Selling Your House While in Chapter 13: What You Need To Know

Selling a house while in the midst of a Chapter 13 bankruptcy can seem like a daunting task. Many homeowners under bankruptcy protection might wonder if it’s even a possibility to do so. The good news is that, yes, it is possible to sell your house during bankruptcy. However, there are certain steps that need to be followed, as well as potential hurdles to be aware of. This guide aims to shed light on the process of selling your home while navigating a Chapter 13 bankruptcy. From understanding the legal implications to preparing your home for sale, we’ll walk you through the entire process, offering practical advice from a home seller’s perspective. Our objective is to empower you to make informed decisions that will help you get out of debt and move on to a stronger financial future.

Chapter 13 vs. Chapter 7 – What’s the Difference?

To fully comprehend the process of selling a house during bankruptcy, it’s crucial to understand the distinctions between Chapter 13 and Chapter 7 bankruptcy. These two legal options, while both aimed at providing relief to individuals facing unmanageable debts, operate in fundamentally different ways and impact the property you own in different manners. The choice between Chapter 13 and Chapter 7 bankruptcy can significantly influence your ability to sell your home and the steps involved. This section will delve into the key differences between Chapter 13 and Chapter 7 bankruptcy, how they impact homeownership, and the implications for those considering selling their house. Armed with this knowledge, you will be better equipped to navigate your financial journey.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, also known as a wage earner’s plan, allows individuals with regular income to create a plan to repay all or part of their debts. Under this type of bankruptcy, debtors propose a repayment plan to make installments to creditors over a period of three to five years, depending on their income levels. If your income is less than the state median, the plan will be for three years unless the court approves a longer period. If your income is higher than the state median, the plan generally must be for five years.

One of the significant advantages of Chapter 13 is that it offers an opportunity to save your home from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. However, they must still make all due mortgage payments during the Chapter 13 plan on time.

Chapter 13 also has a special provision that protects third parties who are liable to the debtor on consumer debts, such as co-signers on a mortgage, from collections action during the bankruptcy proceedings. This provision may protect those who have co-signed on your home loan, offering them relief while you work through your financial situation.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, sometimes referred to as “liquidation bankruptcy,” is a legal process that can help individuals eliminate some or all of their debt. In contrast to Chapter 13 bankruptcy, which involves setting up a repayment plan, Chapter 7 bankruptcy involves the sale of certain debtor’s assets to pay off existing creditors.

In a Chapter 7 bankruptcy, a trustee is appointed to take over your assets. Not all assets are available to repay creditors. Some are protected, or “exempt,” under state and federal law. Exempt assets often include your primary residence, a modest car, and necessary items for living and working. The trustee will sell any non-exempt assets and use the proceeds to pay your creditors according to the priorities set by bankruptcy law.

One key point to remember about Chapter 7 bankruptcy is that while it can wipe out many debts, such as credit card debt and medical bills, it doesn’t eliminate all types of debt. For instance, you’ll still be responsible for paying alimony, child support, certain tax debts, and most student loans.

More importantly for homeowners, filing under Chapter 7 may also mean that you have to give up your home. If there’s significant equity in your home that isn’t covered by your exemption, the trustee appointed in your case will sell your home to repay creditors. If your equity is fully exempt, you may be able to keep your home.

In sum, though Chapter 7 bankruptcy can provide a fresh start, it’s important to consider the potential implications for homeownership before making this decision.

The Differences Between Chapters 7 and 13

While both Chapter 7 and Chapter 13 bankruptcy can provide relief to those burdened by unmanageable debt, they do so in unique ways and have varying impacts on your assets, particularly your home.

Chapter 7 bankruptcy, the ‘liquidation bankruptcy’, may cause you to lose your home if the equity exceeds the allowed exemption limits, as it could be sold to repay your creditors. This might be a suitable option if you have minimal to no equity in your home, or you’re willing to move out and start afresh. It’s also worth noting that Chapter 7 allows for the discharge of qualifying debts without requiring a repayment plan, which could be beneficial if you have little to no disposable income.

On the other hand, Chapter 13 bankruptcy, or the ‘wage earner’s plan’, enables you to keep your home by incorporating your mortgage arrears into a repayment plan extended over three to five years. This plan might be a good fit if you have a reliable income and want to keep your home, but you’re struggling to keep up with your current debt payments.

However, under Chapter 13, you’re required to pay your disposable income towards your debts, which might lead to a tighter budget for daily living expenses. It’s also important to note that while Chapter 13 can halt foreclosure processes, you must consistently meet your repayment plan and any ongoing mortgage payments that fall due during the bankruptcy plan, or you risk losing your home.

Both options have their pros and cons, and the right choice depends on your individual circumstances, including your long-term financial goals, your income stability, your equity in the home, and your willingness to commit to a repayment plan. Always consult with a knowledgeable bankruptcy attorney to understand these implications fully and to make an informed decision.

Bankruptcy – Impact on Credit

When it comes to bankruptcy, understanding the impact on your credit is crucial. It’s essential to note that both Chapter 7 and Chapter 13 bankruptcy will have significant effects on your credit score, but they do so in different ways.

Chapter 7 Bankruptcy Impact on Credit

Chapter 7 bankruptcy can eliminate the majority of your debts, but it comes with hefty credit consequences. It remains on your credit report for 10 years from the filing date, making it more challenging to secure credit during that time frame. Lenders may see you as a high-risk borrower due to the bankruptcy filing. Additionally, any assets sold to pay off debt, including potentially your home, are also recorded, which could further lower your credit score.

Chapter 13 Bankruptcy Impact on Credit

On the other hand, Chapter 13 bankruptcy, while still negatively impacting your credit, does so for a lesser duration. It stays on your credit report for seven years from the filing date. This type of bankruptcy allows you to repay your debts and potentially keep your assets, including your home, which could have less of a negative impact on your credit score in the long run.

In both cases, it’s important to note that the impact of bankruptcy on your credit decreases over time. Moreover, displaying responsible financial behavior following the bankruptcy can help rebuild your credit score, regardless of the type of bankruptcy you file under. These behaviors could include making timely payments on any remaining or new debts, maintaining a low balance on credit cards, and avoiding taking on new debt unnecessarily.

In conclusion, while both Chapter 7 and Chapter 13 bankruptcy will undoubtedly impact your credit, the severity and duration of the impact vary. It’s important to consider these implications when deciding which type of bankruptcy is the most appropriate for your situation.

Can You Sell a House While Filing for Bankruptcy?

Yes, it is possible to sell your house while filing for bankruptcy, but the process varies depending on whether you’ve filed for Chapter 7 or Chapter 13.

In a Chapter 7 bankruptcy, your assets, including your house, are technically under the control of the bankruptcy court from the moment you file your case. To sell your property during this time, you will need to obtain permission, or “motion for authority to sell real property,” from the bankruptcy court. The court will usually approve your request if the sale is in the best interest of all parties involved and doesn’t harm your creditors.

In a Chapter 13 bankruptcy, you also need to obtain permission from the court to sell your house. However, the proceeds from the sale might be used to pay off your Chapter 13 repayment plan. It’s important to note that you can usually keep the exempt portion (if any) of your home equity, and apply it towards purchasing a new home.

In both cases, it’s highly recommended to work with an experienced bankruptcy attorney to guide you through the process. They will help you understand how the sale of your home will impact your bankruptcy case, and ensure you follow all required legal procedures to avoid any complications.

What Happens if I Sell My House During Chapter 13

If you decide to sell your house during a Chapter 13 bankruptcy, there are several factors to consider. First and foremost, any sale conducted during a Chapter 13 plan must be approved by the court. Once your house is sold, the proceeds from the sale are typically applied toward your bankruptcy repayment plan.

However, depending on specific state exemptions and the amount of equity in your home, you might be entitled to keep a certain portion of the sale proceeds. This amount can often be used towards purchasing another, more affordable home, allowing you to start anew while still managing your repayment plan.

It’s important to remember that selling your home during a Chapter 13 bankruptcy can have implications for your repayment plan. For instance, if your home sells for more than expected, this surplus may need to be included in your repayment plan, potentially increasing the amount you are required to pay back to your creditors.

Finally, while selling a home during a Chapter 13 bankruptcy is certainly possible, it can be a complex process. Always consult with an experienced bankruptcy attorney to ensure you understand the potential legal and financial implications. They can guide you through the process and help make the transition as smooth as possible.

How to Sell a House While Filing for Bankruptcy

Selling a house while filing for bankruptcy is a complex process, but with the right guidance, it can be navigated smoothly.

1. Consult With a Bankruptcy Attorney: This should always be your first step, as selling a house during bankruptcy is not just a real estate transaction—it has legal and financial implications that need to be considered.
2. Get an Appraisal: You need to know the value of your home before you put it on the market. Hire a professional appraiser to get an accurate valuation of your property.
3. File a Motion with the Bankruptcy Court: Whether you’ve filed for Chapter 7 or Chapter 13 bankruptcy, you will need to file a “motion to sell” your property with the bankruptcy court. This motion should include details about your property, the proposed sale price, terms of the sale, and the proposed distribution of the sale proceeds.
4. Wait for Approval: After the motion to sell is filed, the bankruptcy court will decide whether to approve the sale. The court will consider the best interests of all parties involved, including your creditors.
5. Market Your Property: Once you get the court’s approval, you can officially list your property on the market. It’s advisable to work with a reputable real estate agent to ensure you get the best deal.
6. Close the Sale: Upon accepting an offer, the closing process begins. This will involve paying off any outstanding liens or mortgages, and Tennessee property taxes, transferring the title to the new owner, and applying the remaining proceeds to your bankruptcy repayment plan. Find out how to calculate your property tax.
7. Report Sale Proceeds: After the sale, it’s crucial to report the proceeds accurately to the bankruptcy court and trustee. This will affect your repayment plan and could lead to changes in the plan, depending on the amount you gained from the sale.

Remember, while it’s possible to sell your home during bankruptcy, you should always consult a bankruptcy attorney to ensure you’re making the best decision.

Things You Need to Know When Selling a House During Bankruptcy

When selling a house during bankruptcy, there are several crucial factors you need to consider:

1. Legal Implications: Selling your home during bankruptcy is a legal process that requires court approval. Failing to adhere to the proper procedures can lead to complications in your bankruptcy case.
2. Bankruptcy Type Matters: The bankruptcy chapter you’ve filed under, either Chapter 7 or Chapter 13, will significantly impact the process and how the proceeds from the sale are handled.
3. Home Equity: If your home has substantial equity, it might be used to pay off your creditors. However, in many cases, a portion of your home equity may be exempt, allowing you to retain some of the proceeds from the sale.
4. Professionals are Key: Partnering with experienced professionals such as bankruptcy attorneys and real estate agents can be crucial to navigating this process smoothly and successfully.
5. Debt Discharge: Selling your house during bankruptcy doesn’t necessarily mean all your debts will be discharged. If your home sells for more than the outstanding mortgage and homestead exemption, the surplus might be used to pay off unsecured debts.
6. Impact on Credit Score: Selling your house during bankruptcy will likely affect your credit score. However, the impact may be less severe than if you had lost your home through foreclosure.
7. Right to Reside: You generally have the right to reside in your home until the sale is completed, even during bankruptcy. This allows you to find alternative accommodation without being forced to vacate immediately.

Remember, every bankruptcy case is unique, and this list doesn’t cover all the possible considerations. Consult with your bankruptcy attorney for advice tailored to your specific situation and circumstances.

Conclusion

Bankruptcy is undoubtedly a challenging and stressful process, but there may be alternative options to consider. If you find yourself contemplating bankruptcy due to overwhelming debt, selling your house fast might be an effective solution.

Companies specializing in quick home sales can provide you with a reasonable cash offer within days, allowing you to pay off your debts and start anew. Such a move could help you avoid the complex legal procedures, long-term credit implications, and emotional stress associated with bankruptcy.

Remember, the journey to financial freedom is a step-by-step process, and exploring all your options, such as a quick home sale, is an integral part of this journey. Always consult with a financial advisor or attorney to discuss the best course of action for your unique situation.

If you need to sell your house fast in Nashville, TN, contact Nexus Homebuyers today! We buy houses in Knoxville, and Nashville, TN. You can also sell your house as is with no need for repairs. Nexus Homebuyers offer cash offers in as little as a day, allowing you to pay off your debts and move on with your life. We will take care of all the paperwork and make sure you get a fair deal that allows you to walk away from this process debt-free. Visit our website or give us a call today!