How to Sell an Inherited House While Under Chapter 13
If you are being protected under a Chapter 13 bankruptcy and you inherit real estate you wish to sell, there a few legal steps you must take in order for the transaction to be allowed under the terms of your bankruptcy. If you take the proper steps and obtain the necessary legal advice, it is possible to proceed in way that won't compromise your bankruptcy protection.
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Instructions
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Find out the status of the inherited property. Contact the executor of the estate. If you are the executor, examine whether there are mortgages that will be satisfied with life insurance. If the mortgage will be paid off by insurance proceeds, you and your heirs would inherit a free and clear property. If not, you will be responsible for either paying back the lender or lenders by refinancing, selling the home or assuming the existing mortgage payments.
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Determine the status of the estate. If the deceased left his estate with debt, cash may be used to pay creditors before heirs receive proceeds. This could take time. Usually, a house is not transferred to heirs until after the estate is settled. Check with your estate attorney or executor to find out when the estate will be settled. This will give you an idea of when you will legally receive the property. If it happens after your bankruptcy is discharged, you have nothing to worry about.
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Have the home appraised. Hire a real estate appraiser to inspect the property to determine what it's worth. You may need this information as part of your disclosure to the court. A real estate appraisal will cost you $250 to $500, depending on the type of property being inspected.
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Place the house in trust. An estate lawyer will decide which type of trust is best, if one has not already been set up. By putting the house in a trust, ownership in the property transfers from you and other heirs to the trust itself. This often protects the home from creditors and others who may wish to sue the estate. A buyer of a house in trust actually purchases the property from the trust. Trustees, in turn, split the proceeds of the sale, less any mortgages or other liens.
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Obtain a mortgage on the property. If there is more than one heir to the property, have a trustee, other than yourself, take out a home loan. This will help protect the home from the courts. Your bankruptcy court will not be as quick to seize a property if there is a lien on it. Such a transaction will cut into the proceeds of a sale, however, it may protect the property. Contact your bankruptcy and estate lawyers before proceeding to avoid breaking the law or violating the terms of your bankruptcy or other estate laws.
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Contact your bankruptcy attorney to inform him of your situation. The terms of your Chapter 13 agreement likely includes a clause stating you must disclose to the court any real estate acquired during your bankruptcy. If the home has been transferred to you, you must alert the bankruptcy trustee of the transaction. If the house has been put into a trust, furnish a copy of the trust to your attorney. The court will then examine the information and determine if allowing you to own the property or sell it and keep the proceeds is feasible.
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Wait for a court decision. If the court allows you to receive proceeds of a sale, there may be conditions on how you may use the funds. If the court denies your request and requires you to use your proceeds to pay the creditors listed in your Chapter 13, you must do so. If you fail to comply, the court will likely dismiss your bankruptcy. This means your creditors will be notified you are no longer protected under the bankruptcy law. In turn, you will likely be forced to use the money to pay back your creditors to avoid further collection activity.
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Use sale proceeds to pay off your bankruptcy. Depending on your share, it may be financially wise to use the proceeds of the real estate sale to pay off your bankruptcy in full. You will not have the money at your disposal if this is done, however, your creditors will be paid back and you will no longer need to make monthly payments to the bankruptcy trustee. This could be a perfect opportunity to redirect your bankruptcy payments into a savings account or other investment vehicle.
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Tips & Warnings
This information is not legal advice. If you need detailed information about trust, probate and estate law, contact an attorney who handles these matters. Know the terms of you bankruptcy (see Resources).
Always disclose assets according to the terms of your bankruptcy. Failure to do so could result in sudden dismissal of your bankruptcy case and criminal penalties.
