Would an unscheduled asset which the chapter 7 trustee had partially administered be deemed abandoned to the debtor’s ex-wife?

Would an unscheduled asset which the chapter 7 trustee had partially administered be deemed abandoned to the debtor’s ex-wife?

Yes, in the case of In re DeGroot, Case No: 11-8083 (BAP 6th Cir., 2012), the Bankruptcy Appellate Panel for the Sixth Circuit upheld the decision of the U.S. Bankruptcy Court for the Western District of Michican, ruling that the asset was properly deemed to have been abandoned to the ex-wife under 11 U.S.C. §554(c) and (d).

In the DeGroot case, the husband and wife were divorced in 2002.  Husband was ordered to pay child support to the wife for two children.  The wife was awarded the house and ordered to pay husband for his share of the marital equity in three installments, the first after three months, the second after seven years, and the bulk upon the emancipation of the youngest child, the sale of the house, or the death or remarriage of the wife.  Under the divorce decree, the entire amount owed to husband by wife was, in effect, a judgment lien against the title to the real property.

After the first payment was made, the husband filed a no-asset chapter 7 bankruptcy case.  The husband listed the wife as a creditor in his chapter 7 case, but did not properly schedule his right to receive payments from her for his marital share or his security interest in the former marital home.

Meanwhile, the wife filed a show cause against the husband in state court to collect the delinquency in child support owed.  The husband and wife entered into negotiations to settle their differences.  The husband Debtor’s bankruptcy attorney informed the chapter 7 trustee of the child support arrearage and asked the trustee, in several letters, to abandon the bankruptcy estate’s interest in the lien for the balance owed by wife to husband.  The husband and wife’s negotiated settlement provided that wife would give up or waive any past or future child support owed in return for a lump sum settlement payment from husband to the wife and a release of his lien on the former marital residence.  Although the state court judge approved the proposed negotiated settlement, neither the Debtor husband nor the wife had first sought relief from the automatic stay to enter into a negotiations, as required by 11 U.S.C. § 362 (thus creating a voidable agreement).

The chapter 7 trustee filed a notice of assignment of lien in land records and had the bankruptcy case noticed as an asset case.  The wife failed to file a proof of claim in the husband’s chapter 7 bankruptcy case.  Nine months later, the chapter 7 trustee filed a Report of No Distribution (“NDR”) and the case was closed.

When the wife later attempted to refinance the former marital residence, the trustee’s notice of assignment came up in the title search.  The trustee refused to release the assigned lien on the home because the parties had not first obtained relief from the stay before reaching the negotiated settlement.  The bankruptcy court granted the chapter 7 trustee’s subsequent motion to reopen the case to administer the asset.  The trustee then subordinated his lien in return for a small lump sum payment to allow the wife to consummate her much needed refinance loan.  The wife filed a motion and a proof of claim for unpaid child support in excess of the amount of the lien claimed by the trustee.


After a hearing, the bankruptcy court judge ruled that the trustee could administer the small lump sum payment, but could not administer the rest of the balance as it was deemed abandoned under 11 U.S.C. §554(c) and (d). with the closing of the case. In re Joel DeGroot, 460 BR 159 (2011).  The court ordered the chapter 7 trustee to release his lien against the former marital residence.  The court found that the negotiated settlement was voidable as obtained in violation of the automatic stay, and determined that there were no equitable considerations against setting it aside.  Consequently the receivable was still valid and the wife had a valid claim for setoff against the estate for child support under 11 U.S.C. §553.

With regard to the Debtor’s failure to properly schedule the asset and the chapter 7 trustee’s failure to administer it, the court held the “…unless the court orders otherwise..” language in Section 554(c) and (d), gave the court the discretionary ability to avoid a miscarriage of justice.  Here, the trustee and the Debtor were at fault, not the ex-spouse.

The chapter 7 trustee appealed.  The Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling, reaffirming that the bankruptcy court judge had the discretion both to modify or revise any technical abandonment (caused by closure of the case) and to excuse any nondisclosure of financial information.  The court was within its discretion to deem the asset abandoned to the ex-spouse pursuant to the “…orders otherwise…” language of 11 U.S.C. §554(c) and (d) to prevent a miscarriage of justice.  The appropriate circumstances supporting that exercise of discretion included the fact that the Debtor failed to schedule the asset but did disclose it, that the trustee knew of the asset and did not administer it, that the trustee caused the case to be noticed as an asset case, and that the trustee filed the notice of lien in land records.  The BAP also noted that the only one who suffered from all the defaults was the ex-spouse.

You should consult with your bankruptcy and divorce attorneys or Virginia bankruptcy and divorce lawyer James H. Wilson, Jr., to discuss your rights in property when your spouse or ex-spouse files bankruptcy.


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