Bankruptcy can give you a fresh financial start, but under Chapter 7 bankruptcy procedures, a court-appointed trustee can take some of your property and sell it to pay your creditors. Since creditors are primarily interested in getting paid, your bankruptcy trustee may be able to take your house, sell it and pay off your debts with the money from the sale. Alternatively, your lender might be able to regain possession of the home for sale to satisfy your mortgage debt.
Your trustee controls your bankruptcy estate, the property eligible to be sold to satisfy your debts. In Chapter 7 bankruptcy cases, the estate includes all property that does not qualify for a statutory exemption. You are generally allowed to exempt a portion of your home equity under either a federal or state exemption; however, available exemptions vary by state. If you have equity in your home above the allowable amount of the exemption, your trustee may take possession of your home to sell it and use the proceeds, less the amount of exemption, to pay off your mortgage and other debts.
While your trustee can sell the property, he cannot alter the lender’s interest in the house as a secured creditor -- a party with rights to property that secures a loan, such as a mortgage or vehicle loan. Absent a bankruptcy proceeding, secured creditors can repossess or foreclose on this collateral property if you do not pay your debt. In contrast, unsecured creditors, such as credit card companies, do not have rights to collateral. In bankruptcy, secured creditors have a higher priority than unsecured creditors and will be paid first, so your mortgage lender must be paid from the sale of the house before any of the sale proceeds can go to other creditors. The bankruptcy trustee has no power to change this.
If you do not have significant equity in your home, your trustee may decide the home is too burdensome or of inconsequential value to your bankruptcy estate. For example, if the amount you owe on your home loan is just a small amount less than the home is worth, selling the home would provide little value to your bankruptcy estate. By the time the selling fees are deducted, your estate might not yield any proceeds to pay other creditors. In such cases, the trustee can abandon the property, voluntarily releasing control of it to your lender. This relieves your bankruptcy estate of the administrative burden, costs and responsibility of maintaining the property and disposing of it.
When you file for bankruptcy, your lenders and other creditors must cease collection efforts immediately due to the automatic stay protection of the bankruptcy proceeding. However, your mortgage lender can file a motion for relief from the automatic stay so it can foreclose on your home even while you are going through bankruptcy. The bankruptcy court judge can grant this relief by lifting the automatic stay, allowing the lender to resume collection efforts including foreclosure. Even if the bankruptcy trustee objects, your lender could regain its rights as a secured creditor and the home could be taken out of your trustee’s control.