Property Value Rising in Bankruptcy

In times when the real estate market is experiencing rising property values, even if the rise only temporary, the equity in your home could potentially be in jeopardy if  you file bankruptcy and don’t do it correctly with the guidance of an experienced attorney.   In a depressed real estate market, this is rarely an issue.  Property values are stagnant or decreasing and many peoples’ homes are underwater, meaning they have no equity since they owe more on their home than what the property is worth.  But in a rising market, even if there is merely a temporary spike in prices, the increase in value inures to the benefit of the bankruptcy trustee overseeing your case and ultimately your creditors.   If the trustee does not timely abandon the property, you could risk losing it through forced liquidation, unless your lawyer takes appropriate steps to protect your interests.

Steps Your Attorney Can Take to Protect Your Home When Values Are Rising

When you file for bankruptcy, all of your assets (homes, cars, bank account funds, etc.) temporarily become part of what is called an “estate.”  The court-appointed trustee who oversees your case will perform a cursory examination of your estate to see if the equity in your home and other assets exceeds or is within the amount of equity you are permitted to have when filing for bankruptcy in San Diego.  In most cases, if the amount of equity you have is within the allowable limits, then the trustee will abandon (no longer have any interest in) your property and release it from the clutches of the estate.  Some trustees, however, and especially in a rising real estate market, will just wait and sit on the property by simply not filing an abandonment.  Many inexperienced practitioners, especially those whose experience is limited to practicing in a depressed market, will not have the insight to see this huge problem before it is too late.  The will assume that once the court grants you your discharge eliminating all of your debts and closes your case, that your matter has been successfully handled and is complete.  Then years later, both you and your lawyer will receive a surprise phone call or letter from the trustee informing you that the estate never abandoned your property and the increase in equity now belongs to the estate.

Increase in Equity Inures to Benefit of Estate

Any increase in equity in a home while it is still considered property of the estate inures to the benefit of the estate, meaning the trustee can liquidate and sell the property and use the funds to pay creditors.  So if there is an increase in the value of your home due to rising prices during the time that your home is property of the estate, the trustee can give you that surprise phone call years later informing you that your home is going to be sold and the proceeds realized from the increased equity will be used to pay your creditors.

Your Attorney Should Compel Abandonment

A knowledgeable and experienced bankruptcy attorney who understands the unique pitfalls and peculiar issues involved in a rising market, will have the insight to take affirmative steps to protect your home.  This requires taking steps to compel the trustee to abandon any interest in your home in cases where an abandonment is not within a short time after your case is filed.  While few bankruptcy lawyers in San Diego have the foresight to do this, the most experienced attorneys make is their regular practice to confirm that a trustee has abandoned all estate property.  If needed, they will bring appropriate proceedings before the court to force and compel the trustee to promptly abandon your home, cars, or other assets.  That way, you will not be taking the chance that of receiving that surprise call or written notification years later informing you that your home is being sold and the proceeds used to satisfy the very creditors that you had included in your bankruptcy.