• Home
  • Bankruptcy in Brief
  • ABC’s of Bankruptcy
  • Considering Bankruptcy
  • True Stories
  • Chapter 13
  • Blog
  • About
  • TOC

Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box
  • How bankruptcy works
  • Mortgage Matters
  • Consumer Rights
  • You & Your Lawyer
  • Small Business
  • Family Law

Bankruptcy Trustees And The Short Sale Racket

By Cathy Moran

fema-katrinaCan a bankruptcy trustee force the sale of the debtor’s underwater home?

Incredibly, that seems to be happening in some districts.

Here’s how the scheme works.

The bankruptcy trustee cuts a deal with the secured lender for a small piece of the action to come to the bankruptcy estate from a short sale.

In return, the bankruptcy trustee manoevres the sale through the bankruptcy court.

The lender is spared the time and expense of a foreclosure sale.

And the debtor, who may have been hoping for a loan modification, or who may even have been current to the lender at filing, finds themselves homeless.

What?

One court says no

Last week, a bankruptcy judge in California’s Central District reined in the trustee who sought to sell the debtor’s underwater home.

In a written opinion marked for publication, Judge Scott Clarkson characterized the sum agreed to be paid to the bankruptcy estate upon sale as a “tip” to the trustee for sparing the lender from California’s consumer protection laws touching bankruptcy.

As if we need to allow banks one more way to skirt the law.

The Wilson decision nominally turns on the debtor’s claim of exemption under California Code of Civil Procedure 703.140.  When the debtor got wind of the trustee’s deal with the bank, she amended her exemptions to claim a grubstake, or wildcard, exemption in the property that would have taken the “profit” out of the deal for the trustee.

The trustee unsuccessfully argued that the “tip” to the bankruptcy trustee from the bank didn’t exist as of the filing of the bankruptcy case.

The court turned back that argument and said, rightly, that the exemption was claimed in the underlying property, not in the gratuity to the estate.

Benefit to creditors unaddressed

Judges only rule on the issue before them.  In this case, the issue was framed in terms of a contest over the amended exemption asserted in the properties without equity.

The judge was not presented with the question about the benefit to the creditors from the trustee’s attempted sale.

In Wilson, two underwater properties were tagged for short sale.  The carve-out for the bankruptcy estate in one instance was $15,000 and in the other, $21,250.

In the absence of Ms. Wilson’s claim of exemption, the carve out would be available to the bankruptcy trustee to pay the administrative expenses of the estate and the trustee’s commission, with the balance going to creditors.

We don’t know what other expenses the trustee might have that would shrink the pot available to creditors.

In bed together

But to my mind, this whole bankruptcy carve out from short sales stinks.

It seems to disproportionately benefit the trustee and to generate very little real benefit to creditors.

And of course, it benefits the realtors involved.  I found it kind of creepy that the trustee’s real estate broker of choice worked for Bankruptcy Short Sale Solutions.

Another entire business enterprise focused on tormenting consumers for profit!

Historically, bankruptcy courts have rejected attempts by trustees to serve as liquidating agents for secured creditors.  The UST  handbook for Chapter 7 trustees tells trustees to only liquidate assets where there is a real benefit to creditors.

I’m also bothered by the bankruptcy trustee lining up to further the interests of lenders.

The court, in a footnote, said it wouldn’t analyze the “bad faith use of the federal bankruptcy system by such actions, except to question whether the Bankruptcy Code was enacted to provide cover for lending entities desirous of avoiding state-imposed consumer protection laws.”

Maybe Judge Clarkson didn’t analyze the bad faith, but he certainly got the name right.

Image courtesy of FEMA.

More from the Soapbox

  • Bankruptcy Alphabet: E is for ExemptionsBankruptcy Alphabet: E is for Exemptions
  • When You Can’t Make Your Chapter 13 PaymentsWhen You Can’t Make Your Chapter 13 Payments
  • IRS warns of credit counseling fraudIRS warns of credit counseling fraud
  • Debtor Bites Collector Over Stale Debt Debtor Bites Collector Over Stale Debt
  • California’s Good Deed:  Passing Real Property At DeathCalifornia’s Good Deed: Passing Real Property At Death

Filed Under: Real property & mortgages

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

How Bankruptcy Works

How To Pay For Bankruptcy When You’re Flat Broke

One of the cosmic ironies of our legal system is that it costs money to file bankruptcy. Bankruptcy gets you out of debt only if you have the money to file. The costs of bankruptcy include the filing fee collected by the court; the required credit counseling; and, if you're smart, an experienced lawyer to make sure … Read more

More Posts from this Category

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700
Phone: (650) 368-4700

Categories

All content copyright © Moran Law Group. All rights reserved.