Listing your house for sale at the same time that you are filing for bankruptcy involves a number of issues, and the answer to the question is a case by case basis. Can you do it? Probably. Should you do it? That needs to be answered by an attorney in your area.
Your bankruptcy attorney can help you get approval for the sale if an offer comes through. In order to get bankruptcy court approval to sell the property, a motion must be filed with the court since you can’t sell it without court permission.
If a listing agreement is signed before filing bankruptcy, you need to tell your bankruptcy attorney about it so that it can be disclosed in your bankruptcy petition. If you file for bankruptcy, you can reject the listing contract if you want. You may want to continue with the listing, or list it after the bankruptcy is filed. Your attorney may recommend special language to protect you to include in your listing agreement, as well as in any offer you want to accept.
If the offer is a good and fair offer, then the court will likely allow the sale so long as the proceeds are distributed according to the law. If your house is sold, mortgage and liens must be paid. If there is equity above the liens, you may be able to keep some or all of the proceeds. You can keep what is exempt under your state’s laws in your bankruptcy, but any overage may go to the bankruptcy court to be distributed to your creditors. Whether the sale is wise or not is another issue you need to talk to your lawyer about.
In some states, like North Carolina, you may be able to keep more of the sale proceeds if you own and live in the house at the filing date, and it qualified for the homestead exemption. If so, it might be advisable to sell after a bankruptcy case is filed, not before. While some states allow the homestead to apply to money from the sale of a residence, not all do, so you really need a lawyer in your area to talk to you about this.
Some situations are better if the property is sold before filing, because the sale won’t need to be approved if a case hasn’t been filed. However, bankruptcy courts will review any transfers and sales of property that happen before filing, so it is a good idea to run any idea before your bankruptcy lawyer first to make sure you aren’t opening yourself up to problems in a later filed bankruptcy case.
Another consideration about selling a house before filing for bankruptcy is the the Means Test. Owning a house and paying a mortgage may help you pass the Means Test. Some people will pass the Means Test with their house, but fail it without it. Again, you need to speak to a lawyer to know if you will be affected if your living situation and/or mortgage payments change.
by Susanne Robicsek, Charlotte NC Bankruptcy Lawyer
See also Having Problems With Your Mortgage And Thinking Of Selling Your House? August 23, 2008 on Mortgage Law Network by Susanne Robicsek, Charlotte NC Bankruptcy Lawyer
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Last modified: October 22, 2012