The Ninth Circuit recently ruled (and I think incorrectly), that it is just the debtor’s “interest” in the exemption that stays out of the bankruptcy estate, thus remaining the property of the debtor. In the Matter of: Gebhart, D.C. No. CV-07-0193 and In the Matter of: Steven Jay Chappell, BAP No. WW 06-1435. Example 1: A debtor and his wife files for bankruptcy in California. Their house is worth $500,000 at the time of filing and they have a loan of $400,000 remaining on the property. They are allowed to claim $100,000 exemption as head of the household. They file bankruptcy in January of 2010 and expect the trustee to close the close in about 4 months as is the usual case. However, for whatever reason, whether intentional or unintentional, the trustee does not close the case until January of 2012. The debtors refinance, get lower rates, and go on with their lives assuming that the house is theirs. The economy improves within the year or two and the house goes up in value to $700,000. The trustee then moves to sell the house to realize the extra $200,000 in value as a result of the increase in value.

Whoa ! Didn’t their attorney tell them that they could keep this house and it was theirs forever as long as they kept up the payments ? How can this be ? Couldn’t an unscrupulous trustee keep a case open in the hopes that the economy improves and that extra equity can be used to pay creditors ? The Ninth Circuit acknowledged that this was a legitimate concern, but that there were other remedies or alternatives available to the debtor: 1) You can tell the U.S. Trustee that the Chapter 7 Trustee isn’t doing his or her job and hope they remove the Trustee; and 2) The debtor can always file a motion for abandonment by the trustee.

There are some problems and flaws in this reasoning. The first solution doesn’t give the house back to the debtors. It actually allows the chapter 7 trustee (by way of the fees earned by distributing to unsecured creditors) to profit by failing to do his/her job of expeditiously administering the estate. The second solution requires debtors to make up for a trustee’s failure to do his/her job. The debtor has to file a motion to abandon in case the trustee fails to expeditiously administer the estate.

Let’s compare this to a case in Chapter 13. The value of the home is measured as of the date of filing. That value is then used to accomplish many things, among which are: 1) to determine the amount that a debtor must pay through the plan; and 2) determine valuation for purposes of bringing a Motion to Strip Lien (a Lam Motion). Does this mean that during the Chapter 13 plan, if the value goes up, the debtor’s plan now becomes infeasible because they are required to pay more but there is no budget to do so ? Does this mean that the Order that stripped the 2nd lien in the Motion to Strip Lien becomes invalidated ?

Let’s make case law that makes sense.