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Protecting Debtor’s Assets - The Ch. 7 Trustees Duties & Obligations 

With Regard to Attempting to Seize and Sell a Good Faith Debtor's Assets

In addition to debtors’ knowledge of the above referred to §522 exemptions, debtors need to realize that it is not the purpose of a Chapter 7 or 13 Trustee to seize every penny of equity which is not protected by a specific exemption. The function of the Chapter 7 and 13 Trustee is to ascertain whether debtors own and/or have an interest in an asset that is substantially beyond the amount of the exemption provided by §522. If the Trustee determines that such an asset exists, then the Trustee is obligated to locate and sell the asset (after deducting the Trustee's fees), and then provide the debtor's unsecured creditors with an equal portion of any remaining funds from the sale of the asset.

In the real world it is simply not worth a Trustee's time to sell an asset in which a debtor might have merely a $1,000.00 equity interest in above the amount protected by §522. Put another way, it makes no sense for a Trustee to do all the necessary work to locate and force a sale of such an asset if the Trustee's legal fees and other closing costs would eat up all or almost all of the proceeds from such a forced/distressed sale, (after paying the exemption amount to the debtor), thus leaving little or no money available to pay to the debtor's unsecured creditors (which is the function of the Chapter 7 Trustee, as opposed to earning fees for themselves). A self-respecting Chapter 7 Trustee must take this real world scenario into consideration before they attempt to procure a court order from a U.S. Bankruptcy Court Judge to enable them to force the sale of a debtor's asset.

By way of further example, before a Trustee could seriously challenge the rights of debtors to maintain all of their interest in their residence, most Trustees will reduce the fair market value of the debtors’ residence by approximately 10% before calculating the real property exemption that would have to be paid to the debtors under §522; this is done to allow for closing costs that would be incurred from such a forced sale of the home. In most cases, the Trustee will attempt to reach a settlement with debtors which will require the debtors to pay the Trustee a cash settlement based on the non-exempt value of the asset, less the estimated closing costs that would be incurred through a distressed sale by the Trustee.

Along these lines, it should be also noted that Chapter 7 Trustees have a strong self-interest/ financial incentive to attempt to sell or threatened to attempt to sell a debtor's home. I have seen several cases where the only material result of a Chapter 7 Trustee's efforts to sell a Chapter 7 debtor's home would be to line the Chapter 7 Trustee's pockets, as opposed to effectuate the Chapter 7 Trustee's duties which is to procure a meaningful recovery for Chapter 7 debtor's unsecured creditors. E. g., I always assure that our Chapter 7 clients submit a fully professional and reasonable appraisal of the fair market value ( "FMV") of their homes whenever there is any doubt as to whether all of the debtor's equity in his/her home can be protected after deducting the prospective reasonable closing costs that would be incurred if a Chapter 7 trustee tried to force a sale of their home; nevertheless, I have been involved in numerous cases over the years where an overly aggressive Chapter 7 Trustees attempts to dispute the debtor's valid appraisal through the opinion of the Trustee's real estate salesman, who simply drives by the debtor's house and provides the Trustee with a high valuation in the hopes of gaining a commission (for which salesman might "sell his own mother"). In other words the Trustee is looking for quick money. Being that Chapter 7 debtors obviously do not want to live with their families under the threat of a forced Trustee sale of their homes, rather than dealing with the stress and having to lay out significant sums of money for attorney’s fees needed to oppose the Trustee’s "bad faith" efforts to sell their homes - debtors will agree to pay a $5000, $10,000 or slightly higher settlement amount to settle the Trustee's threatened or actual litigation which invariably mostly goes to pay the chapter 7 Trustee or the Trustee’s law firm’s fees as opposed to the debtor's general unsecured creditors.

Good faith Chapter 7 debtors faced with the scenario described in the above paragraph basically has three options:

  1. Cave in to the Chapter 7 Trustee's above described, bad faith attempt or threatened attempt to sell their home and pay the Trustee a reasonably small comparative amount of $5000 - 10,000 or perhaps more, which is obviously a significant amount of money for a Chapter 7 debtor to pay in either lump sum or the installment payments. A good faith Chapter 7 debtor will likely have to borrow this money from his/her 401(k) or other retirement account or perhaps borrow the money from friends or family, if this are possible at all.

  2. File a motion to convert their Chapter 7 cases to Chapter 13 cases and pay whatever arguably small amount of equity exists in their homes to the Chapter 13 Trustee over 60 or less Chapter 13 plan monthly installment payments (see the relevant section of the article in the bankruptcy overview section of our website entitled "the chapter 13 Petition/Process"). While this right to convert to a chapter 13 case is not absolute under the Bankruptcy Code and overly aggressive Chapter 7 Trustee have at times opposed this motion to convert, no bankruptcy judge has ever denied such a motion filed by our office on behalf of our clients. I note that the Chapter 13 Trustee’s office is an arm of the United States Trustee's office and there is no personal financial incentive to the Chapter 13 Trustee to be overly aggressive in squeezing out every penny of equity that may exist in the debtors home.

  3. Don't cave into an overly aggressive Chapter 7 Trustee and, if this Chapter 7 Trustee refuses to back off, file a motion with the US Bankruptcy Court for an order compelling the Chapter 7 Trustee to abandon the Trustee’s efforts to sell the debtor's home. I note that the Bankruptcy Court is a Court of Equity in which fairness, meaning truth, justice, and the American way is supposed to prevail and, believe it or not, usually does prevail. My perception is that these overly aggressive Trustees and their attorneys (often from the Trustee' s firm) usually feel sheepish about their prospectively having to go before a bankruptcy judge when there is only a small chance, if any, of their actually being able to procure any kind of significant recovery for the debtors general unsecured creditors through a forced sale of the debtor's home.

For the reasons described above, it is all the more important that Chapter 7 debtors who have any material amount of equity in their homes, or other significant asset, seek a consultation with and retain the Law Offices of Marc G. Alster or another seasoned personal bankruptcy professional who can give their case his/her personal attention and personally provide them with sound advice in these matters.

From his office in Hackensack, New Jersey, Attorney Alster's services extend throughout the state of New Jersey, as well as New York. Some areas he serves in New Jersey are Passaic County, Bergen County, Hudson County, Essex County, and more; in New York, he serves Rockland County, Queens, and the Bronx.