Life does not always go according to plan. If you fall behind on paying your debts or covering various monthly bills, it may be impossible to get out from under this burden. Every month, you lose more money and risk losing important possessions like your car or home. When income does not keep up with payments, some individuals have no choice but to file bankruptcy.
One strategy that can quickly help you pay back your debtors is selling a home in which you have some equity. What if you have already entered the bankruptcy process, which can last three to six months, and want to sell your home when it ends to increase your cash reserves? How long will you have to wait? First, let’s talk about what a Chapter 7 bankruptcy is and how that will impact your goals to sell the home.
What Is Chapter 7 Bankruptcy?
Filers can declare two types of bankruptcy: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is often referred to as a liquidation, while a Chapter 13 bankruptcy is considered a reorganization. With Chapter 7, you are putting your personal property at risk of being sold to pay back your debtors.
Some possessions are exempt—for example, Texas bankruptcy laws protect your primary residence from seizure, except in the case of your mortgage company or another party with a lien. However, many of your possessions, including vehicles, homes, jewelry, collectibles, and money in bank accounts, could be put up for sale.
In the meantime, the court pauses all your debt payments and immediately stops all foreclosure proceedings. Once the appropriate properties have been sold and the debtors paid back to the satisfaction of the bankruptcy trustee, all remaining debt will be forgiven completely.
Who Is Involved in Chapter 7?
When you file for bankruptcy discharge through Chapter 7, multiple parties are involved. You, the debtor, will be involved, as will a bankruptcy attorney if you seek legal assistance. The following parties will also play a role as you go through this process of debt relief.
Bankruptcy Trustee
The bankruptcy trustee is in charge of your bankruptcy estate. That means they assess your situation, determine what nonexempt properties will be sold, and carry out that process. Some exempt properties may have a higher value than the exempt amount, and in that case, the trustee could sell them, too.
The trustee is a bankruptcy court representative. In most cases, you will only have contact with them, not the judge.
Bankruptcy Court
Each district has its own bankruptcy court to assist individuals in financial distress. The court initiates the bankruptcy proceedings and suspends all outstanding debt payments. The court also appoints the trustee. If you are filing for Chapter 7 bankruptcy, you will need to attend a bankruptcy hearing during which your trustee (a representative of the court) will ask you questions about your financial situation.
Once the trustee has sold off all eligible property to debtors, the court will then discharge any remaining debt. Some debts cannot be discharged after you have filed for bankruptcy, such as alimony, child support, court fees, and tax debts.
How Soon After Chapter 7 Can I Sell My House?
If the house is not part of the sellable assets, you can sell it after the bankruptcy discharge. So as long as Chapter 7 has been closed and an order closing your case has been entered, you can sell your home at any time.
If you retain your house after the discharge process, you could sell it to get some cash for a fresh start. The Texas Homestead Exemption protects your primary residence from being seized by creditors, so you may actually keep the equity you have and sell it later.
However, Chapter 7 does not eliminate the lien on your home. It only means you cannot be sued for the difference between your remaining mortgage balance and the home’s real market value.
Selling After Bankruptcy Discharge vs. Closure of the Case
There is a difference between discharge and the end of the bankruptcy case. If you do not wait for the case to be closed entirely, the trustee could seize your proceeds from the sale to pay back debtors. However, if you can hold off even longer until the case is closed, the proceeds will not be at risk of being taken.
If you are selling after bankruptcy with the hopes of buying a new home, you may find the process quite difficult. Your credit score will take a big hit after bankruptcy, and your mortgage lender may consider you a risky borrower. Instead, you may need to search for a government-backed mortgage loan, such as an FHA home loan from the Federal Housing Administration or a USDA home loan from the Department of Agriculture.
Summary
Bankruptcy is usually a last resort for individuals in heavy debt, especially a Chapter 7 proceeding. If you are the legal owner of your house, it could be an asset used to pay off your debts, depending on the mortgage balance remaining and your equity. It is often confusing to decide when to sell your house if you plan to file for bankruptcy.
Most experts agree that the best course of action is selling the house after the process is completely closed. Doing so before may make the proceeds eligible for the trustee to use to pay back debtors. During the process itself, the home could be sold if it isn’t protected by the homestead exemption. If you are unsure how to proceed with your bankruptcy filings and selling your house, consult an experienced bankruptcy attorney.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
