Can I Sell Real Property While In Chapter 13 Bankruptcy?

Yes, you are allowed to sell real property while in a Chapter 13, but your bankruptcy attorney needs to get a written order from the bankruptcy court allowing the sale.

The first step is to get a signed contract for the sale of the property.  You need to make sure that you add a clause in the contract that the sale is contingent on receiving bankruptcy court approval.  This is necessary because if the Bankruptcy Court Judge decides you cannot sell the property at the terms proposed in the contract, you could be held in breach of contract if the contingency is not part of the contract.  Since this would be a post-petition debt, it would not be dischargeable in the bankruptcy. 

The next step is to give the signed contract to your bankruptcy attorney and let them know the name of the attorney who will be handling the closing for you.  (Many bankruptcy attorneys limit their legal work to only bankruptcies.)   In order to prepare the motion to sell, the bankruptcy attorney also needs to know the proposed closing costs, attorney fees and realtor fees so that the Judge can approve everything that needs to be paid from the sale. 

If the house is being sold for more than the amount owed against it and all closing costs,  you may be entitled to keep the excess funds to the extent allowed by your states’ homestead exemption if you claimed the exemption on Schedule C of your bankruptcy petition. (In New York State the homestead exemption is $50,000).  This, of course, will only apply to your residence.  Be aware, however, that the Chapter 13 Trustee may take the position that even if the funds are exempt, they still may be considered “disposable income” and he or she may demand that all of the excess funds be funded into the plan.  A common error is thinking that if you have excess funds to send to the Trustee, you can pay off the plan early at the percentage to creditors listed in the confirmation order.  This may not be allowed, because the Trustee will consider these excess funds to be additional “disposable income” and require that they be funded into the plan IN ADDITION TO the regular monthly payment.  If that is the case, the unsecured creditors get a higher percentage than originally stated in the confirmation order. 

Be sure to let your bankruptcy attorney know about your desire to sell your property early in the process.  He or she will advise you as to how a sale will affect your Chapter 13, and how your Chapter 13 will affect the proceeds of the sale.

A motion to sell property needs to be noticed to all creditors at least 20 days prior to the scheduled Court date.  Therefore, if time is an important factor, (for example, if the buyers mortgage commitment is for a limited time), be sure that your bankruptcy attorney has enough time to get the Court date scheduled in time. 

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