08 Aug Big Problems Arise When a Chapter 7 Debtor Sells Estate Property Without Trustee Permission
I received this question from a very worried Chapter 7 debtor:
I initially filed Chapter 13 after paying back $10,000 and not being able to stay afloat I switched to Chapter 7. I owned two houses at the time and made my attorney aware that I was trying to sell both. I received an offer to purchase and notified my attorney. She advised we needed permission to sell from trustee. By the time the closing was upon us there still was not date to go before the trustee. I sold the house making no profit but my debt was cleared. Now the trustee is denying my discharge thinking I have defrauded the system. I made good on my debt to repay my mortgage company as far as I am concerned. I did not sell to a relative or make any gain.
I am scheduled for a pre-trial next week. I do not know what to expect or do at this point. I cannot afford the attorney so I will have to represent myself. The trustee is very, very nasty. I wanted to pay my debt back but cannot afford. Please help!
Here is the problem in a nutshell: when you sold your house without trustee permission, you sold something that you did not own. When you file a Chapter 7, all of your assets and your debts become part of your “bankruptcy estate.” The Chapter 7 trustee is the administrator of that estate. This arrangement is similar to what happens when you die – if you had a will, the executor of your estate is empowered to distribute your assets and if you die without a will, the probate court has the power to appoint an administrator to distribute your assets and pay certain debts.
In a Chapter 7 bankruptcy, you are, of course, not dead, but you are also no longer the sole owner of your property. Technically you are called a “debtor in possession” which means that you have limited authority to take any action to buy or sell property. The trustee, as the administrator of your bankruptcy estate, is charged with the job of marshaling assets and selling off those assets that are not exempt (protected). The proceeds of such a sale are used to pay the expenses of the estate administration (i.e. the trustee) with the remainder going to your creditors based on priorities set out in the Bankruptcy Code.
As you might imagine your Chapter 7 trustee was not very happy to learn that you had sold an asset without his permission. He may argue that you shortchanged your estate by not generating enough money, or he may be arguing that your act of selling an estate asset should result in the denial of your discharge.
This is probably not a matter that you should pursue without counsel. Bankruptcy Courts are bound to a certain extent by precedent and you need counsel to review the case law in this area and to develop an argument that your estate was not prejudiced and that the denial of your discharge is too harsh of a punishment.
Your case is a good illustration about why any debtor needs to carefully consider the consequences of filing for bankruptcy. When you file bankruptcy you give up control of your financial life to a stranger (a trustee) who is not necessarily looking out for your best interests. In certain situations the Bankruptcy Code can be unforgiving and can leave you worse off than if you had not filed at all.
Best of luck to you in this difficult situation.
Jonathan Ginsberg, Esq.
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