Selling Your House in Bankruptcy: California Rules & Options Explained

Selling Your House in Bankruptcy: In numerous instances, you can shield the sales proceeds briefly, yet ensuring their safety entails reinvesting in a new homestead. Updated by Cara O’Neill, Legal Advisor · University of the Pacific McGeorge School of Law. When you sell your home shortly before initiating a Chapter 7 bankruptcy, ensuring the protection of proceeds hinges on whether your state offers a homestead exemption tailored for this purpose. Typically, it’s wiser to postpone the sale until after your bankruptcy concludes

Protecting Property With Exemptions

In a Chapter 7 case, relinquishing property is often necessary in exchange for debt forgiveness. The bankruptcy trustee, appointed by the court, oversees the sale of assets to repay creditors.

However, this doesn’t mean you’ll be left without essentials. Certain assets crucial for your fresh financial start, like a modest vehicle, clothing, household items, and, in many states, a portion of your home equity, can be safeguarded. Many individuals retain ownership of all their essential possessions.

Ultimately, the specifics of what you can keep, or “exempt,” are determined by your state. Understanding your state’s exemption statutes will clarify which properties are protected. Any assets not covered by exemptions are deemed “nonexempt property.” For further insights, explore “Bankruptcy Exemptions: An Overview.”

How Is a Homestead Exemption Used in Chapter 7?

A homestead exemption shields the equity in your residence. Though nearly all states offer a homestead exemption applicable in bankruptcy proceedings, the extent of protection varies significantly. Certain states limit protection to $10,000 or less, while others extend safeguards of up to $500,000, with a select few ensuring full protection of your home. However, the majority fall within a range in between these extremes.

What Happens If You Can’t Exempt All Home Equity in Chapter 7 Bankruptcy?

Homeowners with substantial home equity may encounter challenges in safeguarding the entire amount, potentially facing the risk of losing their homes if unable to exempt the full equity. In cases where a sale yields profits for creditors, the Chapter 7 trustee typically arranges for the sale of the property. Following the settlement of the mortgage, the trustee disburses the exempted amount to you and utilizes the remaining proceeds to satisfy other outstanding debts.

For those grappling with this predicament and aiming to retain ownership of their homes, exploring Chapter 13 bankruptcy may offer a viable alternative. Eligible individuals can opt for Chapter 13, provided they meet all criteria, including the capacity to address any nonexempt equity and overdue payments through a structured Chapter 13 repayment plan.

Selling Your House in Bankruptcy

Exempting Proceeds After Selling Your Home

If you intend to sell your home shortly before initiating a Chapter 7 bankruptcy case, it’s crucial to verify whether a homestead exemption (or other relevant law) explicitly covers the proceeds, or if another exemption safeguards the funds. Typically, exemptions designed to protect proceeds from a sale afford a window of six months to two years to reinvest the proceeds into another home purchase.

However, despite the apparent availability of this option, seeking guidance from a local bankruptcy attorney is advisable. Varying interpretations of the law by the bankruptcy trustee or court, or potential disagreements regarding your reinvestment intentions, could result in costly legal disputes.

What Happens If You Sell Your Home Without Protecting the Equity Before Filing for Chapter 7 Bankruptcy?

Consider this: Imagine you’ve sold your home through Sell Quick California and set aside the proceeds in a savings account for your next property purchase. But if you file for Chapter 7 bankruptcy and realize that your funds aren’t exempt under homestead or other provisions, you could risk losing them.

Typically, bank account funds aren’t shielded by specific bankruptcy exemptions, and even if they are, the protected amounts are often quite low, sometimes as little as $500 or less. While wildcard exemptions offer some flexibility, not all of them cover deposit funds or cash, and the available amounts vary widely.

Moreover, Chapter 7 filers can’t simply withdraw their bankruptcy petition if issues arise. The court may refuse dismissal if it’s in the creditors’ best interests to continue, especially if there are funds available for distribution.

When safeguarding substantial equity, it’s wise to consult a local bankruptcy attorney well-versed in your court’s procedures. The minimal cost of such a consultation, aimed at understanding how to sell your home securely, pales in comparison to potential losses and is a small price for peace of mind.

Selling Before Bankruptcy: A Strategy for Quick Relief

Sell Quick California knows that waiting until after your bankruptcy to sell your home can offer significant benefits. Most courts agree that once your bankruptcy case closes, the trustee cannot claim the proceeds from your home sale. This strategy often proves to be the most advantageous. However, to retain your home during bankruptcy, you must meet certain criteria, including exempting the equity and staying current on your mortgage payments.

If you’re fortunate to live in a state like California that allows you to exempt your entire homestead, selling your home could provide you with enough funds to purchase a new home outright, without the need for financing. But for many debtors, this may not be the case. While the proceeds from the sale might be sufficient for a down payment on a new home, the damage to your credit from bankruptcy could hinder your ability to secure a mortgage.

When Can You Purchase a Home After Chapter 7 Bankruptcy?

Typically, it takes about two years after your bankruptcy discharge to qualify for an FHA mortgage, provided you can demonstrate a qualifying hardship. Conventional mortgages may take even longer to become accessible to you.

Because lending criteria may change, it’s wise to consult with a mortgage specialist to assess your situation. Learn more about purchasing a home after bankruptcy and explore your options.

Speak With a Bankruptcy Attorney State exemption laws vary greatly, and courts may interpret these laws differently when it comes to home sale proceeds. If you’re considering selling your home before filing for bankruptcy or planning to sell soon, it’s crucial to seek guidance from a knowledgeable consumer bankruptcy attorney. They can provide insights into how a bankruptcy court in your jurisdiction is likely to treat the proceeds from your home sale.

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Marc Afzal- Real Estate Investor

Marc Afzal is a full time Real Estate Investor and has well over 21+ years in the Real Estate Industry. Marc is a Licensed Broker, NMLS licensed Loan Officer. Marc is currently married to his wife Sheila and they live in Napa California. Marc is enthusiastic about Sports, Golf, Real Estate Investing, Family and Travel.

About Marc Afzal

Marc Afzal is a full time Real Estate Investor and has well over 21+ years in the Real Estate Industry. Marc is a Licensed Broker, NMLS licensed Loan Officer. Marc is currently married to his wife Sheila and they live in Napa California. Marc is enthusiastic about Sports, Golf, Real Estate Investing, Family and Travel.

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