If the Chapter 7 trustee abandons your home, it means he or she will not sell it to pay your creditors. The trustee may abandon your home if:
- it has no equity (the value of the house is less than what you owe on it), or
- the amount of nonexempt equity is too small to benefit creditors.
Can You Keep Your Home If the Trustee Abandons It?
Your home is safe in Chapter 7 bankruptcy if the trustee abandons it. It means the trustee is not interested in taking your home and selling it because it has little or no value to the bankruptcy estate.
However, if you have a mortgage, your lender normally has a right to foreclose on your home to enforce its lien. Chapter 7 bankruptcy wipes out your personal liability on the mortgage but not the lender’s lien. As a result, even if the trustee abandoned your home, you must continue making regular mortgage payments if you don’t want your lender to foreclose on it.
The Trustee Will Abandon Your Home If You Have No Equity in It
As discussed, Chapter 7 does not eliminate mortgage liens from your home. If the trustee sold your house, he or she would have to pay off your mortgage lender before making any distributions to your unsecured creditors. As a result, if the balance of your mortgages (or other liens secured by the property) is greater than the value of your home, it is not worthwhile for the trustee to sell it. This means if you have no equity, you can keep your home as long as you continue to pay your mortgage.
Example. Josh and Erica own a home valued at $500,000. They have two mortgages secured by the house. They owe $450,000 on their first mortgage and $100,000 on their second. Since the combined balance of their mortgage liens is $550,000 and their home is only worth $500,000, they have no equity. As a result, the trustee will abandon their home and they can keep it as long as they make their mortgage payments.
What Happens If You Have Equity in Your Home?
If your home is worth more than what you owe on it, the trustee will want to sell it to pay your creditors. But the trustee cannot sell your home if all of its equity is exempt. Prior to filing for Chapter 7, check your state’s homestead and other exemptions (and the federal exemptions if your state offers a choice between state and federal exemptions) to make sure you can fully exempt all of your equity. (To learn more, see The Homestead Exemption in Bankruptcy.)
If you can't exempt all of the equity in your home, the trustee may still decide to abandon it. This can happen because when the trustee sells your house he or she incurs sale costs and gets paid a commission from the proceeds. If the amount of your nonexempt equity is so small that your creditors would receive little or nothing after deducting these expenses, the trustee will likely abandon your home.
Example. Kate’s home is worth $300,000. Her mortgage balance is $245,000 but her state has a $50,000 homestead exemption. This means Kate has $55,000 of equity in her home but she can exempt $50,000 of it. This leaves $5,000 of nonexempt equity. If the cost of selling her home and the resulting trustee commissions exceed $5,000, there will be nothing left to distribute among her creditors. In that case, the trustee will likely abandon her home even if it has a small amount of nonexempt equity.
Worried About the Bankruptcy Trustee?
Get the inside scoop on what to expect when dealing with the bankruptcy trustee in Nolo's new section -- The Bankruptcy Trustee. We hired an experienced bankruptcy trustee to write many great articles and answer some common questions.