The motion to abandon property of the estate is one of the most important parts of motion practice in bankruptcy. It is particularly important in chapter 7 bankruptcy, because the chapter 7 trustee takes control of all property of the estate. Additionally, it is important to understand how it works when you omit property from your bankruptcy schedules.
Let’s start with a few basics. In any bankruptcy, when you file the case the bankruptcy estate is created. The bankruptcy estate consists of all of your non-exempt property and interests in property that existed when the petition was filed. For most people, the bankruptcy estate is not a big deal because all of their property is exempt and the chapter 7 trustee will file a report of no distribution at the end of their case. Additionally, in a chapter 13 bankruptcy, the debtor remains in control of property of the estate. This means that there are only really three times when you might need to file a motion to abandon:
- The chapter 7 trustee has filed an asset report that you either disagree with or that is interfering with your exempt property.
- The chapter 7 trustee is trying to conduct a short sale on a piece of real property; and you want to stop the short sale.
- You omitted a piece of property from your original bankruptcy schedules.
Chapter 7 Trustee Files An Asset Report
The vast majority of cases are no- asset cases, meaning that the chapter 7 trustee will not do anything with your property. Your bankruptcy attorney is usually able to determine whether your case will be an asset case or a no-asset case before the case is filed. It is not possible to guarantee whether a case will be an asset or a no-asset case, but your attorney can usually make a strong educated guess.
When the trustee is administering assets in your bankruptcy, it can prevent you from selling, transferring, or disposing of your property. Most of the time, this isn’t a problem. You know which assets are being administered and you were prepared for it before you filed. If you need to do something with an asset that isn’t being administered, it’s as simple as informing the trustee in writing and making sure that you don’t need a court order to sell, transfer, or dispose of a piece of property.
If for some reason the trustee is administering property that you think should not be property of the estate, then you can file a motion to abandon that property. In order for the court to grant the motion to abandon, you must show that the property is of little or no value to the bankruptcy estate. Oftentimes, this type of motion arises over a disagreement over asset valuation. Your bankruptcy attorney can advise you as to when it makes sense to litigate against the trustee’s administration of assets and what kind of outcome to expect.
Stopping A Short Sale
A chapter 7 trustee can list real property – including your residence – for short sale. Generally, this is not a problem because the chapter 7 trustee can only do it if you are already in default and intend to surrender the property. In fact, many times it is beneficial to you because it prevents a foreclosure from going on your credit report and it may actually increase the time that you have before you have to move. However, this practice is controversial. There is no direct authority in the Bankruptcy Code for the chapter 7 trustee to short sell real property.
The bankruptcy judges in Seattle and Tacoma seem to agree that trustees can conduct short sales if certain requirements are met: 1) there is no equity in the house, 2) the debtor is in default, and 3) the debtor is unable to cure the default or obtain a modification. It has been my experience that if these three requirements are met, then the court will allow a short sale to go forward. I do not recommend that debtors fight the short sale process, because the short sale is usually beneficial and because the local judges are overruling objections. If you are adamant that the trustee cannot or should not be permitted to conduct a short sale and the three requirements are met, then you need to be prepared to litigate the issue in the bankruptcy court and be prepared to file an appeal.
Property Omitted From Your Original Schedules
Property omitted from the original bankruptcy schedules is the most common reason a chapter 7 debtor would need to file a motion to abandon. If property is omitted from a bankruptcy schedule it becomes trapped in the bankruptcy.
This is because all property becomes property of the estate once the bankruptcy is filed. When the trustee files either a no-asset report or a final report at the end of the case, only releases property was disclosed on the schedules. This means that if a piece of property is omitted from your bankruptcy schedules, it is still property of the estate even after your case is done.
The two most commonly omitted pieces of property are 1) personal injury cases, and 2) real property. You may not realize that you have omitted a piece of property until you try to bring the personal injury case or try to either sell or refinance the real property. It is very important that you correct any omission before you bring a personal injury case or try to either sell or refinance real property. If you do not deal with the omission beforehand, your personal injury case could be dismissed with prejudice. With real property, closing or refinancing could be delayed by weeks or months while you sort out the omission.
You can deal with the omission by bringing a motion to reopen your bankruptcy, amending the schedules, and then filing a motion to abandon the omitted property. The purpose of this three step process is to alert the court, the trustee, and your creditors to the omission and then resolve the omission by disclosing the property and affirmatively removing it from the bankruptcy estate.