The Florida Supreme Court’s expanded debtor’s $4,000 wildcard exemption earlier this year giving debtors substantially more exemptions to apply to their cars and personal property. Any debtor who does not need to use their homestead exemption can take the wildcard exemption; joint debtors have a combined additional $8,000 of available exemptions.
Chapter 7 bankruptcy trustees get compensated based upon the amount of non-exempt assets they capture and administer in the bankruptcy estate. The more that courts expand debtor exemptions the less property is available for trustees. Trustee pay goes down.. The wildcard exemption expansion is not good for bankruptcy trustees.
In today’s real estate market, most bankruptcy debtors live in upside down homestead properties. The debtor does not have to be current on his mortgage to stay in his house during bankruptcy, and a large percentage of Chapter 7 debtors, being in financial trouble for one reason or another, will remain in possession of their upside down house, default on their mortgage, and also claim the wildcard exemption because they have no homestead equity. Such debtor who defends a mortgage foreclosure case in state court can remain in their home for a year or more during and after filing bankruptcy. When a debtor does not claim homestead exemption on an upside down house in order to get the wildcard exemption the debtor is betting that the Chapter 7 trustee will not attempt to administer the homestead because there is no value for creditors.
Many of the bankruptcy trustees are trying to obtain money for the bankruptcy estate of debtors who want to remain in their upside down homes while claiming the wildcard exemption.. For example, I have heard one trustee who sold the bankruptcy estate’s rights such a home to a third party investor. The investor acquires title subject to the mortgage in default. The bankruptcy debtor becomes a tenant. The investor can charge the debtor rent, or evict the debtor and find a higher paying tenant. The investor can fight the foreclosure and collect rents while fighting with the bank.
Another possibility is for a trustee to sell the estate’s ownership to the mortgage lender. This lender is facing a long and expensive foreclosure battle with the defiant debtor. If the mortgage lender buys the trustee’s ownership position the lender can take immediate possession and eliminate the debtor’s foreclosure defenses. Trustees may have difficulty explaining this plan to a mortgage lender and then getting approval from the lender’s bureaucracy.
If bankruptcy trustees and bank work together they can fight back against debtors trying to “surrender” a house to maximize exemptions and also squat in the house to maximize free living during a foreclosure.
As far as I know, none of these trustee tactics to get money from the upside down homeowner has been tested in court. Most bankruptcy debtors do not have the financial resources to pay their attorney to litigate this type of issue. The debtors usually decide to pay the trustee money or cooperate with the trustees efforts to sell the trustee’s interest in the homestead rather than pay an attorney to fight the issue in court.
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