Source: http://www.discreetbk.com/bankruptcy-when-does-it-end/
Timestamp: 2017-07-20 14:41:12
Document Index: 671491422

Matched Legal Cases: ['§ 522', '§ 727', '§ 704', '§ 58', '§ 33', '§ 522', '§ 522', '§ 33', '§ 554']

Chapter 7 Liquidation Bankruptcy: When does it end?
A recent case decided by the Ninth Circuit Court of Appeals can have a wide effect on bankruptcy cases filed in Arizona. When an individual files for a Chapter 7 liquidation bankruptcy, the debtor usually receives a discharge from any of the debts owed to creditors within about four months. However, the trustee who represents the creditors can still liquidate non-exempt property after the entry of discharge.
For example, under Arizona law, a debtor can exempt a motor vehicle worth $5,000. If the car is ultimately sold by the trustee for $8,000, then the debtor will receive a check for $5,000 and the creditors will receive their pro rata share of the remaining $3,000. This sale does not need to occur prior to the discharge being entered; it can occur later. However, usually the debtor is alerted to the trustee wanting to sell the car pretty quickly, so there is no surprise.
The recent case involved an Arizona debtor who filed for bankruptcy in 2003. A few months later, he received a discharge and moved on with life. One of his assets was his house which had equity of approximately $90,000 at that time. Arizona law permits a debtor to protect up to $150,000 in equity in his homestead, so there was no problem. He simply kept making his monthly mortgage payment, even refinancing the house, and life was good. It was good until 2006, more than three years after the bankruptcy was filed.
The bankruptcy trustee asked the court to appoint a real estate agent to sell the house. Now, remember, back in those days, the value of real estate was skyrocketing. So the house that the Arizona debtor owned was worth a LOT more in 2006, and he had substantially more than $150,000 in equity in the property.
Most bankruptcy attorneys before this case were in agreement that the value of the house at the time of filing was “frozen”. However, according to the Court of Appeals, that isn’t the case at all. The trustee is permitted to sell the house until either the asset is formally abandoned or the case is closed. However, we do note that simply closing a case is probably not enough, since a trustee could re-open a case after discovering an asset, like a house that is now worth something.
While some Chapter 7 trustees are better at remembering to file notices of abandonment, there is a mechanism in the bankruptcy code that permits a debtor, or another party in interest, to ask the court to declare an asset abandoned pursuant to section 544 because it is not of value to the estate and the creditors.
Although this adds expense to a Chapter 7 filing (including a $250 court filing fee), for debtors with potentially appreciating assets like a house or a business, we do recommend that you consider having a Motion to Compel Abandonment filed. If the bankruptcy court orders the asset deemed abandoned, then there will be no looking in the real view mirror or worrying about the trustee reappearing in the future.
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A copy of the Ninth Circuit Court of Appeals; opinion in the case of In re Gebhardt can be read below.
IN RE: Steven Jay Chappell; Julie Lynn Chappell, Debtors, v. Michael P. Klein, Trustee, Appellee.
Argued and Submitted Dec. 12, 2008. — September 14, 2010
Before A. WALLACE TASHIMA and MARSHA S. BERZON, Circuit Judges, and ROBERTJ. TIMLIN,District Judge.* Harold E. Campbell, Mesa, AZ, for appellant Gebhart. Steven J. Brown, Phoenix, AZ, for appellee Gaughan.Marc S. Stern, Seattle, WA, for appellants Chappells. James W. Shafer, Seattle, WA, for appellee Klein. Tara Twomey, San Jose, CA, for amicus curiae National Association of Consumer Bankruptcy Attorneys.
The Chappells' story is similar to that of Gebhart. Steven and Julie Chappell filed for Chapter 7 bankruptcy on June 30, 2004. They owned a home in Camano Island, WA, in which their equity at the time of bankruptcy-$21,511-was less than the $36,900 they were allowed to claim under the federal homestead exemption in bankruptcy, 11 U.S .C. § 522(d)(1).3 The Chappells received their discharge under 11 U.S.C. § 727 on October 21, 2004. On July 7, 2006, two years after the bankruptcy petition was filed, the holder of the Chappells' mortgage moved for relief from the stay in order to foreclose on the homestead because the Chappells had fallen into default. The Trustee responded that he believed the fair market value of the homestead had increased substantially since the bankruptcy filing, and asked permission to attempt to sell the property and keep the excess recovered for the benefit of the estate. The bankruptcy court ruled that the homestead had passed entirely out of the estate when the Chappells had claimed all of their equity in it as exempt and the Trustee failed to object. The Trustee appealed and the bankruptcy appellate panel (the “BAP”) reversed the bankruptcy court's decision, holding that the postpetition appreciation in the homestead belonged to the estate. Klein v. Chappell (In re Chappell), 373 B.R. 73, 83 (9th Cir.BAP2007). This appeal followed.
Furthermore, abandonment of an estate asset is not a remedy for a trustee's misconduct. A trustee has a duty under 11 U.S.C. § 704(a)(1) to administer the case quickly and expeditiously, and we reach no decision as to whether the Trustee failed to live up to this duty by leaving the case open for eighteen months without activity. If there were any misconduct by the Trustee, the duty to police it falls on the U.S. Trustee in Gebhart's district, who may suspend or expel a trustee for failure to perform her duties or comply with the Bankruptcy Code. See 28 C.F.R. § 58.6(a)(2)-(3). To require the Trustee to abandon Gebhart's homestead would punish Gebhart's creditors for the Trustee's misdeeds.6 CONCLUSION
The statute has since been amended to increase the amount of the exemption to $150,000. The exemption statute, as is common in these statutes, does not protect against foreclosure by holders of consensual liens such as mortgages. Id. § 33-1104(D). Arizona has opted out of the federal system of exemptions pursuant to 11 U.S .C. § 522(b)(2), and thus Gebhart was eligible to use only the state law system of exemptions.
Gebhart states in his brief that the Trustee demanded in October 2006, prior to applying for the appointment of a real estate broker, that Gebhart pay the Trustee $115,000 for increased equity in the house. There is no indication in the record of any such demand.
At the time the case was filed, the federal homestead exemption was $18,450. Because the Chappells filed a joint bankruptcy case, they were allowed to double the value of the exemption pursuant to 11 U.S.C. § 522(m).
We note that Reilly did not address instances in which the full value of property at the time of filing is in fact equal to or less than the monetary limit provided for by the relevant bankruptcy exemption. Although the Court expressed skepticism about the issue, it left open whether such a claim would entitle a debtor to the property itself as opposed to a payment equal to the property's full value. Reilly, 130 S.Ct. at 2668 n. 21. As in Reilly, the facts of these cases do not implicate this scenario, because the debtors here claimed as exempt only their equity interest in their properties (the difference between the value of the homesteads and the mortgages with which they were encumbered), not the full fair market value of their properties.
Gebhart relies on Evans v. Young, 661 P.2d 1148 (Ariz.Ct.App.1983), to argue that the Arizona homestead exemption statute exempts an entire property and not merely a dollar amount equal to the maximum amount of the exemption, and that because Arizona is an opt-out state the Supreme Court's contrary interpretation of the federal exemption scheme is irrelevant. Evans, however, was decided based on an earlier version of the Arizona homestead statute, which exempted “real property”, Evans, 661 P.2d at 1149 n. 1, whereas the current version of the statute exempts an “interest in real property,” ARIZ. REV. STAT. § 33-1101(A) (emphasis added). By its plain language, the Arizona homestead exemption thus appears to track the federal exemption in applying only to an interest up to a given monetary amount.
A debtor also has an alternative remedy of petitioning under 11 U.S.C. § 554(b) for the bankruptcy court to “order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.”
Tags: Arizona, bankruptcy, Chapter 7, Chapter 7 liqidation bankruptcy, motion to compel abandonment