When someone files bankruptcy, an estate is created. The property in the estate is defined in the Code, and it is the property in the estate that is used to pay creditors. But how do you value property of the estate if the nature of the interest held in the real estate changes after the petition date? On Friday, the 7th Circuit Court of Appeals answered that question.
In January 2004, the debtors filed for chapter 13 relief and sought to avoid a judgment lien (valued at about $8,200) on their residence. The lien arose from a deficiency judgment following an automobile repossession. Debtor’s estimated their interest in the residence to be valued at $65,000, subject to a mortgage of about $58,000. Their interest in the residence reflected an encumbrance of a life estate interest held by a relative. Under Indiana law, the homestead exemption at the time was $15,000 ($7,500 per debtor).
Two years later, after the plan was confirmed, the debtor’s filed a motion seeking to avoid the lien on the property. A month prior to the filing of the motion, the mother released her life estate interest by a quit claim deed, thus conveying the property to the debtors a fee simple interest. The value of that interest was determined to be $95,000. However, when the debtors sought to avoid the lien on the property, they used the prior valuation of $65,000.
The creditor argued that the valuation that should be used is the new one of $95,000. After an unsuccessful appeal to the District Court, the Court of Appeals was called upon to answer one question: for the purposes of avoiding a lien under Section 522, when should the debtors’ interest in the real estate be determined?
The Court looked to Section 1306 and what constitutes property of the estate:
Property of the estate includes, in addition to the property specified in section 541…. all property…that the debtor acquires after the commencement of the case but before the case is closed.
Section 541(a)(1) identifies property in the estate as including “all legal or equitable interests of the debtor in property at the commencement of the case.” And Section 541(a)(7) lists property of the estate as including “[a]ny interest in property that the estate acquires after the commencement of the case.” Based on that, the Court held that the value of the real estate should be determined at the fair market value at the time it was recorded in December 2005. The lien could not be avoided.
To get access to the opinion, and to hear the oral arguments of the case, Click Here.
2009: Perchance to Dream
New Years is a time when many make resolutions. Some resolve to quit smoking. Some resolve to lose weight. The list of resolutions is endless. Personally, I think many resolutions are pretty useless. I didn’t stop smoking because of a resolution (but I did quit… a few Novembers ago), and I have not exactly kept up with resolution diets. I’ve been racking my brain trying to come up with something appropriate to write about for New Years. The last thing I want to do, especially today, is sound trite. It’s not like you can simply “resolve” to get out of bad mortgage or you can “resolve” to get a better job when companies are laying off. But then yesterday, I had a surprise visit from an old client who helped my thought process move along.
My client went through a long chapter 13. At times, it was not particularly pleasant. But all plan payments were paid and the discharge was received a few years ago. Now, she’s dedicated to her business and determined to keep make it grow in a difficult economy.
During our brief meeting, I noticed something different. Was it the hair color, I thought? No. Did she have her teeth done? No, not that. Then it dawned on me. It was something more.
She was happy. She was smiling. While she was not a particularly unhappy person while the case was open, I think it’s fair to say the chapter 13 was not a particularly happy period in her life. But now, the chapter 13 case is behind her and yesterday she sat before me smiling, happy, and talking about the future.
As an attorney, while I try to get my client’s perspective, I really can only get so much. I can only put myself so far into a client’s shoes. So I asked her, now that her case is behind her, now that she is moving forward with her life in new directions, what were her feelings about the bankruptcy process now that she was “on the other side of it.”
She didn’t hesitate with her response. (I can’t quote, but I did take a few notes.) She told me that going through that difficult process allowed her to dream again. That now she could dream and that making those dreams a reality again seemed possible. Her dreams were no longer mired down in a chaos created by debt that had spiraled out of control. She told me that she felt freer than she had felt in a very long time.
The minute these words flowed, I could feel a smile growing on my face….and a bit of a lump in my throat. And then, it dawned on me: ‘this is what I’ve been itching to write about for the New Year.’
Many are looking at 2009 with a sense of foreboding and trepidation. World events are not exactly fueling optimism about the future. Perhaps 2009 will not be a year when dreams will come true. Perhaps things may get worse.
Or perhaps in spite of that, you can find a way to knuckle down, stand straight, bite your lower lip, bide your time, and get through a journey that brings you to the other side of it: a side where you can dream once again. I know it may all sound silly, but I know this place exists. Yesterday, I was fortunate to be reminded that for my clients in or facing bankruptcy, there can be a life afterwards. And that life can be wonderous. The only assurance I can give you is that the big smile on my client’s face proves that anything is possible.
With that, I wish you all a very Happy New Year.
Tags: Chapter 13, Chapter 7, Commentary, Life After Bankruptcy
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