Trustees Find New Ways to Sell Debtor’s Real Estate

Trustees are finding new ways to sell debtor’s real estate in South Florida bankruptcies. I recently litigated this issue as to  property that was co-owned by the debtor and a non-debtor, which will be discussed below. I represented the co-owner who was not in bankruptcy.

The basic idea is that Debtors could be unpleasantly surprised if not fully aware of this development.  Trustees have made arrangements with lenders to sell all of the trustee’s right, title and interest in the debtor’s real estate.    These sales could be by short sale or actually by selling back to the foreclosing lender.  The bankruptcy trustee would be paid a “carve out”,  meaning the trustee receives funds for the benefit of the bankruptcy estate. In theory, there would be a meaningful contribution to unsecured creditors, but realistically, most would go to the trustee and his or her attorney.  An aggressive pilot program has started in South Florida on Freddie Mac loans.

Of course, this process does not apply to a debtor who lists in the bankruptcy his property as homestead.  But many debtors want to preserve the small Florida “wildcard” exemption in personal property of an additional $4,000 ($8,000 for husband and wife).  This could result in the sale of the debtor’s home by the trustee. On the other hand, sometimes the debtor really does want to get off the title of the property to avoid future liabilities, such as association fees.  This program could helps some debtors obtain a true fresh start.

As for non-homestead property, especially rental property, it used to be that if there was no equity, the trustee would abandon the property and the real estate would go back to the debtor.  Now, the trustee can sell the property.

This issue is more complicated when the property is owned by a another party who is not a debtor.  The real estate could be protected if owned as husband and wife as tenancy by the entireties.  An attorney should be consulted as to whether this would be applicable in your case.

The case I litigated involved property owned as tenancy by the entireties and property owned with another relative that was the non-debtor’s homestead.  The non-debtor, co-owner can argue that the trustee must prove that the benefit to the bankruptcy estate outweighs the harm to the co-owner.  This defense should be reviewed by any non-debtor whose property is trying to be sold by the chapter 7 trustee.  (Note in my case a settlement was reached saving properties from sale by the trustee in an adversary proceeding pursuant to section 363h of the bankruptcy code).

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