In Chapter 7 bankruptcy, the bankruptcy trustee will sell your home if there is significant nonexempt equity. The trustee will use the proceeds to repay your creditors. (To learn more, see Your Home in Chapter 7 Bankruptcy.)
Here's the how the mechanics of the sale go if the trustee sells your home in the bankruptcy.
Under most circumstances, the bankruptcy trustee will take the same steps to sell your house as you would. The trustee will list the property for sale with a real estate broker and negotiate a price with a buyer.
However, the trustee must go through a few additional hoops:
Trustees generally sell homes free and clear of liens, with a court order allowing liens to attach to the sale proceeds. This gives the buyer clear title by removing all of the liens from the property and transferring them to the money received in the sale. This allows any disputes as to the position of various lien holders or the validity or amounts of their interests to be sorted out by the court afterward, without delaying the sale. If there are no disputes, the lien holders are paid, any exemptions you claimed in the property are disbursed to you, and the remainder is used by the trustee to pay the other creditors in your bankruptcy case.
Sometimes, a trustee will sell property by auction. Under those circumstances, the trustee will often sell only the trustee’s interest in the property, subject to any liens. This means that none of the liens or mortgages are cleared from the property and the buyer gets the property with the liens and mortgages still attached.
When will the trustee use the auction method? The trustee usually uses this method of sale for vacant lots or other property that may not have enough value to justify the expense of a sale free and clear of liens or is difficult to sell in the traditional manner. It is rarely used for houses.