Can I Sell My House While in Chapter 13 Bankruptcy?
Filing for bankruptcy is one of the scariest life events. And for good reason. You might be worried about losing control over your finances. You're also anxious about having a black mark on your credit report for years to come.
You also have a lot of questions: Are you going to lose everything you've worked so hard for? Will you have to sell your home in order to pay off your debts? Is it even possible to sell your home in the middle of a bankruptcy?
It's natural to get overwhelmed and fearful about the future, and in this guide, we'll walk you through the process so you can be armed with the right information.
Will Filing for Bankruptcy Solve Your Financial Woes?
Whatever thoughts you might have about bankruptcy, it is actually beneficial for you when you're faced with devastating debt issues and left unable to make your mortgage payments. As a matter of fact, the goal of a bankruptcy is to give you a chance at a fresh start, rather than bring you down to your knees.
According to Gustan Cho Associates, there are two types of bankruptcy filings available for individuals: Chapter 7 (straight liquidation) and Chapter 13 (repayment plan bankruptcy).
Will you lose your house? That depends on which bankruptcy you file.
What Is a Chapter 13 Bankruptcy?
A chapter 13 bankruptcy is a way to consolidate and restructure debt which you need to pay within three to five years. Not everyone can file for a Chapter 13 relief, and in order to be eligible, you must meet the following requirements:
- a regular income, and hence the financial means to make the payments;
- secured and unsecured debts must be less than $2,750,000 in total
Whereas in a Chapter 7 bankruptcy borrowers are required to surrender their home, in a Chapter 13 bankruptcy filing, you are not at risk of losing your home. If your mortgage lender has initiated foreclosure against you, filing a Chapter 13 bankruptcy halts this process.
After you file, an automatic stay is ordered on your assets and temporarily prevents collection actions from creditors. The bankruptcy court then appoints a trustee to manage the estate and make important financial decisions such as giving trustee approval on a home sale. This doesn't exempt you from making timely payments on your mortgage, however.
Pro-tip: Before filing for Chapter 13, consult a bankruptcy lawyer to analyze your debt and assets and help you decide on a course of action. Who knows, it might even be a free consultation!
Do You Need a Bankruptcy Attorney?
Yes. A Chapter 13 bankruptcy is complicated, with a truckload of paperwork that can be way out of your league. With a bankruptcy attorney by your side, they'll be in charge of handling the following:
- compile a list of your creditors and amounts owed to each of them;
- help you work out a repayment plan in paying off your creditors;
- coordinate with the trustee on matters regarding your estate;
- file the appropriate motions and draft the necessary documentation relating to your Chapter 13 bankruptcy; and,
- work with mortgage lenders and the bankruptcy court for a possible refinance transaction or a new home purchase that requires the court to approve.
What Is the Role of a Chapter 13 Bankruptcy Trustee?
The bankruptcy trustee is appointed by the bankruptcy court to manage your assets and deal with your creditors. A trustee is in charge of making decisions that makes financial sense concerning the estate, and when you decide to sell your home in the middle of your bankruptcy proceedings, you won't be able to sell unless the trustee approved of it.
Additionally, under a Chapter 13 bankruptcy protection, borrowers have no direct contact with creditors. Instead, a neutral intermediary--a bankruptcy trustee--will be the one to make payments on the behalf of the borrower.
How Long Will a Chapter 13 Bankruptcy Stay on Record?
A chapter 13 bankruptcy will stay in your credit report for seven years, but since there is a repayment plan, you'll be able to build your credit back faster and ultimately hasten your financial recovery.
Can You Sell Your House During a Chapter 13 Bankruptcy?
Yes. Remember, Chapter 13 doesn't shield existing homeowners from mortgage liens, and since you've declared bankruptcy, it would be sensible to just sell the house and use the proceeds to chip away, if not entirely clear your debts. Since you retain ownership of your property in a Chapter 13, you don't have to wait for your bankruptcy to close before you can go about selling your house.
Steps in Selling Your Home During a Chapter 13 Bankruptcy
Notify Your Bankruptcy Attorney About Your Intention
Before selling your house, the first person you need to inform is your bankruptcy lawyer, who will then contact the trustee about your intention to sell. If you're selling with a real estate agent, you must inform them and the buyer about your Chapter 13 status.
Obtain Permission From the Bankruptcy Trustee
Your bankruptcy attorney will file a motion to sell which contains the following information:
- the home's value backed by a professional home appraisal;
- the home sale price; and,
- the distribution proposal for the proceeds obtained from the sale.
Your lawyer will also draft a contingency into the contract agreement that the sale would push through once trustee approval is obtained.
Usually, the proceeds from the sale will be used to service priority debts including child support, alimony, taxes, and secured debts, or those with collateral held by the mortgage holder, such as your mortgage and your car loan.
The trustee will review this motion. If it makes financial sense, the trustee will approve the home sale and grant you permission to proceed.
Look for a Buyer to Cover the Mortgage Balance
Selling your house while in Chapter 13 is similar to a traditional sale--with a little extra paperwork. Nevertheless, you can go about it in three ways:
- sell with real estate agents (and pay their hefty commissions);
- sell the house yourself (and do all the legwork); or,
- sell to a cash buyer (and walk away from the sale with money in your pocket without needing to pay commissions and closing costs).
In any of the three, the trustee must approve for the sale to go through.
Get the Statement of Sale and Submit It to Your Bankruptcy Trustee
Once the motion is approved, the sale finalized, and the money and the property has changed hands, you must get a statement of sale and submit it to the trustee.
The statement of sale outlines the following information:
- the home's final sale price;
- closing costs that were deducted; and,
- any funds left over, if any.
Discharge Your Bankruptcy Status
In the case of an extremely profitable sale or if you have built up significant equity, you can get ahead of your repayment plan. It might be possible to pay back your creditors immediately and cure your bankruptcy status. If this is the case, you will receive a discharge on your Chapter 13, signed by a bankruptcy judge.
This is a final decree that indicates that you're free of your bankruptcy status at last.
Mortgage Loan Programs Available During a Chapter 13 Bankruptcy
So, you have successfully sold your house and made enough money that you're able to free yourself from the shackles of bankruptcy. Of course, you'd need to get a new home--stat!-- especially if you have a growing family.
But how do you go about it when you have hurt your credit score?
Fortunately, there are loans that borrowers qualify for even before the bankruptcy is discharged. In many instances, you can even get approved for a loan while you are still in the middle of your repayment plan.
FHA and VA Loans
The FHA has financially friendly loan programs to accommodate aspiring homeowners with low credit scores. If you qualify, you may only be required to pay a 3.5% down payment on the purchase of your new house.
On the other hand, if you or your spouse is in the military, you may qualify for a VA loan with no down payment and no private mortgage insurance requirements.
USDA Loans
If your home purchase is in a rural area (possibly because of a job relocation), you might qualify for a USDA mortgage with zero money down. Contact them or check their website for more details.
Closing Thoughts: Should You Sell Your Home While in Chapter 13 Bankruptcy?
A Chapter 13 Bankruptcy can be a scary prospect, but in many instances, existing homeowners can get away with only a few financial scrapes and bruises that are certainly recoverable.
Selling your home while in Chapter 13 can aid in your financial recovery, and here at House Buyer Network, we can help you do just that!
Fill in our form with your property details and email address. Include your phone number for a faster response, and expect a fair, no obligation cash offer from us within 24 hours!
If you have any questions, you're welcome to call us at (855) 835-2544 for a free consultation regarding selling your home while in Chapter 13!
