Rogue Ch. 7 Bkptcy Trustee's Attempt To Block Debtor Conversion To Ch. 13, Then Pocket Cash By Rent Skimming Upside Down Homestead Gets Judicial Boot

From the Florida Bankruptcy Law Blog:

• I’ve written recently about some Chapter 7 trustees trying to take or administer “upside down” homestead properties when the bankruptcy debtor chooses not to claim a homestead exemption because their home has no equity.



• The debtors purposefully avoid claiming the homestead exemption in order to then qualify for the $4,000 wildcard exemption [available under applicable non-bankruptcy, state law - Section 222.25(4), Florida Statutes] that they can employ to protect cars and other personal property. Some trustees argue that since they can administer for the benefit of creditors all non-exempt debtor property they have the right to get money from the debtor’s homestead by, for example, making the debtors pay rent or by forcing a short sale of the upside down home.



• A bankruptcy judge in south Florida rebuked a Chapter 7 trustee who wanted to take the upside down homestead and make the debtors pay rent to live there.



• The trustee would collect rent but let the mortgage go into default (ie. 'rent skimming'). The trustee would then distribute rent collected to the unsecured creditors until the inevitable foreclosure.



• The debtors in this case tried to save their upside down home from a Chapter 7 trustee by converting to Chapter 13. The Chapter 7 trustee tried to block the conversion; he argued that if the debtors wanted to save their homestead they should claim the homestead exemption and forfeit the wildcard exemption that had been protecting their cars. He said the debtors’ conversion was in bad faith.



• The judge pointed out that a Chapter 7 trustee owes a fiduciary duty to all parties including unsecured creditors, secured creditors (mortgage company), and the debtors themselves. The trustees position, said the judge, ignores his fiduciary obligation to the debtors and the mortgagee. He said, “The Trustee’s proposed administration of this case would have allowed the Debtors’ home to be sold to a vulture-investor imply so that the Trustee could collect rent prior to a default on the mortgage and tax obligation.”



• The court went on to say that, “The Trustee’s position...is misguided and wholly inappropriate.”(1)



• This decision should be used to protect debtors who try to extort money settlements from honest debtors by threatening to confiscate their upside down homesteads.

Source: Court Rebukes Chapter 7 Trustee's Attack On Debtors' Upside Down Homestead.

For the ruling, see In re Luban, Case No. 11-13633-AJC (Bankr. S.D. Fla., September 15, 2011).

For more on out-of-control Chapter 7 Trustees attempting to use over-the-top tactics to screw Florida homeowners in bankruptcy cases, see:

• Underwater Fla Homeowners Using State 'Wildcard' Exemption In Bkrptcy Urged To Resist Being Squeezed By Rogue Trustees Using Unsavory Ch. 7 Shakedowns,



• Bankruptcy Trustee's Attempt To Boot Homeowner In Underwater Home Fails; State 'Wildcard' Exemption Allows Debtor To Stay Put.

(1) In elaborating on the arguably egregious proposal by the Chapter 7 trustee, U.S. Bankruptcy Judge A. Jay Cristol made this point:

• The Court seriously questions how it advances the purpose of the Bankruptcy Code for a Chapter 7 Trustee to administer this estate. The assets to be marshaled would be split among the Trustee and his professionals, leaving perhaps a small percentage of value for unsecured creditors.
• However, the costs inflicted by such administration may include:
  
  (a) honest Debtors in need of a fresh start and their disabled son being driven from their home despite (or perhaps because of) the fact they are current on their mortgages;
  
  (b) a $133,857.00 first mortgage that is being paid going into default and the lien holder necessarily incurring the costs of a foreclosure action;
  
  (c) a $100,165.00 under-secured second mortgage that is being paid also going into default and the creditor likely suffering a significant loss;
  
  (d) a Miami-Dade County real property tax obligation that is being paid going into delinquency; and
  
  (e) another Miami-Dade County single family home going into foreclosure, and needlessly adding another case to an already-overburdened court system.
  
• The Trustee's position in this case is misguided and wholly inappropriate. The Trustee appears to want to administer a fully secured asset primarily for his benefit and the benefit of his professionals, at great cost to the Debtors' interests and at great cost to the interests of the first and second mortgage holders, not to mention whatever damage would result to Miami-Dade County for delinquent tax revenues.