I’m often asked whether a client can sell his or her (or their) house while they’re in a bankruptcy.
The answer is, “Yes,” but it isn’t quite that simple.
Once someone files for bankruptcy relief, whether under Chapter 7, Chapter 11, Chapter 12 or Chapter 13, something called the Bankruptcy Estate is created. The Estate consists of all assets owned by the person at the time they file, and in Chapter 11, 12 and 13 cases, income they receive for some or all of the time their case is open. (Income that is not earned until after the case is filed is *not* part of the Estate in Chapter 7 cases.) So if you own a house when you file, it’s part of the Estate.
What does this mean? It means that the Bankruptcy Court has control over it. In a Chapter 7 case, the The Chapter 7 Trustee can sell it to get money to distribute to your unsecured creditors. The Chapter 13 Trustee can’t sell it, but will consider its equity in computing the Chapter 13 Plan payment. It also means that, because the Bankruptcy Court has control, you must get Court approval before selling the house.
How do you do this? By filing a Motion to Sell with the Court. The Motion to Sell lets the Court determine what happens to the proceeds from the sale, makes sure that the terms, conditions and expenses of sale are reasonable, and lets it oversee the process. It typically takes about 30 days from the date the Motion is filed until it is granted.