Selling Your Home during Bankruptcy: Dos and Don’ts

Owning a home is an amazing feeling. A home is also one of the largest assets many people have, so it makes sense that those in bankruptcy would want to find a way to protect their valuable property.

Unfortunately, there are some no-no’s that you must be mindful of, especially when undergoing a bankruptcy case.

When you file bankruptcy, whether it is Chapter 7 or 13, your home and all of your other possessions will be grouped together and fall into your bankruptcy case. A big question that arises is whether people can sell their house before, during, or after bankruptcy.

You have to be careful during bankruptcy because if you act outside the court’s decision or guidelines, your bankruptcy case could end up in the trash and you flat on your… still stuck with debt.

So can you really sell your home during bankruptcy?

Battle of the Chapters: 7 vs. 13 Property Sales

When considering selling your property while in bankruptcy, you need to mind your p’s and q’s and pay attention to what you can and can’t sell. Houses that are in a Chapter 7 bankruptcy case cannot be sold by you, period.

When you enter a Chapter 7 bankruptcy, all of your assets are appointed to someone called a Trustee, who will serve as the negotiating middleman between you and your debt collectors. What this means is you have little say over what can or cannot be sold. As long as your items are nonexempt, then they probably will be sold in order to clear out as much debt as possible. Your appointed trustee will delegate the sale of the property.

In a Chapter 13 bankruptcy, however, there is a different set of rules governing the sale of your home. Since Chapter 13 bankruptcy is a re-organization instead of a liquidation case like Chapter 7, you are able to keep your home. If you do decide to sell it, that’s fine—as long as it does not cause in disruption or financial harm to your lenders.

However, you still cannot just list your house for sale during bankruptcy without obtaining permission from your trustee, who will grant rights to sell or refinance your home during the bankruptcy process.

How can you Sell Your Home during Bankruptcy?

It’s never easy parting with a house you worked so hard to get. The long hours of work, the steady saving and the cutting of budgets just to save up enough for a down-payment, just to see the fruits of your efforts disappear, can be disheartening. ,

It can also leave those who have to sell in financial peril. When you do have to off your family home or other property, the type of bankruptcy you are in will dictate the amount of power you have over the sale.

Filing the Motion

After you have made the decision to sell your home, you will still have to file a motion to sell real property with the appointed bankruptcy court. This is a little more complex than simply telling a judge that you want to sell your home.  You will need to include all of the details in your motion: the selling price, creditors and/or lien holders of the property have to be clearly stated in the motion. You will have to provide the court with a thorough document that details information about how the proceeds from the sale will be used as well.

Getting Your Trustee’s Approval to Sell

In some cases (like those in Chapter 7 bankruptcy), your trustee may feel that it is necessary to sell your home in order to meet the demands of your creditors. Even your trustee will have to provide the court with all of the information regarding the selling of your home. In the same fashion, your trustee will have to list what and where the proceeds from the sale will go. Even then, getting permission to sell your home is still not guaranteed. The trustee has to make an argument that the sale of your home will not detrimentally impact the petitioner of the bankruptcy (you). Luckily, in most cases, at least part of your home (and maybe all of it) may be protected and exempt from being sold by your trustee.

Is My Investment Property at Risk During a Bankruptcy?

Even though there may be a clause or statue that protects some or all of an owner-occupied home, there is still a chance your main home is at risk. Aside from that, a property that you own outside your occupied residence is most certainly at risk, depending on the type of bankruptcy you are filing. In Chapter 7, investment properties are some of the first items to go. During a Chapter 13, your investment property may be able to be saved. You have a higher chance of not losing any of them than if you were forced to go with a Chapter 7 (you may only be eligible for one or the other).

Even with that said, the Trustee will have to prove that in selling an investment property, there will be no financial difficulty incurred by mortgage lenders of the property. While your investment property may not be fully protected, each state has its own set of guidelines regarding this matter. It’s always best to check acceptable exemptions in your state.