Basic Bankruptcy

[jkloster]

--Tired of looking though U.S.C.

Hey guys,

I've been given a hypothetical (no I'm not a law student and this is not a term paper

Mr. 'A' has a realty company in which he is the sole proprietor. He declares bankruptcy (we don't know what type). At a later date, he enters into contract with another company for the sale of an office building (commercial property) he owns. He assures the other company the buiding in question is NOT part of the bankrupty filing so everything is on the up and up.


Question: Is the building really part of the bankruptcy filing and thus the sale invalid?

Here's what I do know: All real assets, including property, either wholly or partly owned by the declaree are to be reported, under penalty of purjury, at the time of filing.

I feel I know the answer to the question, that being -- of course the building is part of the bankruptcy filing. It's an owned asset that does not fall under any available expemption (homestead) rule.

That said, I can't find any specific language I can cite to support this. 3 hours in the U.S.C. makes me crazy - :)

Any help would be greatly appreciated!! Thanks!

[Charlie_Foxtrot]

Hey guys,

 

I've been given a hypothetical (no I'm not a law student and this is not a term paper

 

Mr. 'A' has a realty company in which he is the sole proprietor. He declares bankruptcy (we don't know what type). At a later date, he enters into contract with another company for the sale of an office building (commercial property) he owns. He assures the other company the buiding in question is NOT part of the bankrupty filing so everything is on the up and up.

 

 

Question: Is the building really part of the bankruptcy filing and thus the sale invalid?

 

Here's what I do know: All real assets, including property, either wholly or partly owned by the declaree are to be reported, under penalty of purjury, at the time of filing.

 

I feel I know the answer to the question, that being -- of course the building is part of the bankruptcy filing. It's an owned asset that does not fall under any available expemption (homestead) rule.

 

That said, I can't find any specific language I can cite to support this. 3 hours in the U.S.C. makes me crazy - :)

 

Any help would be greatly appreciated!! Thanks!

 

 

Section 541 of the Bankruptcy Code (11 U.S.C 541) defines property of the Estate.

 

Because the business is a sole proprietership (as opposed to a corporation), the assets of the business are the assets of the individual. Therefore, the building is part of the bankruptcy estate.

 

Depending on what Chapter was filed (7, 13, or 11), at a minimum, the debtor would have to get court approval to sell the asset (13 or 11 reorganization.) See 11 USC 363 (Use, sale, or lease or property outside the ordinary course of business.)

 

If the debtor filed a Chapter 7 liquidation, the building/asset is "owned" by the Chapter 7 Trustee and the debtor has no authority to sell the building unless the Trustee has "abandoned" the asset. The only reason that a Chapter 7 Trustee would abandon the asset is if the property had no equity. That is, the secured loans on the property were as much, or more than, the market value of the property. (note: if the the debt on the property + the costs of sale: broker's commissions, title fees, etc [typically around 10%] - total more than the market value, then the Trustee will likely abondon because there would be no surplus proceeds for the creditors after the sale. That is, the sale proceeds would all be used to pay the secured debt and the costs of sale.)

 

You are correct that there would be no exemption for the commercial building.

 

Hope this helps.

[jkloster]

Awesome... thanks for the info!

[Charlie_Foxtrot]

I should clarify: There would be no "homestead" exemption for the commercial property. There is the potential that some other exemption, such as the federal "Wildcard" exemption could apply (exemptions vary from state to state, and some states allow a debtor to choose between federal and state exemptions, while others only allow use of the federal bankruptcy exemptions.)

 

But still, the same principles apply. In a Chapter 13 or 11 without a confirmed reorganization plan the court would have to approve the sale. In a Chapter 13 or 11 with a confirmed plan, the terms of the confirmed plan of reorganization would have to grant the debtor the authority to sell the property. In a Chapter 7, the debtor still could not sell the property unless the Trustee has abandoned it back to the debtor.

 

Anyway, it is highly unlikely that the commercial property would be fully exempt. And unless the property is fully exempt (secured debt + exemption = more than market value of the property) in a Chapter 7, the Trustee will want to sell the property (vs. abondoning it) to recover money for the creditors. If the debtor has applied an exemption to the property, the debtor is entitled to receive the amount of the exemption from the proceeds of the sale. For example, $1M sale of property. $800k to secured creditors and costs of sale. Debtor claimed $5,000 federal "wildcard" exemption, so debtor get $5,000. Remaining $795,000 goes to Chapter 7 Trustee for pro-rata distribution to creditors. (Obviously, there are a million other issues raised by the individual facts of the case)