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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to Watch Out For Scams
Furthermore, the net profit from a trustee sale is often considerably more than that of a foreclosure auction. Along with the increased publicity surrounding a trustee sale that tends to bring more potential buyers, those buyers will often pay more at a trustee sale because they will receive a property free of all claims and encumbrances. Finally, what a creditor has to give up in order to ensure a meaningful distribution to unsecured creditors may ultimately be less than what the creditor would lose after the costs of foreclosure and the increased value of a trustee. Assuming a trustee is able to negotiate a carve-out agreement with a secured creditor, the court must still approve that agreement. Although a clear test for acceptance of these agreements has yet to develop, recent court opinions have focused on the need for a carve- out agreement to provide a meaningful distribution to unsecured creditors to garner the court’s approval. What is a meaningful distribution? That remains unclear. However, one court made it clear that an agreement that provided for the payment of administrative claims alone does not qualify as a meaningful distribution. See In re All Island Truck Leasing Corp. 2016, Bankr. LEXIS 634 (Bankr. E.D.N.Y. 2016). Clearly, sufficient assets must be left after priority claims, including tax obligations, which are paid to provide for some type of distribution to unsecured creditors. For a trustee who is considering the possibility of negotiating a carve-out agreement, the importance of knowing the accurate tax basis for the property cannot be understated. The sale of the property may result in a capital gains tax obligation that will take priority over unsecured creditors. If payment of that tax obligation leaves nothing left for unsecured creditors, it is unlikely that the court will approve the agreement. Consult with an experienced tax professional to be certain you know what the tax basis for the property is before you enter into negotiations for a carve-out agreement. What Is a Meaningful Distribution?
Imagine coming home to find that you are on someone else’s property.
The scammers picked your home to take. They did some basic internet research to find out your personal information, and they created fake IDs. They obtained the proper forms, forged your signature, and filed the papers with the authorities. They own your home. You have been a victim of deed fraud. Unfortunately, many homeowners do not know how to spot — let alone protect themselves from — real estate fraud. The American Bar Association highlights some of the many ways scammers can get your home out from under you, including the following: • ‘Saving’ You From Foreclosure Scammers say that you can transfer the title to them for a small amount of time, paying rent to them instead of to your mortgage so you can catch up. Instead, these people often sell the home once they have the title in their name, and you are still stuck paying the mortgage. • The Straw-Man Scheme Essentially, a scammer gets a mortgage on a home by providing the credit history of a straw man, or a less skilled criminal. The scammer then gets the straw man to sign over the deed, which often nets the straw man some money. In the end, the straw man is often the person who gets prosecuted for this crime. • Illegal House Flipping The criminals purchase a home and maybe make some minor improvements. Then, they sell the home for much more than it is worth. By the time you realize that your home’s value is way lower than what you paid for it, it is too late. The possibilities are endless, and scammers often leave long and complicated trails of fake information to sift through. So, how can you protect yourself against these sophisticated criminals? According to the FBI, the best thing to do is stay vigilant by regularly checking in at the county deeds office. All of the records related to homes and businesses are stored in the deeds office and are public information. By checking regularly, you can tip off the proper authorities if and when you find a forged signature or any other suspect information in your home’s file.
Michelle J. Adams, Esq. Adams, Morris, & Sessing
12850 Middlebrook Road Suite 308, Germantown, MD 20874 Phone (301) 637-0143 x 101 | Fax (888) 614-7163 Michelle@amslawgroup.com | www.amslawgroup.com
Short Sales and Real Estate Licensees — Real Estate Commission
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The materials in our newsletter are for informational purposes only and do not convey legal advice.
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For more information (301) 660-6272 | Cormier64@gmail.com | Serving MD, DC, & VA
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