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Chapter 7 Trustee Claims Debtors Undervalued Residence in Bankruptcy Schedules

By VISALIA2010 (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsA California bankruptcy judge recently ruled on a series of motions in a Chapter 7 case, including an effort by the debtors to have their residence declared exempt under California law and a motion by the court-appointed trustee to compel them to turn the property over to him. The trustee alleged that the debtors undervalued the residence in their original schedules, that they did not heed his warnings about the type of exemption they were claiming, and that the amended schedules they filed were not filed in good faith. He sought turnover of the property because he had already entered into a contract to sell it. The court ruled in the trustee’s favor. In re Gutierrez, No. 12-60444, mem. decision (E.D. Cal., Jan. 29, 2014).

The debtors filed a Chapter 7 bankruptcy petition in December 2012. Their Schedule A listed a residence in Visalia, California valued at $127,748, with two mortgages totaling $115,050. They claimed the equity of $12,698 as exempt, using California’s “wild card” exemption defined in Cal. Civ. Pro. Code § 703.140(b)(5). They claimed five other assets as exempt, with a total claimed value of $17,927. At the creditors’ meeting in January 2013, the trustee told the debtors that the residence had more equity than they claimed and was therefore more than they could claim under the “wild card” exemption. He “implicitly suggested” that they look at other exemptions allowed by California law. Gutierrez, mem. dec. at 3.

About a week later, the court issued a notice to creditors to file proofs of claim, meaning it anticipated the sale of assets by the trustee. The court entered a discharge without objection that April. The trustee moved for leave to hire a real estate broker in July. The debtors’ only response was to file a motion to convert the case to Chapter 13. The court granted the motion for sale. It authorized the trustee to sell the residence for $165,000, significantly more than the value claimed by the debtors. It denied the debtors’ motion.

The debtors filed amended schedules, which switched the type of exemption they were claiming, after the court approved the sale of the residence. By that point, the trustee stated, “the escrow documents had been signed and the escrow was ready to close,” id. at 6, but the debtors refused to allow the buyer onto the property to inspect it. The trustee filed objections to the amended exemption and a motion to compel turnover of the property. The debtors responded with a motion to compel the trustee to abandon the residence based on their new exemption.

The court ruled in the trustee’s favor, finding that he had demonstrated bad faith on the debtors’ part based on their “failure to properly value and timely exempt the property.” Id. at 10. It further found that the trustee had adequately warned the debtors about problems with the “wild card” exemption, and that the debtors’ intent in amending their exemption was to prevent the sale of the residence.

The bankruptcy system can offer a fresh start to people who find that their available income is not enough to make their debt payments. For more than 20 years, bankruptcy attorney Devin Sawdayi has represented individuals and families in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies. To schedule a free and confidential consultation with a member of our team, contact us today online or at (310) 475-939.

More Blog Posts:

Bankruptcy Appellate Panel Applies State Law in Determining Homestead Exemption, Los Angeles Bankruptcy Lawyer Blawg, November 1, 2014

Exemption of Property in California Bankruptcies, System 2, Los Angeles Bankruptcy Lawyer Blawg, September 20, 2013

Exemption of Property in California Bankruptcies, System 1, Los Angeles Bankruptcy Lawyer Blawg, September 18, 2013

Photo credit: By VISALIA2010 (Own work) [CC-BY-SA-3.0], via Wikimedia Commons.