Chapter 13 is often a better way to sell real estate, especially if you have other financial complications.
Our last blog was about letting go of real estate that is not your home through a Chapter 7 “straight bankruptcy.” We showed how you can escape debts related to the property. We also showed how you could possibly even have your “priority” debts paid by the Chapter 7 trustee out of any proceeds of the sale of that property.
But Chapter 7 provides limited help. It’s appropriate for certain scenarios, generally more straightforward ones. If you own real estate other than your home, there is a good chance that you have complications that would be better handled through a Chapter 13 “adjustment of debts.”
Chapter 13 Better If…
What kinds of complications would make Chapter 13 the better option?
- if the real estate has equity and you want some control over the its sale and its timing
- if the real estate has equity and you want some control over who gets paid out of the proceeds of sale
- regardless whether the real estate has any equity, Chapter 13 gives you important benefits, some related to the real estate and some unrelated
Control Over Real Estate Sale and Its Timing
In a Chapter 7 case if you have any asset that is not “exempt”—protected from creditors—the bankruptcy trustee takes control over the asset. In the case of real estate with equity, the trustee would decide whether your creditors would benefit from its sale. If the trustee decides to sell it, he or she hires a realtor (usually) and goes through the sale process. You would not have any say in that process, other than to respond to the trustee’s requests for information and cooperate with the trustee’s sale. You would generally have little or no say in when the property is sold, how much it is sold for—beyond very broad standards of reasonableness—or to whom it is sold.
A Chapter 13 case gives you much more control over the sale.
Through a formal Chapter 13 plan put together with the help of your attorney, you propose what you want to do with the real estate, when you want to sell it, for how much, and who will be paid from the proceeds.
There ARE a bunch of rules the plan has to follow. Creditors and the Chapter 13 trustee get a say in the process. The bankruptcy judge has to approve the plan, and resolves any disputes about it. But you have much more say about what happens under Chapter 13 than under Chapter 7.
For example, you would likely be able to hire a realtor of your choosing, and decide whether to put some energy and maybe some money into getting the property ready for sale. Depending on the circumstances you may be able to delay marketing the real estate if the property is increasing in value. You may even be able to sell the property to someone you prefer as long as the transaction is otherwise fair. Overall, you are in control of the sale—albeit under the oversight of the Chapter 13 trustee and the bankruptcy court.
Control Over Who Gets Paid from Real Estate Sale Proceeds
In a sale of your real estate within a Chapter 13 case, valid liens against that real estate would of course have to be paid through escrow as usual. Then if you are entitled to any exemption on the real estate (an amount shielded from your creditors) you would be paid that amount out of the remaining sale proceeds.
But because Chapter 13 is an ongoing process involving your income and expenses, you may not be able to keep that exempt amount. You are generally required to pay “into the plan” all your “disposable income” (generally all income beyond your necessary business and personal expenses). But that may be negotiable. For example, if you need to replace your vehicle, or if it or your home urgently needs some maintenance or repair, some or all of the real estate sale proceeds could go towards such necessary expense(s).
If there are any remaining proceeds after that, there are rules in Chapter 13 about which debts are paid ahead of others out of those proceeds. But within those rules there is some flexibility. For example, certain secured and “priority” debts must be paid in full by the end of the 3-to-5-year payment plan, but you may have some flexibility about which ones are paid faster.
An example can show how this could be of significant practical benefit.
Early in your Chapter 13 plan you may want to earmark money towards a debt that is particularly important to you, say a child support arrearage in order to bring some peace between you and your ex-spouse. Or you may want to start by catching up on property taxes on your home to avoid the high interest rate and to calm down your anxious mortgage lender. Then you could earmark other important but less urgent debts to be paid somewhat later from the subsequent sale proceeds of the (non-home) real estate. For example, you could hold off paying “priority” income taxes until the sale of the real estate. That because those taxes have to be paid by the end of the Chapter 13 case but incur no interest and penalties in the meantime. And the IRS and state tax agency can’t pressure you during the case.
Chapter 13 Benefits Related and Benefits Unrelated to the Real Estate
Beyond the question of maintaining greater control over the real estate sale process, timing, and payout, Chapter 13 may provide you many other benefits over Chapter 7. Depending on your circumstances, those benefits may tie in with the real estate itself or may be unrelated to it. We’ll tell you about both sets of benefits in our next blog post.