Court Rebukes Chapter 7 Trustee's Attack On Debtors' Upsid...

I’ve written recently about some Chapter 7 trustees trying to take or administer  “upside down” homestead properties when the bankruptcy debtor chooses not to claim a homestead exemption because their home has no equity. The debtors purposefully avoid claiming the homestead exemption in order to then qualify for the $4,000 wildcard exemption that they can employ to protect cars and other personal property. Some trustees argue that since they can administer for the benefit of creditors all non-exempt debtor property they have the right to get money from the debtor’s homestead by, for example, making the debtors pay rent or by forcing a short sale of the upside down home.

A bankruptcy judge in south Florida rebuked a Chapter 7 trustee who wanted to take the upside down homestead and make the debtors pay rent to live there. The trustee would collect rent but let the mortgage go into default. The trustee would then distribute rent collected to the unsecured creditors until the inevitable foreclosure.

The debtors in this case tried to save  their upside down home from a Chapter 7 trustee by converting to Chapter 13.  The Chapter 7 trustee tried to block the conversion; he argued that if the debtors wanted to save their homestead they should claim the homestead exemption and forfeit the wildcard exemption that had been protecting their cars. He said the debtors’ conversion was in bad faith.

The judge pointed out that a Chapter 7 trustee owes a fiduciary duty to all parties including unsecured creditors, secured creditors (mortgage company), and the debtors themselves. The trustees position, said the judge, ignores his fiduciary obligation to the debtors and the mortgagee. He said, “The Trustee’s proposed administration of this case would have allowed the Debtors’ home to be sold to a vulture-investor imply so that the Trustee could collect rent prior to a default on the mortgage and tax obligation.” The court went on to say that, “The Trustee’s position...is misguided and wholly inappropriate.”

This decision should be used to protect debtors who try to extort money settlements from honest debtors by threatening to confiscate their upside down homesteads. In re Luban, Case No. 11-13633-AJC