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Bankruptcy Courts May Consider Increase in Values of Exempted Homes, Ninth Circuit Rules

September 21, 2010

As Rancho Cucamonga personal bankruptcy attorneys, we were interested to see a recent federal appeals ruling on how bankruptcy courts deal with increases in the values of homes exempted from the bankruptcy. According to a Sept. 15 article in the Metropolitan News-Enterprise, the Ninth U.S. Circuit Court of Appeals ruled Sept. 14 that exemptions made at the time a bankruptcy is filed cover only the amount of equity exempted, not the entire value of the home. Thus, if the home increases in value while the bankruptcy is pending, a bankruptcy trustee may seek to sell the home to claim the excess value on behalf of creditors. The case, In re Gebhart, No. 07-16769, was consolidated from two bankruptcy appeals within the Ninth Circuit, concerning Arizona filer Nikalous Gebhart and Washington filers Steven and Julie Chappell.

Gebhart filed for Chapter 7 bankruptcy in 2003 and claimed the full value of his home at that time as an exemption. His trustee did not object at the time, but the home appreciated in value between then and 2006, while the case remained open. In 2006, the trustee sought to sell the home to reclaim the appreciated value, on behalf of Gebhart's creditors. The Arizona bankruptcy judge allowed that sale to go through despite Gebhart's objection that his exemption should have covered the full value of the home. In the Chappells' case, a Washington judge faced with similar facts came to the opposite conclusion. In the consolidated appeal, the Ninth Circuit ruled that any additional value after an exemption is still the property of the estate. This relied on the Supreme Court's decision in In re Reilly, 130 S. Ct. 2652, which said that exemptions naming specific dollar amounts exempt only an interest in a property, not the entire property.

This article implies that the trustee in Gebhart's case may have negligently failed to close the case. Gebhart's debts were discharged four months after he filed, but the case remained open until 2006, giving the home time to appreciate. For this reason, our Stanton individual bankruptcy lawyers would have preferred a different ruling. The Ninth Circuit noted that a ruling in favor of Gebhart would have penalized creditors for the trustee's negligence. While this is true, the current ruling penalizes Gebhart for the trustee's negligence. While homes are unfortunately not gaining much value right now, future Chapter 7 filers and consumer bankruptcy attorneys like us should take an active role in discharging a bankruptcy when it is over. And of course, bankruptcy filers who are trying to keep their homes should also consider a Chapter 13 bankruptcy, which avoids liquidating homes (and most other things) by allowing debtors to set up a repayment plan at rates the court determines they can afford.

If you're considering bankruptcy, with or without trouble making mortgage payments, you should call Howard Law PC. We help individuals and married couples deal with overwhelming debt through legal channels, including bankruptcy as well as loan modification and more. Our Tustin consumer bankruptcy lawyers know that bankruptcy is not right for everyone, so we start every case by thoroughly examining our clients' finances and determining whether a bankruptcy is the best move. If it is, we can stop harassment by creditors by filing for bankruptcy as soon as possible -- and if any creditors ignore that automatic stay, we can help clients sue them for violating the law. We stand by our clients throughout the bankruptcy process, from the mandatory credit counseling to post-discharge counseling about the tax and credit implications of the bankruptcy.

Howard Law offers free, confidential consultations, so you can speak to us at no risk or obligation. To learn more or set up a free consultation, send us an email today or call toll-free at 1-800-872-5925.