In a previous post we discussed in detail the math that applies when a Chapter 7 Trustee is deciding whether or not to sell a house. In short, unless there is significant equity over and above exemptions, rarely will a Trustee be interested in taking a second look at the house. There is simply no value to the Bankruptcy estate or creditors. Why would a Trustee waste time and resources for their $60 fee in a no-asset case? A recent case in Georgia shows that there are exceptions to the general rule that a Trustee will not sell a property that is underwater (i.e., the house is worth less than the secured debt).
In the case, the house had a first priority loan of $227,000 and second and third liens (from the same lender) in the combined amount of $129,000. Presumably, the payments were not being made and the first lender was going to foreclose and wipe out the junior liens. The Trustee marketed the house and received an offer of $280,000 — well below the total amount of the three liens. That is not enough for the Trustee to bother with, right? No – the Trustee actually negotiated with the creditor holding the second and third liens and reached an agreement to sell the house and pay that creditor $9,000 from the sale proceeds — basically, a short sale. After the first lien was paid in full, closing costs were paid and the junior creditor was paid $9,000 it left about $25,000 for the Chapter 7 Estate. The Court stated this was a win/win as the first lien holder was paid in full without a foreclosure, the second lien holder received $9,000 it would not have received if there was a foreclosure, unsecured creditors shared about $6100 (after estate expenses) and the debtors received a discharge of their debts without a foreclosure on their record.
As an aside, the actual issue in the case was not an objection to the sale of the house, but the Debtors’ claim that they should be paid their exemptions from the sale proceeds. The Judge denied the request, holding that the sale proceeds were based on the work and efforts of the Trustee and would not have otherwise existed but for the Trustee. It was noted that courts in other states have held differently so, again, we see the importance of having good counsel in the case.
For those interested, the case is In re Diener, Case No. 11-83085-mhm (July 6, 2015).