Selling Your Home During Bankruptcy? We Work Within the System to Help

Selling Real Property During Bankruptcy in California

Filing for bankruptcy is a serious financial decision, and selling real estate during the process adds significant complexity. Federal bankruptcy law (Title 11, United States Code) governs the process, while California exemption laws and local court rules affect how property is treated. Understanding these rules is essential to making informed decisions.

Chapter 7 vs. Chapter 13: How They Affect Your Home

Chapter 7 Bankruptcy (Liquidation)

In Chapter 7, a court-appointed trustee takes control of the debtor's non-exempt assets, liquidates them, and distributes the proceeds to creditors. The process typically takes 4 to 6 months from filing to discharge.

For real property, the key question is whether the home is exempt — meaning protected from liquidation:

Under California's homestead exemption (CCP §704.730, as amended by AB 1885 in 2021), a debtor can protect equity in their primary residence up to a minimum of $300,000, with the actual amount varying based on the county median home sale price, up to a maximum of $600,000. In high-cost Southern California counties like Los Angeles and Orange, the exemption is at the higher end.

If your equity is below the exemption amount, the trustee will typically "abandon" the property — meaning it is not part of the bankruptcy estate and you keep it (though the mortgage and any liens remain).

If your equity exceeds the exemption, the trustee may sell the property, pay the debtor their exempt amount, and distribute the remaining equity to creditors. This is where SHH Holdings can help — by purchasing the property at fair value, ensuring the debtor receives their full exemption and the estate is properly administered.

Chapter 13 Bankruptcy (Reorganization)

Chapter 13 allows debtors with regular income to create a 3-to-5-year repayment plan. The debtor keeps their property but must make plan payments to creditors. Under 11 U.S.C. §1322, the plan must pay unsecured creditors at least as much as they would receive in a Chapter 7 liquidation.

Selling a home during Chapter 13 is possible but requires court approval through a motion under 11 U.S.C. §363. The court must find that the sale is in the best interest of the estate and creditors. Common reasons for selling during Chapter 13 include:

• The debtor can no longer afford the mortgage payments even under the plan
• The debtor needs to relocate for employment
• The property is underwater and continuing to pay is not financially viable
• Selling will generate proceeds that can fund the remainder of the plan

The Automatic Stay and Property Sales

One of the most important protections in bankruptcy is the automatic stay (11 U.S.C. §362), which immediately stops virtually all collection actions against the debtor and the debtor's property. This includes:

• Foreclosure proceedings
• Lawsuits and judgments
• Lien enforcement
• Utility disconnections

The automatic stay also means that no one can sell your property without court permission — including you. Any sale during bankruptcy must be approved by the bankruptcy court, either through the trustee (Chapter 7) or by motion (Chapter 13).

The Process of Selling Property in Bankruptcy

Chapter 7 Property Sales:

1. Trustee evaluation. The trustee determines whether the property has non-exempt equity worth pursuing.
2. Motion to sell. If the trustee decides to sell, they file a motion under 11 U.S.C. §363(b) for court approval. The motion must describe the proposed sale terms and demonstrate that the sale is in the best interest of the estate.
3. Notice to creditors. Creditors and interested parties receive notice of the proposed sale and have the opportunity to object.
4. Court hearing. The court holds a hearing and may approve the sale, deny it, or approve it with conditions. The court may also allow overbidding, similar to probate sales.
5. Closing. Once approved, the sale proceeds through escrow. The trustee distributes proceeds: first to secured creditors (mortgage lender), then the debtor's exemption, then administrative costs, then unsecured creditors.

Chapter 13 Property Sales:

1. Motion to sell. The debtor (through their attorney) files a motion under 11 U.S.C. §363 requesting permission to sell.
2. Plan modification. If the sale materially affects the repayment plan, a modified plan may need to be filed.
3. Trustee review. The Chapter 13 trustee reviews the proposed sale and may support or object.
4. Court approval. The court evaluates whether the sale is in the best interest of the estate, creditors, and the debtor's rehabilitation.
5. Distribution of proceeds. Sale proceeds are typically used to pay off the mortgage, fund the repayment plan, and cover administrative costs.

California-Specific Bankruptcy Considerations

Choosing Your Exemptions. California is one of the few states that offers two sets of exemptions. Debtors must choose between:

• System 1 (CCP §704 series): Includes the homestead exemption described above ($300,000-$600,000). Better for homeowners with significant home equity.
• System 2 (CCP §703.140): Based on federal exemptions with a smaller homestead exemption ($31,950 as of 2024) but includes a "wildcard" exemption that can be applied to any property. Better for renters or those with little home equity.

You must choose one system or the other — you cannot mix and match. A bankruptcy attorney can help determine which system maximizes your protection.

Anti-Deficiency Protections. California's anti-deficiency statutes (CCP §580b and §580d) may provide additional protection in bankruptcy. For purchase-money loans (the original mortgage used to buy the home), the lender generally cannot pursue a deficiency judgment after foreclosure or short sale. This protection can be valuable in bankruptcy planning.

Fraudulent Transfer Concerns. Under 11 U.S.C. §548 and California Civil Code §3439 (Uniform Voidable Transactions Act), transfers made within two years of bankruptcy filing (or up to four years under state law) can be voided by the trustee if they were made for less than fair value. This is why it is critical that any sale during bankruptcy is at fair market value — and why our fair cash offers provide protection for all parties.

How SHH Holdings Works with Bankruptcy Sales

We purchase properties during bankruptcy proceedings with full understanding of the legal requirements:

We provide fair market value. Our offers are based on comparable sales data and independent analysis. This satisfies the court's requirement that bankruptcy sales be for fair value and protects against fraudulent transfer claims.

We work with your trustee. In Chapter 7 cases, we coordinate directly with the trustee and their counsel. In Chapter 13 cases, we work with the debtor's attorney to prepare the motion and supporting documentation. We have been through this process many times.

Cash offers expedite approval. Cash sales are simpler and faster than financed sales. Courts and trustees prefer cash buyers because there is no financing contingency, no appraisal delays, and no risk of buyer mortgage denial.

We close quickly after approval. Once the court approves the sale, we can close within days. There is no reason to delay once permission is granted.

We buy as-is. Financial distress often leads to deferred maintenance. We purchase properties in any condition without requiring repairs.

Protecting Your Fresh Start

The purpose of bankruptcy is to give you a fresh start. Selling your property as part of this process can help you achieve that by:

• Eliminating mortgage debt that you cannot afford
• Generating cash for your exempt amount
• Funding your Chapter 13 repayment plan
• Removing the ongoing costs of a property you can no longer maintain

Call SHH Holdings at (626) 414-4859 to discuss your situation. We work discreetly with bankruptcy attorneys and trustees to facilitate property sales that serve everyone's interests.