Bankruptcy Trustee Finds New Way to Increase Estate

11 Dec Bankruptcy Trustee Finds New Way to Increase Estate

The bankruptcy trustee, at last week’s meeting of creditors, came up with a new way of making money for the bankruptcy estate and annoying debtors.

Here’s what happened:

The debtor owns a house and a rental property that she would like to keep. Both properties are completely up-side down (she owes more than they are worth).

The holder of the first mortgage on the rental showed up at the meeting to ask questions. After a few minutes, the bankruptcy trustee suggested that they simply speak on the phone in a day or two. I wondered why.

The trustee’s plan is to “sell” the property from the bankruptcy estate to the holder of the mortgage for $5,000 to $10,000. NO, the house hasn’t suddenly gone up in value, but the bankruptcy trustee figures that buying the property from the bankruptcy estate would be a lot quicker and less expensive for the mortgage holder than foreclosing.

In California, a foreclosure can take about 4 months. And that can’t even be started until the property is released from the bankruptcy estate – either by bringing a motion in court or waiting for the case to close. In an asset case, closing can take 6 months to a year (or longer).

Buying the property, however, can be done fairly quickly. A motion to sell must be filed, but under these circumstances, with no one else likely to bid on the property, the process goes pretty smoothly.

For the bankruptcy trustee – he gets some funds to distribute to unsecured creditors (and receives a percentage for doing that).

For the mortgage holder – she gets the house quickly, and without the hassle and expense of going through a formal foreclosure.

For the unsecured creditors – they get a payout from the bankruptcy estate where there would have been nothing.

And for the debtor – she loses the house with no chance to stop the foreclosure or get caught up in payments. (Certainly, that was probably unlikely to happen anyway, but at least she would have had a chance.)


Image Credit: apes_abroad

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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