Will The Court Sell My House If I File For Bankruptcy?

Like a lot of things in law, the answer to this question is “depends.”

Most consumers wishing to shed unsecured debt through bankruptcy (e.g. credit card debt, medical bills, etc.) opt to use the Chapter 7 form of bankruptcy. Chapter 7 bankruptcy is known as a liquidation type of bankruptcy in that after you file, you place all of your assets in trust with the bankruptcy court and the court determines what, if anything, can be sold (liquidated) in order to pay back your creditors. If you own relatively few assets and just rent an apartment, then the court appointed trustee is likely not going to take your playstation and Boyz II Men CDs and sell it at a yard sale. But if you have a large asset like a house, then the court very well may put it up for sale.

The question of whether the court will sell your house in a Chapter 7 bankruptcy depends on whether you have equity in the house. If you have no equity in the house, then it wouldn’t make sense to sell it as all of the money from the proceeds of the sale would go to your mortgage holder(s) leaving nothing left to pay to your creditors.

But even if you do have equity in your house, it does not necessarily mean that you cannot file for bankruptcy under Chapter 7. In every state, there are certain exemption amounts that can be applied to your assets. Exemptions are basically those assets defined by state law that the court cannot liquidate in order to pay back creditors. In California, you can exempt between $75,000 to $175,000 dollars in your equity share which depends on whether you live alone or with a family and whether you are elderly or disabled. If the amount of the exemption meets or exceeds the amount of equity you have in your home, then the court will not sell it.

For example, say you live in a home with your wife/husband and children and the house is worth $400,000 with $320,000 remaining to be paid off. Here, you have $80,000 in equity. Using the California exemption scheme, a home that has a family living in it is entitled to a $100,000 exemption amount. Because the exemption amount ($100,000) is greater than the equity ($80,000), the court will not sell your house as there will be no exempt assets they can get in order to pay back your creditors.

If after applying the exemption amounts you find that you still have a small amount equity remaining in house, then it becomes a little bit trickier to predict what will happen if you file for bankruptcy. If you have a very small amount of equity, it is not guaranteed that the court will sell your house. Because with the closing costs of a home sale (broker fees, title checks, etc.) which can be around 10 percent of the sale price, the court could still find itself with nothing to pay back the creditors with. And even if the court can only net $1,000 from the sale of a house, it is very unlikely they will go through the trouble of selling the home. In situations where it is a close call on how much unprotected equity you have, it is best to have the home appraised and consult an attorney.

The Surprising Virtues of Bankruptcy

In this frigid economic climate, I meet a lot of people seeking advice on what to do with thousands of dollars of credit card debt, huge medical bills, or other financial headaches. For the most part, these people don't run into these problems because they are poor financial planners or because they are irresponsible; what typically happens is a person loses his or her job and they become dependent on their credit card to buy food or other necessities or they get injured and they have little to no medical insurance.

For people in these tough situations, it can seem like there is no way out and the only way you can cope is to throw the bills in the dustbin. But if you ignore a bill for too long, the company who you owe money to (called a 'creditor') will take the following actions: First, they will send your bill to a collection agency (whom will begin a nasty telephone assault against you at all hours and even at work); Second, they will file a lawsuit and obtain a judgment against you; Third, they will attempt to enforce their judgment against you by putting a lien on any valuable property you may own, freezing your bank account, or even garnishing your paycheck.

Usually, the best option to address large unpaid bills is to see if you can negotiate a settlement with the creditor to pay a smaller amount of what you owe. While most creditors will allow you to enter into a payment plan, even making monthly payments on a reduced debt will be tough for a lot of people having financial problems.

So if coming to a settlement with a creditor isn't an option, your only other (viable) option to deal with your bills is to file for bankruptcy. For those of you unfamiliar with bankruptcy, it is essentially a process where you petition the government to either eliminate your debts (called a "Chapter 7" bankruptcy) or have them consolidated in order to be paid off in monthly installments during a three or five period (called a "Chapter 13" bankruptcy).

So what's the catch to having your debts magically eliminated with a Chapter 7 bankruptcy? First and foremost, a bankruptcy will stay on your credit record for between seven and ten years. Secondly, the bankruptcy process will make certain private information about your financial affairs public.

But another reason people feel that bankruptcy isn't for them is that they feel that there is something morally wrong with walking away from legitimate debts. They feel that it is wrong to tell their creditors "listen, thanks for the money you lent me, but I don't feel like paying it back and here's the papers saying I don't have to." While this sentiment is certainly noble, I think two things should be considered in reflecting on the morality of bankruptcy:

1. Creditors Don't Care About You

This statement is pure hyperbole but it contains a lot of truth. Creditors won't hesitate to put a lien on your home, seize your car, or do other nasty things to get their money. Considerations such as whether you have kids to feed, or whether you just lost your job do not enter into the equation when a creditor is attempting to collect. If there is a way a creditor can get your money, they will do what they can to get it.

While not every creditor engages in strong-arm tactics, they are the exception and not the rule. Next time a collection company calls you, tell them about your kids and losing the job. Not only will this information not move them to the slightest, it will be immediately be forgotten the next dozen phone calls from a dozen different people you receive all trying to collect on the same debt.

2. Part of the Blame for Your Debt Belongs to the Creditors.

Bad deals happen. And if you will excuse the bluntness, when a credit card company allows you to run up a $5,000 debt that you can't pay back, they made a bad deal.

The allure of credit cards is easy to understand. You get a credit card and you can buy things you simply don't have the money for at that moment and you're able to make relatively small monthly payments. In exchange for this flexibility, the credit card companies slap on grossly high interest rates that average around 17 percent. Essentially, these creditors are betting that you will be able to pay them back at an interest rate that no sane person would accept in a normal lending situation.

But it's so easy to apply for and receive a credit card. We all receive junk mail on a weekly basis touting pre-approved cards, 0 percent introductory rates, cash-back promotions, that it is almost irresistible to not take up these offers. And after you get the card, the credit card company generously increases your credit limit as use the card (increasing their the amount of interest they earn on the card).

The combination of the ease of getting a credit card and the high interest rates associated with them make it make it extremely easy for you to get in over your head - and the credit card companies do little to warn you of this. By making it so easy, credit card companies must bear some of the blame when you rack up a huge credit card debt that you can't pay back. In many ways they set you up to fail.

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A popular expression associated with bankruptcies is that it allows an individual a "fresh start" when they are swamped by debt. While it can certainly afford a person a great way to get out of a bad situation, it is a weapon that should be used sparingly as once you obtain a discharge through bankruptcy, you cannot file again for another seven years. But if you do decide to file, it is important to remember that there is nothing immoral or reprehensible about filing; it truly is one of the most powerful weapons a person can use to combat debt.