Is Chapter 7 Bankruptcy Broken?
According to the US Courts website, the fundamental purpose of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from heavy debt and provide for “liquidation” in a Chapter 7 filing. – the sale of goods or the distribution of the product to creditors.
The question is, is it?
Bankruptcy was created to give individuals a legal vehicle to settle debts or negotiate manageable terms. In general, trustees do a great job working with debtors to settle the vast majority of their debts. However, when it comes to real estate, the options outlined in federal bankruptcy laws are rarely followed, creating a greater burden, hindering or preventing debtors from truly receiving a “fresh start.”
Bankruptcy law is well defined and offers several solid solutions for debtors and creditors, but in most cases these options are never allowed. It sounds hard to believe, but if you delve into the process and structure of how business is administered, the law and the intent of the law take a back seat to reality.
In Chapter 7 bankruptcy, a trustee is appointed to administer the case. The main role of the US Trustee Program is to serve as a “watchdog over the bankruptcy process”.
As stated in the mission statement: The mission of the United States Trustee Program is to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders: debtors, creditors and the public. For this service, the trustee receives a fee for administering the estate and a percentage of the assets sold.
Although the trustee should be fair to the debtor, his interests are not always aligned.
The Trustee Handbook states: “The Chapter 7 Trustee is the representative of the estate. 11 USC § 323 (a). The trustee is a trustee responsible for protecting the interests of all beneficiaries of the estate, namely all categories of creditors, including those who hold secured, administrative, priority and non-priority unsecured claims, as well as the interests of the debtor in exemptions and any surplus. property.”
The statement sounds simple enough and relatively straightforward, but where does it all go wrong?
Let’s break it down
When an individual files for Chapter 7 bankruptcy and owns real estate, they “keep” or “give up” the property.
If the individual chooses to “keep”, he intends to keep his home and negotiate or eliminate other debts. However, if they choose to surrender, this is where things go wrong.
When a debtor assigns an asset, the trustee becomes the legal administrator / seller and has a trustee to sell the asset or deliver it to the secured creditor to settle the debt. In most cases, this does not happen.
If the trustee sells the property, he fulfills his obligation to the secured and unsecured creditors and will apply the proceeds of the sale to the unsecured creditors (medical bills, credit cards, etc.) of the estate.
Alternatively, the trustee can choose to relinquish the property, which removes it from the bankruptcy estate. There are many reasons why a trustee may decide to abandon a property in bankruptcy. Suppose the sale of the property did not add significant value to the estate, the property has title issues, or cannot generate significant compensation for the time the trustee spent working on the property. ‘case.
Often times, a trustee shies away to avoid scrutiny from governing authorities such as the United States Office of Trustees, which regulates the activities of trustees. Also, their local judge in the district may have a different perspective on selling assets as it may be overloaded assets.
These are all valid problems that come from a faulty system. Trustees, creditors and even creditors’ lawyers become antagonists rather than working together to align the interests of all parties for a positive outcome.
Most debtors and their legal advisers believe that once an asset is assigned, they are out of the woods. The burden of resolving the lien is on the debtor. The secured creditor has few options when this happens, and if the debtor does not make financial arrangements with the creditor, he primarily files the foreclosure and ends up taking possession of the property.
This creates emotional turmoil and lasting financial hardship for the debtor when his intention was to find a solution for the transferred property.
To make matters worse, a foreclosure has a much larger impact on a debtor’s credit future. A bankruptcy or short sale will impact a credit score of around 85 to 160 points (higher scores have the most significant impact), but this is only in the short term, offering debtors the ability to re-establish their credit in 18-24 months and the ability to buy another home.
Foreclosure, on the other hand, remains as a negative mark on a credit report for seven years, preventing the debtor from mortgage credit and more. Even after that time, a new mortgage will still be at a much higher rate.
If a trustee gives up the property and the lien on real estate is not resolved during bankruptcy, the debtor loses the benefit of bankruptcy, suffering complete financial hardship and depriving the debtor of the ability to receive that “fresh start” that is. the goal of bankruptcy.
For the secured creditor, the sale of a bankrupt property versus foreclosure saves an average of $ 49,000 on a $ 250,000 home — a preferable outcome for a creditor to save money and save money. ‘Get a result without foreclosure, but when the secured creditor is denied his right home sold in bankruptcy, the mortgagee suffers that loss. The courts will argue that they have remedial options aside from bankruptcy.
However, since the bankruptcy sale is a much better option and the debtor has chosen to sell the house; the fact of not authorizing this sale creates significant financial difficulties for both the debtor and the creditor. This is not the intention that the bankruptcy law was supposed to provide.
Why is this happening?
Well, several problems lead to this result.
The role of the trustee
The trustee is responsible for administering the debtor’s estate and receives $ 60 for this service plus a percentage of funds distributed to other creditors of the estate.
The Trustees are appointed by and report to the Office of the United States Trustee (UST). UST is an executive agency that is part of the Ministry of Justice. His responsibilities include monitoring the administration of bankruptcy cases and detecting bankruptcy fraud.
Directors are subject to constant review by the UST office and may be penalized for any wrongdoing, real or perceived. The main focus is on potential fraud on the part of the trustee receiving fees for the services he provides and rarely on the benefits to debtors and creditors. This perceived scrutiny that accompanies the sale of an asset often discourages a trustee from fulfilling their fiduciary duty.
Bankruptcy law is federal law; however, it is governed by approximately 94 judicial districts across the country and differs in its application from district to district.
Bankruptcy law clearly defines how real estate assets are sold in 11 USC §363. The law is very detailed for overcharged assets, giving the trustee several options depending on the circumstances and the consent of all stakeholders. Today, there are several districts that “do not allow” the sale of “short sales” (over-encumbered assets) whether by the UST office or the judge.
The reasons why short sales are not allowed in some neighborhoods range from the different applications of the transaction law. The most common misconceptions are that these transactions are fraudulent and do not help the debtor, that short sales never help the creditor, or that these transactions will only benefit professional payers and trustees. These misconceptions of the courts and trustees are at the heart of the problem. In an appropriate 11 USC § 363 transaction, neither of these generalizations is valid.
It makes you wonder if the law allows debtors and creditors to exercise their rights under 11 USC § 363, why are they denied court approval for the sale if they follow the rules? governed by law?
Where it doesn’t make much sense is when a debtor chooses to assign their assets for sale and the secured creditor (mortgage agent) has agreed to a short-term repayment and has undertakes to pay the trustee an exclusion fee to administer the sale, creating significant value for the estate and unsecured creditors.
This follows the Bankruptcy Code, but the UST or the judge denies the sale. Doesn’t that violate their rights?
The law is also clear that when selling fully encumbered assets, the trustee must administer the sale to avoid a decrease in funds otherwise available to unsecured creditors, 11 USC § 704, 28 USC § 586. The trustee has a fiduciary duty. Guarantee the law is followed and should sell an asset to settle the debt in order to protect and preserve the funds available to unsecured creditors. However, this rarely happens because the system is down. Bridging the gap between mortgage agents, their attorneys and trustees translates into a much better outcome for all parties involved.
So how do you deal with the process to ensure that debtors and creditors can exercise their rights and use bankruptcy for the benefits it is supposed to provide? It seems that this is never a topic of discussion and why most creditors view bankruptcy as a “black hole”.
Maybe it’s time to reassess and improve the process.
Some potential solutions could be:
- Modify the remuneration of the bankruptcy trustee to ensure that bankruptcy requirements are met.
- Have a different focus from governing authorities to ensure the law is followed and not just focus on fees and compensation.
- Ensure that when all parties agree and follow the law, they have the legal right to make a sale.
Bankruptcy is one of our legal rights and one of the greatest advantages of our financial and legal system. Over time, regulation, process, and interpretation have turned the bankruptcy process into a black hole for creditors and the end of the road for debtors, resulting in a lose-lose for all stakeholders.
Is it time to correct the process and restore the rights of debtors and creditors?
We have come a long way since we began this mission, but there is still a long, long way to go. Today, there is a large part of the country where trustees will not accept a “short sale” in bankruptcy, even though the trustee has the fiduciary responsibility to administer the sale. Ultimately, debtors and creditors should have the legal right to ask for the sale.