Trustee Blog

Real Property Prices are Increasing: Bankruptcy Attorney Beware

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Today at the Riverside Meeting of creditors, I spoke to Chapter 7 Trustee Charles Daff. Mr. Daff was a longtime bankruptcy trustee in Orange County, California and now is assigned to the Riverside Division of the Central District of California. Though he conducts hearings in the Inland Empire, Mr. Daff has an office in Tustin, California which is in the heart of Orange County, California.

Mr. Daff is also a real estate broker, he is the “bankruptcy broker” and has his hand on the pulse of the real estate market. Mr. Daff said that in April 2014, the average home price increased 14%. This increase was driven by people wanted to buy into the Irvine, California market. The Trustee said that people from all over the world want to get their children into the Irvine School system. This creates a demand for housing as the sellers can raise their prices with many people willing to pay the higher prices.

The problem for the bankruptcy attorney is that with prices increasing so quickly, it is difficult to exempt the equity. If the property has a certain amount of equity on the date of filing and the equity increases in value, the extra equity over and above the exemption amount would then go to the trustee to possibly administer for the benefit of the estate. For example if the Irvine, California real property is valued at $700,000 with a debt of $600,000 on the date of filing and is exempted at $100,000. Then the value of the property increases by 10%, the property is now worth $770,000 and there is $70,000 that is not exempt and a portion of that equity could be used by a bankruptcy trustee to pay of the bankruptcy estate expenses.

The Practice Pointer: Since prices are increases so dramatically in Orange County and in one city in particular, the bankruptcy attorney must be careful about exempting property. The value of real property fluctuates and the attorney and the client must be aware of this possible movement. The attorney should take care to gain an accurate appraisal of the real property prior to filing the petition. It does the attorney no good to rely on the debtor’s idea of the real property value and a more formal process should be undertaken to determine the vale.

The Second Practice Pointer: With the market increasing, the client should be warned in writing that the trustee gets all appreciated equity. I suggest the attorney have the client sign a document that says she has been warned about the possible value increase and the that the exemptions can only protect so much equity, any unprotected equity may go to the trustee. This signed disclosure will help the attorney should the try to say she was not told about this when the bankruptcy trustee tries collect on the un-exempt equity.

Mr. Daff also said that he sees this price increase in home values moving over to the Inland Empire in the next year. While our house prices have been steady or remaining flat this year, he says he sees inceases coming next year.

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