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Justin Harelik, the Bankrate.com Bankruptcy AdviserDo we sell home before or after bankruptcy?

Dear Bankruptcy Adviser,
Unfortunately, we are looking at filing bankruptcy because my husband has been without work for over a year. It looks like we will have to move out of state for him to find adequate employment. Our question is: Should we try to sell our house and move before filing or after?
-- D.H.

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Dear D.H.,
It is feasible that you could sell your property before filing a bankruptcy, keep all the money from the sale and then eliminate debt in a Chapter 7 bankruptcy filing. Ideally, you should file bankruptcy and then sell the property during the bankruptcy with trustee involvement. This possibility must be considered on a state-by-state basis.

The key questions are:
In which state will you be filing?
How much equity will that state allow you to protect?
How much will you be able to get for your home?

Let's take these questions in order. First, you need have been living in the state in which you file bankruptcy for more than half of the past 180 days. Meaning, you could not sell your property, move to another state for a job and then immediately file in that state. It's very likely that your case will have to be filed in your current state.

Second, how much equity you can protect depends on your state. Your state of residence depends on where you lived two years ago. Meaning, you cannot simply move from one state to another and use the exemption amounts in your new home state. In California, you could protect from $50,000 up to $150,000. But you must also put the sale proceeds back into a homestead (another home purchase) or the proceeds are lost. In Florida and Texas, you can protect all the equity in the property, provided that you place the profit from the sale in a special homestead account. But many state exemptions, such as Florida's, have no applicability out of state, so if you lived in Florida two years ago, you have no homestead exemption, other than the limited federal one.

What can you get for the home? Enough, one hopes, to cover your debts and have plenty leftover for a fresh start in a new state. But be careful. DO NOT transfer the property prior to the bankruptcy with the hopes of protecting the house.

Typically, when a person attempts to get around the system, it goes like this: Suppose Jack lives in a home with $150,000 equity, but his state only allows him to protect $50,000 when filing a Chapter 7 bankruptcy. Jack tries to a) transfer the property to a family member or b) sell the property to a family member for less than it's worth. That way, the equity in the home would not be considered an asset of Jack's, his bankruptcy would wipe out his debts and he might still have access to the equity in the home.

That's what Jack thinks. What usually happens is that the trustee discovers a) or b) and the property is brought back into Jack's estate as an asset. Now Jack is in a very difficult position and his bankruptcy case could be a long, hard fight.

One option is to enlist the bankruptcy trustee assigned to your case to help you sell your home. This would be a legitimate, albeit expensive, way to shed some or all of your unsecured credit card debt or personal loans. At the same time, the trustee would be thrilled to sell a home with equity because he/she will earn a significant fee from the sale. The trustee will have a significant interest in your case and your case may be scrutinized less harshly because the trustee will be directly involved in the sale.

At this point, I recommend that you speak to a bankruptcy attorney in your area to determine your options. While you may be able to file your case on your own or with a document preparation company, you will still need legal advice regarding differences in state laws, especially if you are moving any time soon. If you use a document preparation company, be aware that they can't advise you what to do, or about exemptions, etc. As well, depending on the amount of equity in your home and what can be protected, an attorney may be able to negotiate a settlement with your creditors that would eliminate the necessity for filing bankruptcy in the first place.

Whatever you do, it's best to act quickly. Things have a way of getting worse if you aren't working to make them better.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.

Bankrate.com's corrections policy-- Posted: May 8, 2007
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