In Chapter 7 bankruptcy, your state law determines how much home equity you can exempt (protect) using a bankruptcy exemption. If your home has significant nonexempt equity (equity you can’t protect), the bankruptcy trustee assigned to your case will:
Your priority unsecured debts, such as outstanding taxes and support obligations, will be paid first. Any remaining creditors with nonpriority unsecured claims will receive a pro rata share (percentage) of any funds left after the trustee pays the priority creditors in full.
Here's what to expect 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.
The trustee must go through a few additional hoops too, including:
The sale could delay the closure of your bankruptcy depending on the real estate market and how long the trustee wants to keep the house listed. For instance, in a down market, it would be unusual for it to take a year or more to sell a vacation home.
You’ll still receive your bankruptcy discharge (the order that erases qualifying debt) after three to four months, assuming all proceeds normally. But the bankruptcy case will remain open until the trustee sells the assets or relinquishes them.
Find out more about how long Chapter 7 will take to complete.
Removing all of the liens from the property and selling it with a clear title can speed up the sales process. A lien lets a lender take the house, sell it at auction, and pay off the mortgage if the purchaser fails to pay the loan.
To circumvent the liens, a trustee might get a court order allowing the liens to attach to the sale proceeds. This approach retains the lender’s right to the funds, and if any disputes arise between the various lien holders regarding payment order or the amount, the issues can be sorted out by the court afterward without delaying the sale.
If there are no disputes, the trustee pays lien holders and any exemptions you claimed. The remainder is used by the trustee to pay the other creditors in your bankruptcy case.
Learn more about the Chapter 7 bankruptcy process.