How Does Bankruptcy Impact the Sale of a Home
When the real estate market crashed, we had clients who wanted to both sell their home and file bankruptcy and the timing of those two events was important. Today, we get the question less often, but in more cases, the house has some equity (the value of the house exceeds the amount owed to the mortgage company).
How a bankruptcy impacts the sale of a house will depends on a few factors, including: whether the house has equity or is upside down, whether the debtor has exempted the property, and whether the bankruptcy is a chapter 7 liquidation or chapter 13 reorganization.
- The House Has Equity: If the house has equity then the debtor’s plan for the house becomes important. If the debtor has exempted the house then he can likely sell the house and use the equity to buy a new house, or the debtor can ask the trustee to sell the house and use the equity to pay off creditors.
- The House Has No Equity: If the house has no equity then the seller probably did not exempt the house in order to take advantage of Florida’s increased personal property exemption. Also in that scenario the seller is likely doing a short sale in which case the trustee and the court’s approval must be obtained through a simple motion and order.
- What Chapter Bankruptcy:
- In a chapter 13 case, the trustee will need to confirm that the sale of the house will still allow the debtor to make his plan payments. Therefore it’s not really the sale of the house that’s the issue; instead, the trustee will want to confirm that the new house or new rental will be consistent with the debtor’s budget and allow the debtor to continue to make plan payments.
- If the house is exempt this is less of a factor for the trustee, but still one that must be factored into the analysis.
- If the house is not exempt then the chapter 13 trustee may require any equity from the house be used to pay the debtor’s chapter 13 plan and creditors.
- In a chapter 7 case, if the house is exempt the debtor will likely have to invest any sales proceeds into a new home (selling one homestead to fund the purchase of another homestead) to have the equity retain its character as exempt homestead property.
- If the house is not exempt then the decision to sell the house belongs to the trustee who will either short sell the house to make a fee, sell the house to an investor subject to any loans, or sell the house and use the money to pay creditors of the chapter 7 estate.
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Shawn M. Yesner, Esq., is the founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate debt by providing options, so they can live the lifestyle of their dreams. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.