End Run On Chapter 7 Trustee

One more reason to file 13 when there MAY be non exempt equity.

I tout Chapter 13 as the better choice when there are issues of insider preferences, transfers that might be found constructively fraudulent, or where there are  small amounts of equity in assets. It’s better, I think, that the debtor propose a plan and shape the facts to present the debtor-friendly characterization of an ambiguous situation.

But in discussion of conversion of a pending case where  a Chapter 7 trustee is sniffing after a house that might have some non exempt equity, another facet of the advantage of 13 struck me.  Aggressive Chapter 7 trustees sometime cut their commissions to justify the sale of an asset; yet I’ve never had any resistance to using the statutory commission in calculating the liquidation analysis in 13.  No Chapter 13 trustee protests my calculation, claiming that the Chapter 7 trustee would cut his fee.

In the case in question, the house is perhaps worth $800,000, with $600,000 in secured debt and a $100,000 homestead. If costs of sale are 7% and there is no capital gains tax owed, there is $51,000  in equity in the sale, before the trustee’s commission.  I know several trustees who would take a $20,000 commission to get the sale, and have $31,000  to distribute to creditors.

The statutory commission comes out at  $38,250.  (Remember the trustee doesn’t get a commission on funds paid to the debtor.)  Now, calculated at a full commission,  the fund for the creditors is $12,750, an amount payable fairly easily in a Chapter 13.

To the extent that I can also project the Chapter 7 trustee’s other expenses of administration (tax preparation, appraisers, or  attorneys fees to prosecute disputed issues), the liquidation dividend shrinks further and the Chapter 13  becomes cheaper still.  We’ll hope to find that needed repairs or obsolescence brings the property value down from the current estimate.

In the end, the Chapter 13 will certainly cost less than the price of a fight with the Chapter 7 trustee to keep the house.  All because we gave the Chapter 7 trustee what the law says he’s entitled to in our liquidation analysis.

Image courtesy of Ewan-M

 

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  • http://ca-bankruptcylaw.com Malcolm Ruthven

    What a great article, Cathy, with lots of realistic and meaty stuff in it. I do have one basic question, however. I calculate the available equity from a hypothetical sale as $800,000 sale price – $600,000 secured debt – $100,000 homestead exemption – cost of sale (7% x $800,000 = $56,000) = $44,000 instead of $51,000. What am I missing?

    • Anonymous

      I married a mathematician so I’d be relieved of such calculations! I think you’re right.

      • http://ca-bankruptcylaw.com Malcolm Ruthven

        I plead guilty of having a math degree :-) On a separate note, I’d appreciate if you’d explain how to calculate the trustee statutory commission in your example.

        • Anonymous

          It’s in the statute, section 326.

  • Jeff Hoffman

    I also do not understand the calculation of the T fee. If the equity is $44,000 after the exemption, shouldn’t the T fee be $5,150? The statute says, “upon all monies disbursed or tuned over in the case by the trustee to parties in interest, excluding the debtor …” If T turns over $44,000, 25% of the first $5,000 is $1,250 and 10% of the remaining $39,000 is $3,900. What am I missing?