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Trustee wants the rent I paid to mortgage

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  • Trustee wants the rent I paid to mortgage

    When I filed Ch 7 I asked my attorney’s secretary (who files the BK schedules) if I should stop paying my creditors and she told me no, that I should continue paying everything the same. I asked specifically about the mortgage and HOA dues on my rental and she said if I want to keep it I should continue paying. There was little to no equity in the house but I was finally about break even (or nearly so) on the rent/expenses after refinancing and paying down the mortgage in 2014. I have been paying on the house since 2007 and it was just now recovering from the value being underwater.

    At the 341 meeting the trustee asked why I wanted to keep it and I said because of all the sacrifices I have made to pay the expenses thus far and that it was the only retirement plan that I had left. The trustee asked my atty for the rental agreement etc and then it was over. No one gave me instructions to change any of my actions such as stop paying the mortgage or HOA or do something different with the rental income. Six months later the RE market where the rental is has experienced strong growth. The trustee files for permission to sell the rental along with my residence. I asked my atty (several times) if I should stop paying the mortgage. My atty recommended (finally) that I should stop paying the mortgage and let the rental go since I do not have the income without the rent to pay the mortgage. I stopped paying the mortgage and the trustee starts collecting the rent from the property management company. The trustee asked what I did with the rent collected over the past six months. I replied with my bank records showing that the rent came in and went out to the HOA and the mortgage. Now the trustee (as part of the negotiations to retain my residence) wants me to pay to the estate that six months rent. I no longer have that money since I used it to pay the mortgage and HOA dues.

    What I understood from reading was that money that I pay to creditors while in BK can be “clawed back” by the trustee. My attorney says that is before the 341 meeting and he doesn’t think it applies after the 341 meeting. I am not sure what I should do now.

  • #2
    Yeah, your attorney should have been on top of that. When you filed, the rental property became property of the estate (trustee), which means that the rental income that comes from it does too. Even if you exempt rental income or the equity in the property, that only applies pre filing.

    If you indicated you were going to abandon the property in your statement of intentions, the trustee will want that money no question. And if your attorney knew you were walking away they should have told you to either stop collecting rent, or at least hold it until the trustee decided on his course of action. I'm afraid to say it's highly likely you will have to pay the trustee.
    Case Closed > 2/08/2010

    Comment


    • #3
      Revised post to make it more direct and to the point:

      When I filed Chapter 7 I had two houses that I wanted to keep. One was my home and the other was a rental property. The mortgages on both were current and I was collecting rents off the rental property. I continued to collect those rents after I filed the bk.

      It has been six months since my 341. During that time I had no contact with the Trustee. During that time I have made my mortgage payments and have continued to collected the rents. My home has appreciated in value and the equity in it now exceeds my homestead allowance (if any).

      The Trustee now wants to sell the rental property and my residence. In addition, he has taken over the collection of rents. As a result I have stopped paying the mortgages on both properties.

      The Trustee is requesting the turnover of all of the rents I collected since the Chapter 7 was filed and, if I do so, he is willing to abandon the estate’s interest in my home.

      My attorney did not tell me that any of the above could happen if I filed a Chapter 7. What do I do?

      Unfortunately you are stuck between a rock and a hard place. . .

      1. Both your home and the rental (along with all other property you own) became property of the bk estate the moment you filed.

      2. The appreciation in the value of property of the estate belongs to the bk estate until the property has been abandoned by the Trustee.

      3. Property of the bk estate (including anything that appreciates in value)that is not fully protected by an allowed exemption can be taken by the Chapter 7 Trustee and sold. There is no time-limit placed upon a Trustee to liquidate property of the estate so long as the Chapter 7 remains “open” and the asset has not been abandoned.

      4. Rents generated by property of the estate belong to the Trustee, not the debtor, unless some exemption protects the rents. The rents should have been turned over from day one.

      5. If you had a non exempt asset you did not want to risk losing to a Chapter 7 Trustee you probably should not have filed Chapter 7. If you knew such was a possibility but filed anyway, then you understood the risk and were willing to accept the potential loss of the property.

      What can you do now? Find a way to come up with the cash settlement or let the Trustee sell your home along with the rental property. The Trustee controls this negotiation so, if you want to keep your home, you need to find a way to settle with the Trustee.

      Please note that the Trustee is being generous. If there is non exempt value to your residence he could just sell it and still go after you for the rents you collected and then used without his permission. It does not matter what you used the rents for. The money did not belong to you.

      Des.


      Comment


      • #4
        Thank you for the replies from both Bob and especially Des for the revised and simpler rewrite of my post and the detailed addressing of some of the issues.
        1. Would the trustee not have had to pay the mortgage and the HOA fees etc if I had not done so? If so then why would I have to pay it back to the trustee since that is what they would have done with it and the rent has already taken care of those expenses? In this case the trustee will have received the rent twice. First when I used it to pay the trustees expenses and second when I pay the funds into the estate.
        1. If the mortgage company and HOA was not supposed to receive those funds because they belong to the trustee would they not be required to repay those funds to the trustee?
        1. “Yeah, your attorney should have been on top of that.”
        2. “they should have told you to either stop collecting rent, or at least hold it until the trustee decided on his course of action.” - They should have? Is there no obligation or requirement for legal council to actually council their clients on their legal rights and legal obligations and the potential consequences of not fulfilling those obligations?
        3. “unless some exemption protects the rents. The rents should have been turned over from day one.” - They should have? Is there no obligation or requirement for legal council to actually council their clients on their legal rights and legal obligations and the potential consequences of not fulfilling those obligations?
        1. “if you want to keep your home, you need to find a way to settle with the Trustee.” - Thank you. That is what I am attempting to do now hence my questions here. I want to work out an amenable and doable settlement with the trustee. In order to do that I need to know and understand what is doable and then we can work out what is amenable.

        Comment


        • #5
          Would the trustee not have had to pay the mortgage and the HOA fees.
          No. The Trustee is not obligated to pay any secured creditor. If payments are not made the creditor gets the automatic stay lifted and takes steps to regain possession of the collateral.

          Why would I have to pay it back to the trustee since I used the rents to pay the mortgage on the rental property and the HOA?
          Unless the mortgage company had a valid and enforceable (under state law) assignment of rents there was no obligation to use those funds as you did. You chose to take the rents and pay the mortgage and HOA. You could have just as easily used those funds to go on a trip or buy a big screen TV. Bottom line is that those funds were not yours to spend, no matter how you spent them.

          If the mortgage company and HOA was not supposed to receive those funds because they belong to the trustee would they not be required to repay those funds to the trustee?
          No. It was your responsibility to turnover property of the bk estate to the Trustee. This is not a fight between the Trustee and the mortgage company or HOA.

          Is there no obligation or requirement for legal council to actually council their clients on their legal rights and legal obligations and the potential consequences of not fulfilling those obligations?
          Of course there is. I cannot comment on what your attny did or did not do since I was not privy to any conversation. Maybe he told you and you did not understand or listen. Maybe he did not tell you and therefore screwed up.

          I have been doing this for 30 years and cannot tell you how many times a client tried to blame me for something that happened in the case. Fortunately, I put everything in writing. The nature of the cases I handle requires a lot of back-up on my end to make sure the client is well informed and my rear is covered. Each time a client tried to play the “it’s the attorney’s fault” card I simply sent the client a copy of the letter he/she was given before and just after the case was filed. For any case that I did make a mistake, I made sure the client was made whole since I will always take responsibility for my actions.

          I want to work out an amenable and doable settlement with the trustee. In order to do that I need to know and understand what is doable and then we can work out what is amenable.
          What a Trustee will accept depends upon the Trustee. There is no way for me to know what your Trustee will agree to since I do not know who your Trustee is and, unless you filed in Arizona, would have no clue what he would be willing to accept in settlement. Just out of curiosity, how much is he asking for (how much is 6 months of rent)? If it is a reasonable amount maybe he will accept payments over a 6 month to 1 year period????

          Des.

          Comment


          • #6
            It was actually 5 months of rent (sorry for the mistake) but equals $6,000. The problem is my average income without the rental home is less than $600 per mth. Maybe we could work something out where I pay a lump sum borrowed from my family members (It makes me sick to have to do that) and then some portion payed over a 6 mth period. I would have to increase my income quickly, maybe with adding more independent contractor type work. I could probably do just about anything I can qualify for, for 6 mths. A good paying job would likely take too much time to get and likely require unpaid training or pay for training to become eligible. Not so many places interested in training someone my age anyway.

            What determines the timing of discharge in chapter 7 and what determines the timing of the closing of the case? When can I start rebuilding my life again?

            Comment


            • #7
              Originally posted by bkonfusion View Post
              It was actually 5 months of rent (sorry for the mistake) but equals $6,000. . . Maybe we could work something out where I pay a lump sum borrowed from my family members and then some portion payed over a 6 mth period. . . What determines the timing of discharge in chapter 7 and what determines the timing of the closing of the case? When can I start rebuilding my life again?
              I know that Trustees in my area would agree to such a proposal.

              Unless someone objects, the entry of the discharge should be automatic and, by now you should have it. The deadline to object was 60 days after the 341. You are now at 6 months so, if you do not have your discharge one of four things happened: 1) the deadline to file a 523/727 was extended by the filing of a Motion requesting the extension; 2) someone timely filed a 523/727 complaint; 3) some local rule allows for the extension of the deadline based upon the continuation of the 341 meeting (this, in my opinion, should not happen); or 4) you did not take the second credit counseling class and/or have not filed the certificate of completion for that second class.

              The closing of the case, which has nothing to do with the discharge, only happens after the Trustee completes his/her job and files his/her final report. There is no set timing for this. No asset cases usually close right after the entry of the discharge. Asset cases can remain open for a very long time. The longest I have dealt with was 4 years but I should think 2 years is more typical - just depends upon the type, number of and complexity of the assets.

              I should think you can start to rebuild anytime after the case was filed. Lenders typically are looking for the discharge so the entry of the discharge may be critical - not sure.

              Des.

              Comment


              • #8
                "4) you did not take the second credit counseling class and/or have not filed the certificate of completion for that second class."

                A week after the 341 meeting I asked my attorney's secretary if I should take the second debtor's education course. She told me not to take it yet because she would hate for me to do it too soon and have to retake it. She said she would let me know. She has not yet told me to go ahead and take the course.

                Now I am distraught. Should I go ahead and take it now and give the certificate it to my attorney Monday morning? What can I expect to happen at this point? I have just read that it needs to be filed within 60 days after the 341 meeting.

                Comment


                • #9
                  If you want your discharge entered take the class and get the Certificate filed. BUT. . . if there is a strategic reason to delay the entry of the discharge, such would be a reason not to take the class. Why not call your attny first thing Monday morning to confirm it is ok to take the second class?

                  Des.

                  Comment


                  • #10
                    Thank you so much. That is what I'll do, call my attorney and check. I was just so concerned because I read that it must be filed within 60 days but did not see what would be the consequences of filing later. So filing after the 60 days will likely be acceptable even if there is no strategic reason to delay the entry of the discharge?

                    Comment


                    • #11
                      I am guessing that there was probably some static reason to delay the discharge but I believe there should not be anymore. I hope to find out Monday.

                      Comment


                      • #12
                        I am, of course, not an attorney, but it should be noted that the trustee's authority to demand anything comes from the court, and can be challenged through the court.

                        If it is the trustee's position that the rental house is property of the bankruptcy estate, and that it is to be "administered" for the benefit of creditors (i.e. sold or retained for its rental revenue stream) then couldn't the debtor argue that sending the rent money to pay the mortgage and HOA was protecting the asset on behalf of the bankruptcy estate? Had these things not been paid, wouldn't the trustee have had to pay them, either directly, or indirectly in the form of a lower selling price to cover the resulting liens? Or is it the trustee's position that he could just sit back, collect rent money, and allow the mortgage lender or HOA to sell the property out from under him (and the tenant)?

                        Similarly, although you live in a state with a paltry $15,500 homestead exemption, in order for the trustee to receive a meaningful payout from selling your home, it would have to sell for at least $25,000 more than what you owe on it. Does that seem probable anytime soon? Is the trustee planning to keep the case open for years so you can pay down your mortgage, and the house can appreciate in value? Has your attorney commented on any of this?

                        Comment


                        • #13
                          Thank you bcohen for your comment and interest in my case.

                          I agree that my paying of the mortgage and the HOA protected the property from accumulating debt but I am not sure what effect it would have had on the trustee and the estates responsibilities. I do know the HOA is threatening lien and foreclosure since I stopped paying them. Most of my mortgage payment goes towards the principle so at minimum I have increased the equity in the rental house by using the rent money to pay the mortgage. I do believe that at minimum the amount of the collected rent that the trustee is requesting should be reduced by the amount of the resulting decrease in the payoff amount of the mortgage.

                          My residence is in an area that does not experience much appreciation and I am certain that the trustee cannot squeeze $25,000 out of the house after paying the homestead exemption.

                          Comment


                          • #14
                            Originally posted by bcohen View Post
                            If it is the trustee's position that the rental house is property of the bankruptcy estate, and that it is to be "administered" for the benefit of creditors (i.e. sold or retained for its rental revenue stream) then couldn't the debtor argue that sending the rent money to pay the mortgage and HOA was protecting the asset on behalf of the bankruptcy estate? Had these things not been paid, wouldn't the trustee have had to pay them, either directly, or indirectly in the form of a lower selling price to cover the resulting liens? Or is it the trustee's position that he could just sit back, collect rent money, and allow the mortgage lender or HOA to sell the property out from under him (and the tenant)?
                            Payment of the mortgage is not required and, in fact, lenders have argued that the rents belong to them and such arguments always fail unless there is a valid assignment of rents.

                            Just to illustrate here is a quote from a 2010 Illinois case. This type of ruling is the standard.

                            In re Maatuka (Bankr. C.D. Ill., 2010)


                            The material facts in this matter are not in dispute and the parties agree that First Federal has a valid mortgage lien against four parcels of real estate owned by the Debtors at the time of their Chapter 7 bankruptcy filing. Each of the four mortgages at issue contain an Assignment of Rents. . .

                            In its Motion for Turnover of Rents, First Federal contends that, under each of the four mortgages at issue, it is entitled to any and all rents collected by the Chapter 7 Trustee following the Debtors' Chapter 7 bankruptcy filing. Trustee contends that, while First Federal does have a valid mortgage lien on each of the four parcels of real estate at issue, the security interest created by the Assignment of Rents clause in each mortgage was not activated at the time of the Debtors' Chapter 7 bankruptcy filing; and, as such, First Federal is not entitled to a turnover of the rents collected by the Chapter 7 Trustee. . .

                            Pursuant to paragraph 17 of the subject mortgages, it is clear that First Federal has a lien on the rents collected from the subject properties, but that lien is not a blanket lien on all rents. The right of First Federal to collect and retain rents only takes effect on the happening of one of two events: (1) acceleration of the mortgage loan; or (2) abandonment of the mortgaged property. The clear facts in this matter reveal that none of the subject properties were abandoned prior to the receipt of the specific rents in question, nor had First Federal accelerated any of the mortgage loans at issue. This being the case, the Court finds that the Motion for Turnover of Rents filed by First Federal must fail. Based upon the clear language of paragraph 17 of the subject mortgages, First Federal's right to collect rents was not ripe at the time of the Debtors' Chapter 7 bankruptcy filing, and there is no authority to suggest that the Debtors' Chapter 7 bankruptcy filing gave First Federal any additional or expanded rights to the rents at issue. The Chapter 7 Trustee standing in the shoes of the Debtors had a right to collect the rents following the Debtors' Chapter 7 bankruptcy filing until such time as First Federal either accelerated the mortgage loans in question or the subject real estate parcels were abandoned by the Chapter 7 Trustee.
                            (Emphasis added.)

                            Des.

                            Comment


                            • #15
                              Individual Estate Property Record and Report - How important is this document?
                              Under Petition/Unscheduled Values is listed my residence at the value from the professional appraisal. Under Est. Net Value (Value Determined by Trustee, Less Liens, Exemptions, and Other Costs) it is listed at the same value. How can that be? No reduction of value from the exemption or estimated selling costs? Also there are other items listed under Est. Net Value (Value Determined by Trustee, Less Liens, Exemptions, and Other Costs) as having a value of 0.00 yet the trustee has stated that I must pay money to the estate in order to retain them.

                              Comment

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