in the homestead. The trustee owns the debtor’s homestead interest because the debtors did not claim the homestead exemption in order to get the wildcard. Even though the trustee cannot help the unsecured creditors by selling the upside down house, the trustee does own the debtor’s right to live in the house during the foreclosure process.

The investors can buy the trustee’s interest,themselves defend and delay the foreclosure, evict the debtors, and rent the property to a new tenant. Or, the investors can leave the debtors in their house during the foreclosure and make them pay rent.  In any event, the debtors lose their right to live free in their house when they file bankruptcy and waive a homestead exemption.

This is new to the Orlando bankruptcy division, but the Chapter 7 trustee told me that investors in other divisions have been going after  this type of investment for some time.  The trustee also said that bankruptcy courts are resisting debtor attempts to file amended schedules claiming the homestead exemption after the trustee has received an offer to sell his rights to the debtor’s property.

I suspect that many bankruptcy attorneys will not anticipate this issue, and their bankruptcy clients may find themselves unprepared to rent or surrender their upside down primary residence soon after they file Chapter 7 bankruptcy.