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Collecting Rents After Filing A Chapter 7 - A Must Read

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  • Collecting Rents After Filing A Chapter 7 - A Must Read

    I am starting this thread due to the numerous posts relating to collecting rents post petition. As I have said before, once you file Chapter 7 you do not have the right to collect AND keep post petition rents. A number of you have questioned this. Others have stated that they feel obligated to collect rents and pay the lender. In response I have indicated that unless there is a clear “assignment of rents” in the mortgage or deed of trust, the lender has no more right to the money than the debtor.

    There is a ton of case law ranging from the simplest Chapter 7 to the very complex Chapter 11 that supports this. Below are only three such cases.

    In Re Lockbaum (Bankr. N.D. Ill., 2010) - not published

    This matter came before the court on two motions:1) Chapter 7 trustee's motion to compel the debtor to render an accounting and turnover property, and 2) Debtor’s motion to determine property abandoned and close the case, or in the alternative compel abandonment. The Trustee's Motion was granted the Debtor's was denied.

    The debtor disclosed in Schedule A that he owned a residential condominium to which the property was leased and he was collecting rents. The trustee filed a Motion for Turnover asserting in his motion that the rent is property of the estate pursuant to § 541(a)(6) and should be turned over to him.

    “The general rule contained in § 541(a)(6), includes within property of the estate "proceeds, product, offspring, rents or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. § 541(a)(6). Under this provision, money received by a debtor after the case was filed is property of the estate if it was generated as proceeds from property of the estate. ( See United States v. Messner, 107 F.3d 1448 (10th Cir. 1997)). For example, if a debtor owns real property on the day the case is filed and he receives post-petition rent from tenants living in the property, the rent is also considered to be property of the estate.” (See In re Amaravathi Ltd. P’ship, 416 B.R. 618 (Bankr. S.D.Tex. 2009))

    In re Davis, Case No. 07-11795-MAM-7 (Bankr.S.D.Ala., 2007) - not published.

    The Court initially ruled that the rental proceeds collected by the debtor post-petition on nonexempt real estate were properly exempted under Ala. Code § 6-10-6. However, upon further review of the case law, the Court changed its decision and stated that its conclusion was erroneous.

    "What is property of the estate of a debtor is determined first by reference to 11 U.S.C. § 541(a)(1). It provides that the trustee succeeds to all legal and equitable rights of a debtor in property as of the date the debtor files bankruptcy. Section 541(a)(6) states that property of the estate includes "proceeds, product, offspring, rents or profits" from property of the estate as well. Therefore, unless the rents claimed by Ms. Davis are exempt on their own merits (since the real estate is not exempt), it is clear the rents are property of the bankruptcy estate" and must be turned over to the Trustee.

    In re Moody, 241 B.R. 238 (Bankr.M.D.Fla., 1999)

    "On March 19, 1999 Trustee filed a Motion for Turnover of Property seeking the turnover of post-petition rents on a townhouse in Stirling Virginia owned by Debtors. . . Debtors collected approximately $3,000.00 in post-petition rents on a townhouse they own in Stirling, Virginia. . . On July 2, 1999 the Court entered Order Granting Relief from the Automatic Stay to Charter One Mortgage, mortgagee on the townhouse. Debtor wife testified that Debtors have not turned the rents over to Trustee because Debtors believed the rents belong to Charter One.

    Trustee seeks turnover of post-petition rental income as well as any accrued interest thereon from a townhouse in Stirling, Virginia owned by Debtors. Trustee points out that Debtors' only justification for their failure to turn over the rental income is that the automatic stay has been lifted and the property will be foreclosed. Debtor wife testified that the rental income has been set aside in a bank account in Virginia, and that she believes it should be paid to Charter One, the mortgagee. Rents from property of the estate are themselves property of the estate. 11 U.S.C. § 541(a)(6). Therefore, the rental income is property of the estate. Trustee's contention that the lifting of the stay has no effect on whether or not Debtors are entitled to keep the post-petition rental income is correct. As Charter One has not claimed an interest in the rental income, the only issue before the Court is whether the rents are subject to turnover to Trustee. Based on the foregoing, the Court concludes that they are and will grant Trustee's Motion for Turnover of post-petition rents."

    ____________________________________

    Bottom line folks. . . if you take it upon yourself to collect rents after the day you file a Chapter 7 and fail to turnover those rents to the Trustee (when asked to) you can get into big trouble. I have seen this issue time and time again. The debtor always states either 1) I did not know I had to turnover the $$ or 2) but if I turn it over I cannot pay the mortgage, insurance, taxes etc. or 3) I need the money to live. My response. . .

    If you want to keep control over the property and the proceeds it generates, do not file a Chapter 7.

    Des.

    PS - maybe the moderators want to make this a “sticky”?
    Last edited by despritfreya; 02-20-2011, 09:10 AM.

  • #2
    Excellent post. Thanks for time spent researching this info. Please clarify this situation: Discharged (not yet closed due to asset, automobile, which has been sold at auction) from Chapter 7, did not reaffirm the current residence, want to leave the area. If I rent it until foreclosure happens, who gets the rent?
    Last edited by scooter6251; 02-20-2011, 09:53 AM.

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    • #3
      Thats my question as well, what happens to rents after your Chapter 7 closes? And, will your closing be held up (not close in the usual amount of time) if there are rents? I seem to recall a post awhile back where someone said the trustee was using the rents to pay off their unsecured creditors and not closing/discharging?

      Comment


      • #4
        From my research, if the property is exempt the rents are exempt but I have not had any personal experience with this issue. Once the case is closed all assets not administered are abandoned back to the debtor (subject to any liens such as mortgages, auto liens etc.) Once abandoned, since the property is no longer "property of the estate", rents generated by the property are no longer property of the estate as well.

        Des.

        Comment


        • #5
          Originally posted by scooter6251 View Post
          Excellent post. Thanks for time spent researching this info. Please clarify this situation: Discharged (not yet closed due to asset, automobile, which has been sold at auction) from Chapter 7, did not reaffirm the current residence, want to leave the area. If I rent it until foreclosure happens, who gets the rent?
          The most conservative approach would be to wait until closing of your Bk before doing so.

          However, if the property was exempt at the time of filing, then if you convert it to non-exempt property after filing, there should not be an issue, but it is more risky if there is an aggressive trustee.

          Strictly speaking, ALL property is property of the estate until the case closes. It's just that exempt property cannot be liquidated. However, the debtor does not have 100% legal control over exempt property while a BK case is pending.

          Comment


          • #6
            Originally posted by StrawberrySu View Post
            Thats my question as well, what happens to rents after your Chapter 7 closes? And, will your closing be held up (not close in the usual amount of time) if there are rents? I seem to recall a post awhile back where someone said the trustee was using the rents to pay off their unsecured creditors and not closing/discharging?
            Yep, that is what happens. So long as there are assets to distribute in a case, the case stays open.

            Comment


            • #7
              Originally posted by HHM View Post
              The most conservative approach would be to wait until closing of your Bk before doing so. . . Strictly speaking, ALL property is property of the estate until the case closes. It's just that exempt property cannot be liquidated. However, the debtor does not have 100% legal control over exempt property while a BK case is pending.
              Very good point.

              Des.

              Comment


              • #8
                Originally posted by HHM View Post
                Yep, that is what happens. So long as there are assets to distribute in a case, the case stays open.
                So if by the time we file our properties are "house sitter" status, no income coming in, it should be smooth sailing?

                Comment


                • #9
                  Originally posted by StrawberrySu View Post
                  So if by the time we file our properties are "house sitter" status, no income coming in, it should be smooth sailing?
                  Not quite sure what you are asking. In the extreme, if the properties are not rented, the trustee could just take them and rent the properties for the benefit of your creditors (unlikely, but a legal possibility).

                  Comment


                  • #10
                    Originally posted by HHM View Post
                    Not quite sure what you are asking. In the extreme, if the properties are not rented, the trustee could just take them and rent the properties for the benefit of your creditors (unlikely, but a legal possibility).
                    The properties would be occupied, by essentially care takers, so they could be maintained, since we will be in another state, the care takers would be responsible for minor repairs, lawn care, utilities, but not pat actual rent. Since we are responsible until they are foreclosed on, and have to carry insurance on them, we don't want to leave them empty.

                    Comment


                    • #11
                      The trustee could contact the care takers and give them 30 day notice (or whatever is required in your state for eviction) or charge them rent. Again, unlikely, but a possibility. If the properties are headed to foreclosure, then unlikely.
                      Last edited by HHM; 02-20-2011, 11:00 PM.

                      Comment


                      • #12
                        Originally posted by HHM View Post
                        The trustee could contact the care takers and give them 30 day notice (or whatever is required in your state fore eviction) or charge them rent. Again, unlikely, but a possibility. If the properties are headed to foreclosure, then unlikely.
                        Thanks for all your advice, I hadn't thought of that, will apprise whoever I am leaving in homes of that possiblilty!

                        Comment


                        • #13
                          Su,
                          I wonder how the trustee would know if if there was a caretaker or even a paying renter in the house, a house that is headed to foreclosure?

                          Comment


                          • #14
                            They would ask at the 341 meeting.

                            The properties would be listed on the petition, it would not be unusual for the trustee to ask about the current occupancy of the properties.

                            Comment


                            • #15
                              Originally posted by HHM View Post
                              They would ask at the 341 meeting.

                              The properties would be listed on the petition, it would not be unusual for the trustee to ask about the current occupancy of the properties.
                              Thanks and I understand that, except in my case, I have been discharged, but not closed.

                              Comment

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