Bankruptcy Estate & The Realtor’s Open Escrow

Real estate for saleHow can bankruptcy trustee’s demand the debtor’s real estate commission from  escrows open when the bankruptcy case is filed?

Twice this month, I’ve watched debtors and their counsel surprised by the turnover demand of Chapter 7 trustees for the proceeds of a real estate transaction pending when the case commencement, but closing weeks after the filing of the case.    What the debtors, who were both licensed real estate salesmen,  missed was that their piece of the escrow represented, at least in part, the debtor’ s prepetition efforts.  As of the filing, the debtor had a contractual right to the commission if the deal was consummated.

These kinds of assets are often difficult for the debtor, your client, to see as an asset that has to be scheduled.  I talk about other kinds of  oft-overlooked assets in my Fundamentals course.

So, what’s a bankruptcy lawyer to do?  There are two kinds of arguments you can make for your client:  one is the uncertainty factor as of filing (will this deal close?) and the second it that the realtor continues to shepherd the deal after the sale is in contract.

You can argue for a proration of the commission between pre and post petition periods.  Have the debtor keep a log of her efforts for each transaction pending when the case is filed.  Use that to support the idea that the contract was executory at filing, and the debtor-realtor had to do more to earn that commission.  The longer the interval between filing and closing, the stronger your argument that a larger part of the income was earned post filing.

You may also have an argument that the realtor has certain expenses customarily paid from the commission on a sale and argue that the trustee must pay those expenses tied to that deal from the estate’s share.

Take a look at the exemptions available to your client and see if some part of the prepetition portion can be exempted.

Whatever split you work out with the trustee, make sure that the broker’s tax reporting allocates the commission, and therefore the tax consequences of that income,  between the estate and the debtor.  It’s hard enough for your client to give up a long anticipated pay day, but to get stuck with taxes on money she never saw is worse.

Image courtesy of kimubert.

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  • Paul Murphy

    what great timing…I needed this answer the same day it was sent to my email!

    I had been asking bk attorneys all week about this exact issue and had not gotten a clear answer. Just filed a 7 and used this to inform my real estate agent debtor of the potential issues involved.