underwaterhouse In a July 2015 case the Chapter 7 Trustee sold a house that was underwater with three liens, and received a carve-out from the lender that held the second and third liens.  The Debtors did not object to the sale, but to the Trustee’s Final Report because it did not allow for payment of their homestead exemptions from the carve-out funds.  In re Diener, Case No. 11-83085-mhm (July 6, 2015).  The house had a first priority loan of $227,000 and second and third liens (from the same lender) in the combined amount of $129,000.  Presumably, the payments were not being made and the first lender was going to foreclose and wipe out the junior liens.  The Trustee negotiated with the creditor holding the second and third liens and reached an agreement to sell the house and pay that creditor $9,000 from the sale proceeds.  After the first lien was paid in full, closing costs were paid and the junior creditor was paid $9,000 it left about $25,000 for the Chapter 7 Estate. Debtors’ objection to the Final Report took the position that they were entitled to their $10,000 exemption from the proceeds even though there was no equity in the property and the funds were from the sale and carve-out.

Judge Murphy reviewed authority on both sides from the issue, but found no binding authority in the 11th Circuit.  She held that the Debtors were not entitled to claim an exemption from the proceeds.

Debtors are asking the Court to forgive them of their debts, and then reward them for it—to find value where none existed previously. The funds created by a trustee’s negotiation during a carve-out do not exist at the time the petition is filed. If Trustee had taken no action, Citimortgage would have foreclosed, evicted Debtors, and reported the foreclosure to the credit bureaus. Wells Fargo would have had a claim to whatever funds might have remained, and unsecured creditors would have received nothing. Instead, all of the parties are able to walk away having received something—including Debtors, who received a discharge from their debts without a foreclosure of record.

Therefore, the Objection was overruled and the TFR approved.