Bankruptcy Horror Story #2: Do You Want the Trustee to Sell Your Property?
Do you ever want to take the offensive position in a property dispute and file a Chapter 7 Bankruptcy with the intent of the Trustee selling the property? I call this the nuclear option, wherein, a person is involved in a dispute regarding the ownership, percentage of ownership or you want to sell the property, but the other party does not want to sell.
There are some advantages of having the Trustee selling the property, but the facts of the situation must be unique and the pros/cons must be thoroughly analyzed. It may make sense for the Trustee to sell if there is a lot of equity in the property, the cost of state court litigation is not affordable and all legal issues will be resolved with the sale of the property.
Last week, I received a call from a woman, whose attorney put her in a Chapter 7 bankruptcy, so the Chapter 7 Trustee would sell the property that she lived in and owned with her mother. The property had $300,000 of equity, and her mother refused to sell the property, as they had a family dispute years earlier. The daughter did not want to file a participation lawsuit against the mother due to the cost of attorney fees. Her attorney advised that by filing the Chapter 7 bankruptcy and not taking the $626,400.00 exemption she was allowed to protect the equity in the property, the Trustee would sell the property. She was told after the Trustee paid 50% to her mother and was paid his statutory and legal fees that she would have enough money to pay off all her debts and buy a mobile home.
Unfortunately for this woman, the attorney did not calculate all the cost and fees correctly and she was left with only $30,000 and no say in the proceedings. What happens when the Trustee liquidates a property: the Trustee hires a real estate agent to market and sell the property, the Trustee hires a law firm to file all required legal pleadings and the Trustee requests the court to authorize for the Trustee to receive their statutory fees. All of these cost and expenses is paid by the debtor’s assets in the property.
In the situation above, the Trustee received an offer for $300,000 over what was owed on the property. The Trustee then negotiated with the mother’s attorney to agree to take $150,000 or half of the equity. The debtor was now left with $150,000. The Trustee then filed a Motion to allow the real estate agent to receive 6% commission and 2% percent to title and escrow. The house sold for $700,000 so that equated to $56,000 that the debtor was required to pay from her share, thus she was left with $94,000. Then the Trustee filed a Motion requesting attorney fees and his statutory fees that came out to $64,000. Accordingly, the debtor’s net equity ended up being only $30,000.
Lesson learned: if a debtor wants the Trustee to sell a property they have interests in, they better be prepared to absorb all the cost related to the transaction. Remember, the debtor avails themselves of the rights and privileges of filing bankruptcy, so they must be prepared for the responsibility of all the cost associated with the sale of the property. I spoke to the woman after this whole scenario fettered out, and her only comment was “I wish I would have never filed Chapter 7 and let the Trustee sell the property, it cost me $100,000.”