Will the Trustee Sell Your Home in a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is a liquidation. The Chapter 7 bankruptcy petitioner is entitled to keep certain assets up to a certain value, which are called exemptions. The bankruptcy trustee sells everything else to pay unsecured creditors. A trustee will only sell your home if the remaining unencumbered equity — after subtracting the mortgage and other loans secured by the property, all other liens and whatever exemptions you can apply to the home — exceeds the cost to sell the property. To determine whether you can keep your home, you must do 3 things:

  1. determine the unencumbered equity in your home, which is its fair market value minus any loans, especially the mortgage, securitized by the property, and any liens;
  2. determine what exemptions, particularly the homestead exemption, can be applied to your home, and for how much;
  3. subtract your total exemption amount determined in step 2 from the unencumbered equity determined in step 1.

If the above result is less than the cost to sell your home, then you can keep your home. If they are about equal, or a little more, then the costs of selling it would probably deter the trustee from selling it to pay unsecured creditors, since there would not only be little for the creditors, but there would not be much of a fee for the trustee, since the trustee is paid a percentage of what is left. (Trustees are paid on a sliding scale. See Bankruptcy Trustee for more information.)

If the equity is much more, then the trustee will sell your home. The proceeds of the home sale will be allocated in the following order:

  1. To pay off the mortgage and other loans secured by the property, and all priority lienholders.
    1. A priority lien is for a debt that is not dischargeable by bankruptcy, and includes child and alimony support and attorney fees incurred as the result of the case.
  2. Pay you your exemption amount.
  3. Pay off all other lienholders, which can include mechanics' and tax liens (More on liens: Secured Debts).
  4. Pay unsecured creditors with what is left. The trustee also gets a percentage of this amount.

All of the following assumes that you are not behind in your mortgage payments, and are continuing to pay your mortgage. Otherwise, the bank (or other mortgage holder) can foreclose on your property. Because it is secured property, the automatic stay will not prevent this, so there would be no need to read further.

Calculating Your Unencumbered Home Equity

The 1st step you must take is to determine your home's fair market value. If you recently gotten an appraisal, and real estate prices are not rising rapidly in your area, then you can use that. Otherwise, a few websites can give you a good idea of your home's worth, and can provide recent actual sales figures for comparable homes in your area. Since home prices are changing rapidly in some areas, it would be wise to determine your home's fair market value right before you file for bankruptcy. These websites can help you to determine your home's market value:

Get values from several of these sites, especially if the results will make it difficult to determine if the trustee will sell your property, and take their average. There is a good chance that the trustee will also use these sites since they are quick and convenient.

The 2nd step is to subtract the remaining amount of the mortgage and any other loans secured by the property. If you do not know what the values are, you can call your lender for the payoff amount.

The 3rd step is to determine the unencumbered equity by subtracting all liens, if any, on your home from its fair market value. Liens can arise from mechanics liens, court judgments, unpaid taxes, and child support debts.

There is 1 caveat regarding liens. Filing a lien must be done properly, according to regulations. If the lien is improperly filed by the lienholder, which often happens, the trustee can have it removed, freeing up some equity. However, if the amount of the lien is small, you probably won't have to worry about this.

To summarize:

Unencumbered Home Equity = Fair Market Value - Payoff Amount of Loans Secured by Property - Amount of All Remaining Liens

If unencumbered equity is zero or less, or it is less than the cost to sell it, then you will not have to worry about losing your home, so you do not need to go any further.

However, if your unencumbered equity is greater, then you need to determine if you can use the homestead exemption or a wildcard exemption to protect your home, which is next: Can You Use the Wildcard or Homestead Exemption to Save Your Home?.