Elderly Parents, Life Estates, Remainder Interests, and Bankruptcy

by L. Jed Berliner, Western & Central Massachusetts Consumer Lawyer

November 27, 2011

How Long Can A Bankruptcy Trustee Keep A Case Open?

Bankruptcy trustees in California and elsewhere were notorious for holding a Chapter 7 case open while real estate prices rose (hah!  remember those days?) above the protected values.  The trustee would then sell the home, forcing a debtor to move – and spend the protected part of the sale proceeds to do so -  while recovering money for the creditors.

In other situations, a debtor might own a “remainder” interest in an elderly parent’s home.  The elderly parent had deeded the home to the debtor but reserved a “life estate”, the right to possess while the parent lived.  The trustee would hold the case open until the parent died.  The value of the remainder interest would increase above the protected value, and the trustee would then sell the home.

The vast majority of cases ruled that the increase in value of a Chapter 7 asset belonged to the trustee, while the debtor was stuck with the fixed exemption amount.  Those courts have ruled that a frustrated debtor’s remedy was to move to compel the trustee to abandon the asset.   A trustee cannot keep a case open indefinitely.  The trustee must close the case expeditiously, after due consideration of the possibility of recovering money for the creditors.  How long is “expeditiously” in these circumstances is up to a judge’s discretion.  Unfortunately, that motion to compel has a $176.00 filing fee.

An analysis of compelling the abandonment will include the anticipated delay before the trustee sells the property.  In the life estate context, the life expectancy of the elderly parent is important.  It will also include a calculation of the anticipated dividend to the creditors after the parent dies.  Finally, the court will balance the competing policies of repayment to creditors against the need for an expeditious, just, speedy, and inexpensive determination and closing of the case and the violence done to the debtor’s fresh start and claims of exemptions.  See In re Saunders, 2011 Bankr. LEXIS 520 (Bankr. M.D. GA Feb. 17, 2011).

Oddly, in Massachusetts and elsewhere an increase in value of a Chapter 13 asset does not belong to the estate if it is not realized through a sale or refinance.  This appears to contradict the Chapter 7 rulings that postpetition appreciation belongs to the estate.

There is also a developing split of cases about whether a debtor can protect post-filing appreciation by having claimed “100% of fair market value” when the case was first filed.  This can be another helpful argument, if the appropriate exemption was claimed.

 

Image Credit:  USA

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L. Jed Berliner practices exclusively in consumer bankruptcy, foreclosure defense, and related consumer protection litigation such as credit card defenses and suing debt collectors. He established his Springfield, MA practice in 1988. Attorney Berliner is a regular and active contributor to the Bankruptcy Law Network, the Bankruptcy Roundtable, and the National Association of Consumer Bankruptcy Attorneys, three specialized consumer bankruptcy forums on the Internet, and is an informal mentor to regional practitioners. He is recognized by his peers as an expert in consumer bankruptcy issues. He thoroughly enjoys being rated "excellent" in his client surveys.

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Last modified: November 27, 2011