Homestead Can Be At Risk To Investors When Chapter 7 Debtor Chooses ...

Real estate investors and some bankruptcy trustees are looking for ways to make money off your upside down homestead. Many Chapter 7 debtors with upside down homesteads do not utilize their homestead exemption on their bankruptcy petition because there is no equity to exempt. By not using the homestead exemption the debtors then can qualify for a $4,000/debtor wildcard exemption which they can use to protect their cars or other assets. The debtors assume that the trustee will not bother to go after their house because there is no equity. 

In one of my bankruptcy cases this month I received a phone call from the trustee who indicated that some real estate investors were interesting in looking at my clients’ upside down property, and that they would offer to pay the trustee money for the trustee’s interest in the property. 

Here’s why. After filing bankruptcy a debtor can stay in his upside down house for free while he defends the bank’s foreclosure case in state court. Or, the debtor can move out of the house and rent it for income while fighting off the bank’s foreclosure for a year or more. 

Some real estate investors want the same arrangement and are willing to pay for it. The investor would pay the bankruptcy trustee a few thousand dollars for the trustee’s interest in the debtors’ house. The investors would then take title to the house and either make the debtors pay rent or evict the debtors and find a tenant. The real estate investors would fight the bank’s foreclosure and pocket all the rent. The bankruptcy trustee makes a fee from the sale and pays the balance received to the unsecured creditors.

The only way for the debtors to stop this deal is for the debtors to amend their petition and claim the homestead exemption. But, by doing so they lose their wildcard exemption and could expose other property to the trustee. 

This type of investment tactic is relatively new to our Orlando court, but it has been used successfully for some time in other jurisdictions. Debtors need to understand the risk of waiving homestead exemption even if their house has no equity.