Your house is usually your most valuable asset, especially if it is worth far more than you owe. Depending on the type of bankruptcy, you might have the option to keep your house or voluntarily sell it. On the other hand, the court-appointed bankruptcy trustee may force the sale. However, bankruptcy may even allow you to keep your house if you are facing foreclosure.
Once you file for bankruptcy, you create a bankruptcy estate. Technically, you place all of the property and debts you own into the hands of the bankruptcy court to manage while your case is open. The court will appoint a trustee to manage your estate during bankruptcy. You cannot sell or give away any of the property in your bankruptcy estate without the court’s consent.
Under Chapter 7 bankruptcy, the trustee may seize certain assets and sell them, using the proceeds from the sale to pay your creditors. The trustee can only sell nonexempt assets; exempt assets are excluded from sale. Both state and federal laws provide lists of exempt assets, often including personal items, household appliances, family keepsakes and vehicles. Importantly, a certain portion of the equity in a debtor’s home also qualifies for exemption, and this can allow the debtor to keep his home even if this means his creditors will not be fully paid.
Chapter 7 Discharge
Because of exemptions, the trustee may wind up with no nonexempt assets to sell. In such cases, the debtor’s remaining eligible debts may be discharged -- or erased – as soon as 60 to 90 days after the trustee’s first scheduled meeting with creditors. If you are allowed to keep your home because it qualifies for an exemption, you’re generally better off waiting for your discharge before selling it because liens that creditors have against your house may be discharged when the court issues your Chapter 7 discharge. If you wait to sell until these debts have been erased, you can keep more of the money from the sale.
Unlike Chapter 7, Chapter 13 bankruptcy does not permit a trustee to seize your assets and sell them. Instead, you must establish a repayment plan in which you make payments on your debts over a three-to-five-year period using your disposable income. If you decide to sell your house while still making payments under the repayment plan, you must first get permission from the court.
Motion to Sell
To get the court’s permission to sell your home, you must file a Motion to Sell. The court will decide whether the sale is appropriate and will oversee the sale process to ensure the terms of the sale are reasonable. Typically, a Motion to Sell takes about a month to gain approval. Once the house is sold, the sales proceeds are usually used to pay off the liens or mortgages on the property. If the seller has money left over, the court may require that he put it toward his repayment plan.