Filing for bankruptcy isn’t a decision borrowers should take lightly. This is especially true if you own a home or investment property. During bankruptcy proceedings, your property will fall into one of two categories:
- Exempt assets: Items classified as exempt cannot be taken by the court to repay your creditors. These items are safe, and you can keep them or sell them. Types of property typically considered exempt include clothing, necessary vehicles, household items, and ERISA-qualified retirement funds. Sometimes, you may be able to keep equity in your home.
- Non-exempt assets: Non-exempt assets are funds or items that are not protected and could be sold to repay your debtors. Things considered non-exempt include vacation homes, property that is not your primary residence, expensive vehicles, valuable jewelry or collections, family heirlooms, designer clothing, and investments that are not protected.
While the bankruptcy court can sell valuable items to repay a debt, they cannot take items necessary for you to live. This means older cars, clothing, everyday furniture, tools for work, and retirement accounts are safe.
It’s essential to understand how your assets are classified when you’re considering bankruptcy because selling some items could trigger investigations or questioning of your intent. It is possible to sell a property before filing for bankruptcy, but there are some factors you should consider.
Types of bankruptcy
A Chapter 7 Bankruptcy eliminates all qualifying debt. If you meet the debt and income threshold, you can have all your past debts wiped away. Your credit will take a hit, but you won’t have to make payments to your creditors. Non-exempt assets may be sold to repay your debt.
A Chapter 13 Bankruptcy requires you to make payments to your unsecured creditors. The payments will equal the amount of your disposable income or the value of your non-exempt property. You may need to sell items (like your home or car) to repay secured debt.
Can I sell my house before I file for bankruptcy?
Maybe. If you sell your house within two years of filing for bankruptcy, you’ll need to keep good records and explain why you chose to sell your home or other non-exempt properties.
For example, you could sell your car or vacation home to cover medical expenses or monthly expenses. You cannot sell a car or a home to reduce the value of your non-exempt assets to avoid paying your debtors. If you sell something before filing for bankruptcy, make sure you receive fair market value. Selling an item to a family member or friend for far less than its worth could be interpreted as fraud.
Can I sell my house to avoid bankruptcy?
Yes. If you want to avoid bankruptcy or foreclosure, you can sell your home. You could sell your house and use the profits to repay your debtors. Again, you should keep records just in case you need to file for bankruptcy soon.
Can I sell my house after I file for bankruptcy?
You may be required to sell your home during bankruptcy. If you file for bankruptcy, you’ll likely need to sell the house, but most courts will allow you to keep some equity to have money for a fresh start.
If you want to sell your home after you file, you’ll need to discuss what portion of the sale is protected with your bankruptcy attorney. The amount you can keep from the sale will vary depending on your state. You will not be able to keep all the proceeds from the sale of your house if you sell before your bankruptcy closes.
You may be able to keep the proceeds from the sale of your home after the discharge of your bankruptcy if your state allows you to exempt your entire property. In North Carolina, homestead protection allows up to $35,000 in protected equity, and Utah allows up to $30,000 in protected equity. Married couples can protect up to $60,000.
For example, consider a single homeowner in Utah with a home worth $500,000 and still owes $400,000. That means that the homeowner has $100,000 in equity. But, since the state’s exemption is $30,000, the house will be sold. The homeowner will get a check for $35,000, and the rest of the proceeds will go towards repaying debt.
Using the same numbers, a homeowner who files a Chapter 13 could keep the house if they can pay $35,000 towards their debts over their repayment plan (typically three to five years).
What happens if I put the title to the house in someone else’s name before filing for bankruptcy?
If you transfer (or sell) your property within two years of bankruptcy and the court determines that it was done to avoid losing the item to repay debt, you could face significant problems. The court can legally transfer the property back into your name, sell it, and use the proceeds to pay your debtors. You could be on the hook for fraud if you attempt to move the property to another person to protect it from bankruptcy proceedings.
The Bottom Line
Bankruptcy can be a financial relief, but it’s also a complicated legal process. If you’re concerned about bankruptcy, you can sell your home if you take the proper steps to ensure that your sale is made in good faith. If you can prove that your intention was to make your life more affordable, not to avoid repaying debtors.
Financial difficulties are stressful. If you’re facing bankruptcy and considering selling your house, we may be able to help. Call us today for a quick cash offer on your home.