Motion to Compel the Trustee to
Abandon real estate property
By Gary Ray Fraley, Esq.
CA State Bar Board of Legal Specialization
Certified Bankruptcy Law Specialist
Sacramento, California
(This article is part of “Countdown of
the Top 12 Malpractice Mistakes Made
by Bankruptcy Attorneys” ongoing
column)
MISTAKE #2: Not making a “Motion to
Compel the Trustee to Abandon Real
Property” to remove the exempt home
from the bankruptcy estate.
Note: This article focuses on California
bankruptcy
attorneys
and
may
reference California and 9th Circuit
law. However, most of the concepts
presented here are applicable to
bankruptcy attorneys everywhere. The
12 issues presented are not necessarily
in order of importance.
To put the following into perspective,
you have to understand that in
California, the so-called “California
Homestead Exemption” does not
protect the home. It protects a dollar
amount of equity in the home. This is
true in many other States but some
have much greater protections for the
home than in California where many
homes are at the top limits of the
exemption amounts.
Often bankruptcy attorneys are very
pleased with themselves when they file
a Chapter 7 bankruptcy and they have
been able to exempt most if not all of
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CONSUMER BANKRUPTCY JOURNAL
the client’s assets. That happens to
include the client’s home. The clients,
of course, are pleased with this. Their
home, the most important thing they
have, is safe from the Bankruptcy
Trustee and their creditors, or it seems
that way.
For whatever reason, the case drags
on and the home increases in value.
Suddenly the bankruptcy attorney
gets a call from their client. The client
tells the bankruptcy attorney that the
Bankruptcy Trustee just told them that
the Trustee is going to sell their home to
pay creditors. “No way!” the bankruptcy
attorney says. “We exempted it.” “The
Trustee can’t touch it.”
Why a Motion to Compel the Trustee to
Abandon Real Property is Needed
“Yes way!” In any bankruptcy, no
matter where what state you are in,
the “exempt assets” are assets of the
bankruptcy estate. It stays that way
until the Bankruptcy Trustee abandons
the assets and the case is closed.
The problem with this is that the
home may well increase in value
while the bankruptcy estate is open.
This is happening in many states and
cities in the United States nowadays.
Unless the home is removed from the
Winter 2016
bankruptcy estate, the equity in the
home can rapidly exceed the available
homestead exemption.
Since Bankruptcy Trustees make more
money if they have non-exempt assets
to administer, many are finding excuses
to keep the bankruptcy case open
as long as possible. The Bankruptcy
Trustee hopes the home will increase
in value. If it does, then the Bankruptcy
Trustee can reach the non-exempt
equity. Equity that was not there when
the case was filed. The most common
excuse for doing so is that they have to
keep the case open to see if the debtor
might be entitled to a tax refund. Of
course, the tax returns are not going to
be prepared until next year.
I have seen at least one case where
the Bankruptcy Trustee was going to
keep the case open and administer a
bankruptcy estate for $86 in non-exempt
cash. Really? I doubt it was the cash
that interested the Bankruptcy Trustee.
It was the increasing home equity that
had the Bankruptcy Trustee’s eye.
Fortunately, you can avoid this
happening to you or your client. You
can file a “Motion to Compel the Trustee
to Abandon the Real Property.” If the
Bankruptcy Court grants it, the motion
National Association of Consumer Bankruptcy Attorneys