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Selling Real Estate in Bankruptcy

Typically, the debtor may sell real estate during the pendency of a Chapter 7 and/or a Chapter 13 bankruptcy case. However, the seller must obtain a bankruptcy court order approving the sale of the real estate. In the event that there is a real estate sales representative or broker involved with the sale, the sales’ representative must be appointed by the bankruptcy court by way of a bankruptcy court order. At settlement, both of these orders must be presented to the closing agent. Typically, every debtor that owns real estate may receive the first $20,200 of profit, after payment of costs, satisfaction of mortgages, and payoff of unavoidable property liens. In the event that there is a substantial profit from the sale of the real estate, the trustee may be permitted to make a disbursement of the excess profit to creditors.

Chapter 7

Typically, in a chapter 7 bankruptcy case in New Jersey, the trustee and not the debtor would request the sale of a debtor’s house. However, the trustee would require the sale of the house only if the house has substantial value and excessive unexempt equity. This is explained in our section about keeping property in a chapter 7 bankruptcy. As I explain the debtor should avoid filing a chapter 7 if there is excessive unexempt equity in the property.

A debtor may not sell their during the case, unless and until the trustee determines that he/she is not interested in selling the property. A trustee would determine whether the property is worth selling based on the amount of equity in the property. A trustee that decides to not sell the property will file with the court a document called “Notice of Abandonment of Property”. This means that the debtor may keep or sell the property. However, if the debtor sells the property during the case, he/she must still obtain the necessary court orders.

A chapter 7 bankruptcy case lasts approximately five (5) months from the time of the filing to discharge. After discharge, the case is complete. After completion of the case, the debtor may sell their house without the need for any bankruptcy court order. Therefore, a chapter 7 debtor generally waits until discharge to sell their house. Please note that the debtor may be required to show the “Notice of Abandonment of Property” notice at closing.

Chapter 13

In a New Jersey chapter bankruptcy case, the trustee will never sell a debtors’ house, no matter the value. However, no less than the amount of the unexempt equity after the cost of sale, must be paid to unsecured creditors. Therefore, a house with substantial equity may require the debtor to pay a substantial payment to unsecured creditors. This is explained in separate portion of this website.

At the time of the filing of the Chapter 13, a debtor files a plan that reflects the amount of their monthly payment to the trustee. The plan may include the debtors’ intention to keep their house and pay their mortgage. There may be a change in circumstances that require a debtor to change their mind and sell their real estate. This is permitted, as the Chapter 13 laws are very flexible.

Generally, in a NJ Chapter 13 bankruptcy, a debtor is required to pay to the trustee all of their disposable income over a certain period of time. Consequently, as a result of the sale of the house, it is no longer necessary for the debtor to make payments to the mortgage company regarding that house. After the sale, the debtor may be required to modify their plan to reflect the sale, disbursements of the sale and the change in the monthly trustee payments. The trustee payments will be effected, in that the debtors’ monthly disposable income will change as a result of the elimination of the mortgage payment. Please note that the debtor must always obtain a court order approving the sale and an order appointing a sales’ rep. if applicable.

Contact an Experienced Bankruptcy Attorney in NJ

If you are considering filing for bankrtuptcy protection in New Jersey under chapter 7 or chapter 13 and are concerned about the sale of your home, you should contact an attorney. A NJ bankrtupcy attorney familiar with the sale of real estate during bankrtupty proceedings will be able to provide answers and guide you through this difficult and complex process. Contact The Law Offices of Robert Manchel for a free consultation with a veteran bankruptcy attorney, or contact us online for an immediate response.