Updated May 20, 2016
In most cases, you won’t be able to keep your vacation or other second home if you file for Chapter 7 bankruptcy. However there are some exceptions to this general rule. For instance, if the state you live in has a wild card exemption, you may be able to save your vacation home if you have a low amount of equity in your property. You may also be able to keep your second home if the bankruptcy trustee decides to abandon it. Finally, the trustee may allow you to keep your vacation home if you can either pay for it or if you agree to give up another piece of your property in exchange.
In Chapter 7 bankruptcy, a debtor asks for a fresh financial start. The debtor is able to wipe out many (or all) of his or her debts. In return, the debtor must give up certain property. The bankruptcy court appoints a trustee to oversee the case and deal with the debtor’s property. (Learn more about how Chapter 7 bankruptcy works.)
Both federal and state laws allow a Chapter 7 debtor to keep certain property in Chapter 7 bankruptcy. The idea is that the debtor should be able to keep items that are necessary for living and working. These items are referred to as exempt property. Property that is not protected is referred to as nonexempt. The trustee can sell this nonexempt property and distribute the proceeds from the sale among the debtor’s creditors.
Vacation homes usually fall under the category of nonexempt property. This means that they are not protected by the statutory exemptions set forth by state or federal bankruptcy law. However, if you don’t have a lot of equity in your second home, you might be able to keep it by using a wildcard exemption
Federal law, as well as many state statutes, provide for a wild card exemption. A wild card exemption allows a Chapter 7 debtor to save certain nonexempt assets that wouldn’t otherwise be protected.
State wildcard exemptions. Most states have some sort of wildcard exemption. In some states, you can use the wild card exemption only for personal property, which means it won’t help you keep your vacation home. In others, you can apply the wildcard exemption to any type of property, including your second home. Unfortunately, in most states the dollar amount for the wildcard exemption is fairly small, often just a few thousand dollars, if that. In a few states, however, you can apply unused homestead exemption amounts to the wildcard – which may give you more money to work with. (To find out what the wildcard exemption amount is in your state, see Bankruptcy Exemptions in Each State.)
The federal wildcard exemption. The federal wild card exemption is currently $1,250 plus any unused portion of the federal homestead exemption up to $11,850. If you don’t claim your full homestead exemption, you will have up to $13,100 total towards to the protection of your vacation home under federal law. (To find out if your state allows you to use the federal exemptions, see Federal Bankruptcy Exemptions.)
In order to determine whether the wild card exemption can help save your vacation home, you will have to consider how much equity you have in your property. To start, you must subtract all mortgages and liens on your vacation home from its current market value. Also, you will have to account for the trustee’s commission and the cost of sale.
If you get a negative number, you do not have any equity. If you get a positive number, that will be the total amount of your equity. If you use the federal bankruptcy exemptions, and your remaining equity is less than $13,100, you will be able to keep your vacation home by using the wild card exemption.
Example. Let’s say the current market value of your vacation home is $100,000 and that you are using the federal wild card exemption in the amount of $1,250 plus $8,750 from the unused portion of your homestead exemption, totaling $10,000. The trustee’s commission in this transaction is $8,000 and the cost of sale is another $8,000. Let’s assume you owe $75,000 on your mortgage and that you have no other existing liens. To determine your equity in your vacation home, start with the current market value of your vacation home ($100,000), and then subtract the trustee’s commission ($8,000), the cost of sale ($8,000), the amount of mortgage owed ($75,000), and any other outstanding liens ($0). The total equity is you have in your vacation home is $9,000. Since, in our example, the wild card exemption of $10,000 is more than the $9,000 that you have in equity, you will get to keep your vacation home.
If you cannot protect your vacation home with an exemption, the trustee would normally sell it and disperse the proceeds among the creditors. However, it may be possible to keep your vacation home, despite its nonexempt status, under the following circumstances:
If the trustee decides to abandon (or not to keep) your vacation home, you will not have to give it up. A trustee might decide to abandon your vacation home if the home is difficult to sell, or if the total amount expected from the sale (minus any associated costs) is less than what would be acceptable to give to the creditors. (Learn more in Property Abandonment in Chapter 7 Bankruptcy.)
You may also keep your vacation home if you pay the trustee an amount equal to the nonexempt portion of the equity in your vacation home.
Example. Let’s say that the nonexempt portion of the equity in your vacation home is $5,000. If you offer to pay the trustee the full $5,000 to keep your vacation home, it is very likely the trustee will accept your offer.
If you want to try this tact, you may also be able to negotiate with the trustee for a lower price. The trustee may be open to this arrangement because it could be easier than trying to sell the property. The trustee will then use whatever amount you agree upon to repay the creditors what they are owed.
Another option is to ask the trustee if you can exchange one of your exempt assets for your vacation home. The trustee can then decide whether or not to allow the exchange. The trustee will likely look at the value of the exempt asset you wish to exchange, as well as the ease of its sale, in order to make the final decision.
Example. Let’s say your car is worth $5,000 and your state has a $5,000 automobile exemption. If you also have $5,000 of equity in your vacation home, you could offer to exchange your car in order to keep your vacation home. If the trustee thinks that your car will be easy to sell for its full value, it is likely that the trustee will accept your offer.