Many people considering filing a Bankruptcy case are justifiably concerned that they may lose their home in the case, either to the lender or to the Chapter 7 Trustee. The reality is that rarely will the Chapter 7 Trustee have an interest in the homes of individuals who have filed Chapter 7 cases. The reason is that a Trustee is only interested in the equity available for the benefit of creditors, after paying off all of the liens on the property and accounting for the debtor’s exemptions. Only a small percentage of people filing Chapter 7 cases own a home with significant equity, and even fewer still have enough equity for the Trustee to even consider.
Each Trustee has his or her own idea of the net return they need to get on a sale before they are interested in a property. Some may want to see a return of $8-10,000 and others need to see $12-15,000 or more. Remember, this is after deducting the debtor’s exemptions, real estate commissions and other costs of sale. For example, let’s consider a couple in Chapter 7 who own a house worth $200,000 subject to a secured loan with a balance of $130,000. On its face, it appears there is $70,000 equity that could go to creditors if the house is sold. However, the true figure is far less so let’s do the math. Although the house has a market value of $200,000, the Trustee is usually not willing to keep it on the market as long as the owners would so the Trustee accepts a quick offer for $190,000. The owners are entitled to an exemption in Georgia of $43,000 in the Chapter 7 case, and the Trustee’s real estate agent gets a 6% commission at closing ($11,400). Without even considering such things as property taxes, the Trustee’s commission, and attorneys fees, the $70,000 equity is now down to only $5600.00. The expenses of the Chapter 7 case, including Trustee commissions and attorneys fees would be more than $5600.00, so most Trustees would not consider a sale.
However, if we change the facts a little, we can see an example of a situation in which most Trustees would attempt to sell the house. Let’s say the owner of the house was a single person, and the Trustee left the house on the market just a little longer to get the full $200,000 value. If we deduct the owner’s $21,500 exemption and $12,000 in real estate commissions, the Trustee has a net return of $36,500.00. Since this would lead to a distribution to creditors in the case, the house would be sold. In either case, it is important for the owners to consult with a Bankruptcy lawyer to discuss what may happen in their case. Although it is very unusual, some Trustees may occasionally try to put a house on the market for higher than its market value to see if they get a bite, or try to negotiate a lower payoff to the lender in exchange for getting the house sold and the loan paid off. Again, it is unusual for Trustee to sell a home at all (perhaps one case in several hundred), so these situations are rare. Importantly, this analysis only applies to the primary residence of the debtors. The analysis is different for second homes, rental properties and other real estate because there are typically no exemptions available for these properties beyond the wild card exemption (which would normally be used on the primary residence).