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Court Ruling Clarifies When You Can Keep Your Home in Bankruptcy

Posted on Sep 29, 2010
People contemplating a bankruptcy are often concerned with whether they risk losing their home to the trustee.  Will he or she sell it?  The answer I have given is that it starts with a "liquidation analysis" to demonstrate to the trustee that, after costs of sale, payment to the mortgage company(ies), and payment of exempted equity to the debtor, there would be nothing left to pay creditors.  However, this is not where it ends.

The Ninth Circuit Federal Court of Appeals observed in a ruling recently that exemptions alone are not enough to take a home out of a bankrupt estate.  In the consolidated cases of In re: Chappell and In re: Gebhart the chapter 7 trustee waited three years (Gebhart) and and two years (Chappell) after discharge to proceed with sale of the property, after it had appreciated significantly in value!  The court held that the failure of the trustee to object to the homestead exemption against equity and the issuance of the discharge wiping out the debtor's debt, do not alone take the home away from the trustee.  "A Chapter 7 debtor will not be certain about the status of a homestead property until the case is closed (something that may not happen for several years after bankruptcy filing) or the trustee abandons the property."

In Southern New Jersey, trustees have generally been prompt in filing abandonments of property with the court, and the court, in turn, has promptly closed cases following discharge.  However, it is important to bear in mind that if you get your discharge in bankruptcy without the trustee abandoning his interest in your home, it is still at risk until the case is closed.  Should you find yourself in this situation, you should contact me immediately, so as to be proactive in dealing with this issue.

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