15 May Florida: Chapter 7 bankruptcy trustees tactics rebuked by courts
Now more than ever, Florida bankruptcy debtors need court protection from some money-grubbing Chapter 7 trustees.
As previously reported on Bankruptcy Law Network, the Florida legislature approved a $4,000 wildcard exemption for those debtors not claiming the benefit of a homestead exemption. At the time it was passed in 2007, bankruptcy experts believed it would be a narrowly used exemption by non-homeowners, but with the collapse of Floridaâ€™s real estate market, debtors abandoning their homes in bankruptcy use the Wildcard exemption to protect more of their personal property.
Since bankruptcy trustees get to keep 25% of whatever they collect for the estate as their fee, the law change has meant that they miss out on $1,000 in fees for an individual filer and $2,000 in fees for joint filers whenever the wildcard is used.
Predictably, most bankruptcy trustees have accepted this new exemption without much complaint, but some of them canâ€™t let go of the gravy train. They have developed cockamamie legal theories in an effort to circumvent the wildcard exemption.
The favorite tactic of a rogue bankruptcy trustee is to demand that the debtor immediately vacate his abandoned home or pays him rent for its use. Fortunately, federal and state court judges arenâ€™t having any part of the shakedown.
As previously reported here, the Supreme Court of Florida, in Osborne v. Dumoulin, ruled that a bankruptcy debtor doesnâ€™t need to do anything special to â€œnot claim or receive the benefit of the homestead exemption.â€ Chief Justice Canady explained that a homeowner can just choose the $4000 wildcard exemption if it provides a greater protection than the homestead exemption would. Actual abandonment of the homestead is not necessary.
In Osborne, Justice Canady concludes, â€œAccordingly, . . . where a debtor in bankruptcy elects not to claim the article X, section 4, homestead exemption and the trusteeâ€™s administration of the bankruptcy estate is not otherwise obstructed by the existence of the homestead exemption, the debtor . . . may claim the [wildcard] exemption of $4000. [Emphasis added.]
But hard-headed trustees have interpreted this sentence to (somehow) mean that the debtorâ€™s continued occupation of the house obstructs the trusteeâ€™s administration of the house. Please donâ€™t email me and ask that I explain this because itâ€™s just stupid. I cannot fathom this logic. Fortunately, neither can judges.
Following the lead of Floridaâ€™s highest state court, The Federal District Court for the Middle District of Florida has recently expanded the Osborne decision in the case of Iuliano v. Brook, 2011 U.S. Dist. LEXIS 47156 (M.D. Fla. Apr. 29, 2011) to specifically prevent a trustee from forcing a debtor to vacate his home just because he claims the wildcard exemption.
In the Iuliano case, the Trustee argued that a debtor who does do not claim his homestead as exempt in his bankruptcy petition, but opposes delivering exclusive possession to the Trustee for administration, is “otherwise” impeding the Trustee’s administration of the property. United States District Judge James Moody disagreed, stating, â€œBut this contention assumes a trustee cannot, for all practicable purposes, sell an occupied home. And the argument is refuted by existing bankruptcy law and the explanation by the Florida Supreme Court of its Osborne decision.â€
Judge Moody also pointed out the obvious. If a debtorâ€™s house has negative equity, it is of no benefit to the bankruptcy trustee or the creditors:
11 U.S.C. Â§ 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. [Cite omitted.] Where there is no equity, it makes no sense for a Bankruptcy Court to order the surrender of possession of property to the Trustee.
It is obvious that the ONLY reason a trustee would want to threaten a debtor with eviction is to force the debtor to abandon the wildcard exemption, thereby extorting $4,000 – $8,000 of money from his pockets. It is a brutish scare tactic that preys on an already stressed out debtor, and it is good to see that judges are putting an end to the practice.
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