Inactive open bankruptcy case bad for homestead exemption

What a strange and incomprehensible title for a bankruptcy article? What is to be discussed is a situation in a Chapter 7 bankruptcy where the case remains open for a long time even though discharge has been entered and debtor has a residence with equity that he has claimed as exempt. So, what is the problem? The problem is that if the case remains open while nothing is going on in the case, debtor’s residence may be appreciating in market value which causes the equity to go over the exemption amount. To illustrate, let’s assume that you filed a chapter 7 case six months ago. In your bankruptcy petition, you declared that the fair market value of your residence at the time you filed your bankruptcy was $400,000. On schedule A and D, you declared further that there was one mortgage on the residence with a balance of $300,000. Thus, your equity in your home six months ago was $100,000. You claimed a homestead exemption using 704.730 for $100,000, the entire equity of your home. No problem. The chapter 7 trustee does not object to your homestead exemption within 30 days of the 341-A hearing, thus losing his right to thereafter object to your claim of exemption forever. No creditors object within 60 days of the 341-A hearing so there are no adversarial complaints. The U.S. Trustee does not file a motion to dismiss your case. Eventually, the court enters an order discharging all your debts 6 months after the 341-A hearing. There is absolutely no activity in your case after discharge but for some reason the chapter 7 trustee has not closed your case. Your case is now an INACTIVE OPEN BANKRUPTCY CASE.

From the title of the article you know that an INACTIVE OPEN BANKRUPTCY CASE IS BAD FOR YOUR HOMESTEAD EXEMPTION. So, now you ask yourself, why is it bad for your homestead exemption? Trust me it’s BAD. Let’s say OBAMA comes back from the G20 meeting in Seoul next week and instead of him bowing and genuflecting to all the other G20 world leaders, he was able to put marijuana in their food, and all 19 world leaders bow and genuflect to OBAMA and his plan for American and world economic recovery, i.e. print another trillion of American dollars every 6 months and go for broke as if there were no tomorrow. The entire world is now in lock step with our charismatic president’s economic plan and the plan actually works. Six months from now, our economy grows at 18%, China’s 20%, India’s 22%, Germany’s 23%. No more unemployment in America. Everyone here in America is gainfully employed in high paying jobs. Instead of a foreclosure problem, we are faced with a critical shortage of homes. Hence, your house doubles in value. In May, 2011, realtors are knocking your door down asking you to list your house for sale at $800,000. You think of pocketing half a million dollars of equity and moving to Hawaii. Whoa, hold on. The chapter 7 trustee is thinking the same thing. He is going to sell your house for $800,000 and give you your claimed exemption of $100,000, pocketing $400,000 of your equity to pay your credit card debts of $200,000 and his legal fees of $100,000.

 After your heart attack, during your momentary lucid moment, you argue that the trustee’s request for permission to sell your house came more than 6 months after you got a discharge. You also argue that the trustee failed to object to your claim of homestead exemption for all of the equity in your house within 30 days of the 341-A hearing; therefore, trustee has lost his right to object to exemption. Trustee argues that he may force the sale of your house to recover nonexempt equity that was not there when you filed your case. Who is correct? In re Gebhart and in re Chappell, the court of appeals for the 9th circuit agreed with the trustee.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.