We’ve discussed elsewhere the question of what happens in bankruptcy when your home is “underwater”, that is, when the balance owed on a mortgage loan is greater than the value of the property. But what if your home has increased in value? If you have filed a Chapter 13 petition and your repayment plan has been confirmed, can you later sell your home for more than you paid for it? If so, how long must you wait? What happens to the net proceeds? Must they be used to buy a new home? What if you convert your case to a Chapter 7 liquidation; does the appreciation belong to you or your creditors? Those were the questions before the Colorado Bankruptcy Court in the recent cases of In Re Baker and In Re Barrera.
The Baker Case
Baker, a Chapter 13 debtor, sold his residence after his plan was confirmed. The net proceeds were greater than the Colorado homestead exemption. He paid off the mortgage balance and then asked the Court to amend his plan to let him stop future payments to the lender. The Chapter 13 Trustee didn’t object to the modification, the sale, or the repayment of Baker’s mortgage debt. He did, however, ask that Baker’s use of that portion of the net proceeds protected by the homestead exemption be restricted to the purchase of a new home. He also asked the Court to order Baker to turn over to the estate proceeds in excess of the exemption. Finally, the Trustee also challenged Baker’s request to amend the plan as having been filed in bad faith.
The Court first considered the unsettled question of whether the sale proceeds that make up the homestead amount are even property of the Chapter 13 estate. It found that neither the homestead-protected proceeds nor any excess were property of the bankruptcy estate. It also rejected the Chapter 13 Trustee’s contention that Baker’s request to modify his plan was filed in bad faith. The debtor was able to keep that money to spend as he needed.
The Barrera Case
In a somewhat similar case, a Chapter 13 debtor also sold his home and received the appreciated value after plan confirmation. However, he later converted the bankruptcy to a Chapter 7 liquidation. The Chapter 7 Trustee sought to have the proceeds in excess of the homestead amount included in the bankruptcy estate. The issue to be decided was whether the phrase “property of the estate” includes the amount by which the property appreciated between the date of filing the Chapter 13 plan and the conversion to a Chapter 7 case. If it does, the amount of appreciation belongs to the estate for the benefit of creditors. However, the Colorado Bankruptcy Court interpreted this clause to exclude appreciation occurring post plan confirmation, even if the case is later converted to a Chapter 7 liquidation. As such, the amount of appreciation that occurred after the confirmation of the Chapter 13 plan belonged to the Debtors and was not property of the bankruptcy estate. This finding was upheld on appeal. Here also, the debtor was able to keep that money to spend as he needed.
It now appears that a Colorado Chapter 13 debtor whose plan has been confirmed (that is, approved by the Trustee and the Bankruptcy Court) can ordinarily sell his home, pay off any mortgage balance and keep the proceeds after the sale. The same holds true even if the case is later converted to a Chapter 7 proceeding as long as the chapter 13 plan was confirmed. The debtor need not use the proceeds to buy a new home. However, if the sale was contemplated when the repayment plan was approved or the Chapter 7 petition was filed, the Court may conclude that the plan or petition was filed in bad faith and reject it. Unfortunately, while the Court in Baker found that the request there was made in good faith, it did not set any specific waiting period after plan confirmation before the sale can occur. It noted that bad faith is to be determined on a case-by-case basis.
If you are considering filing a Chapter 7 or Chapter 13 bankruptcy and are planning to sell your home, we recommend you consult an experienced bankruptcy lawyer. We offer free consultations. You can schedule an appointment by clicking here.