Selling Real Estate in an Active Bankruptcy

In any bankruptcy, whether it be a Chapter 7 or Chapter 13, the issue of real estate is nearly always at the forefront. In Chapter 7 liquidations, the amount owed on any liens on the property, together with what the value is of the home, go a long way to determining whether it will be shielded from liquidation. In a Chapter 13, numerous real estate assets can drive up the percentage to be paid to unsecured creditors, or can have other impacts on the actual trustee payment (such as when the mortgage or the arrears are paid back through the plan, or a debtor chooses to surrender the property in the Chapter 13).

An offshoot of this is when a debtor decides he or she wants to sell particular real estate. At the outset of this discussion it is important to remember that all of the debtor's property is part of the bankruptcy estate as of the time of filing. So, whether it is a Chapter 7 or 13, the debtor will need to get permission from the bankruptcy court before embarking on a sale of real estate.

In a Chapter 7, the issue is whether the sale of the home creates another asset, i.e., whether the proceeds of the sale (if any) are thus entitled to be liquidated by the trustee. If there are any proceeds, the trustee could certainly take an interest in them, presuming the bankruptcy judge approves the motion to sell to begin with. If the motion is for a short sale of real estate, essentially meaning that a regular sale is being conducted but no proceeds are being garnered to the debtor, the trustee still may object based on the creation of a taxable event in the bankruptcy estate. This thus may entail filing a motion to compel the trustee to abandon the asset.

In a Chapter 13, the issue always comes down to proceeds. If there are to be proceeds from the sale, the interim trustee will likely want those proceeds to be turned over as a special dividend to unsecured creditors, especially if the percentage to be paid in the Chapter 13 plan to unsecured creditors is less than 100%. The trustee, and more than likely the judge as well, will want to know if this will have an adverse effect on the rest of the creditors in the case or if it is preferentially beneficial to the creditor whom holds the mortgage.

Clearly, the issue of selling real estate in an active bankruptcy is a tricky one. There are important legal ramifications to consider, including objections from other creditors, the trustee, or the bankruptcy judge. It is best, given these circumstances, to speak with a Chicago bankruptcy lawyer to handle these matters for you.