CHAPTER 7 BANKRUPTCY BULLETIN
November 2017 Vol. III
Note From the Editor
What a Trustee Needs to Know Before Negotiating a Carve-Out
Dear Reader, We would like to wish all of our clients, friends, and family a blessed and bountiful Thanksgiving.
As a general rule, a trustee cannot administer a fully encumbered property in a Chapter 7 bankruptcy. The rationale behind this is simple. A trustee has a duty to the unsecured creditors in a Chapter 7 bankruptcy. Administering a fully encumbered property only benefits the secured creditor. Therefore, a trustee should not waste time and resources administering the property when there is no benefit available to the unsecured creditors. What if
Yours truly, –Marc Cormier Editor/Realtor
Our real estate practice specializes in understanding the unique complexities of selling homes tied up in legal processes, whether that’s bankruptcy, divorce, or probate. The challenges of these types of filings don’t come just from the buyers and sellers, but also from creditors, spouses, heirs, the IRS, local tax authorities, local code enforcement, HOAs, and POA. If you value working with an agent who can avoid these pitfalls, someone you can feel confident will close the file, then give me a call or send an email: (301)660-6272 , ext. 700 , or Cormier64@gmail.com .
However, a secured creditor can voluntarily enter into a carve-out agreement. As the name implies, a carve-out agreement is one in which a secured creditor agrees to “carve out” a portion of the value of the property to be distributed to unsecured creditors. This effectively results in the treatment of the asset as one that is only partially secured, while simultaneously creating an unsecured estate to administer. Why Would a Secured Creditor Agree to a Carve-Out Agreement? An obvious question is why a lender would make an agreement that nets the them less than the amount secured by the property. There are several reasons why a carve-out agreement may be attractive to a secured creditor. One reason is that a bankruptcy trustee can often liquidate a property much quicker through a private sale or auction than a secured creditor, who will have to go through the often-lengthy foreclosure process to accomplish the same goal.
there was a benefit to unsecured creditors, though? Trustees are finding creative ways to secure a benefit for unsecured creditors by negotiating carve-out agreements. A trustee, however, must be careful when negotiating a carve-out agreement, because if there is not a meaningful distribution to unsecured creditors, the court is unlikely to approve the agreement. One area to be particularly careful with is the tax basis of real property. As a trustee, you must take into account any capital gains taxes that will result from the sale of the property, and ensure that sufficient funds will remain after payment of the tax obligation to result in a meaningful distribution to unsecured creditors. In a Chapter 7 bankruptcy, a fully-secured creditor is entitled to take possession and title of the real property used to secure the debt through the state foreclosure process. Because the debt is secured, the bankruptcy trustee is not required to administer the property since the secured creditor is entitled to the entire benefit of the property. What Is a Carve-Out Agreement?
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