Selling
a House Despite a Bankruptcy
Many of my clients are involved
with a real estate broker before they meet met to discuss bankruptcy
options. One common issue is that a sale
of real property is in process while the lender is attempting to foreclose on
the property. The broker has made many
good faith efforts to delay the foreclosure to complete a sale. Unfortunately, the lender is unwilling to
continue the foreclosure any further to accommodate the sale.
Many brokers simply walk away at
this point chalking up the sale as dead in the water. They know the client probably needs to file a
bankruptcy proceeding to delay the foreclosure and resolve any future liability
after the resolution of the sale. The
broker also believes that the bankruptcy will terminate their ability to sell
the property and receive their commission.
Therefore, the broker moves on to other potential sales.
Is the broker correct in this
circumstance?
Absolutely Not!
In these kinds of cases, the
first thing a broker should do is have their client meet with a qualified
bankruptcy or distressed property attorney in preparation for the worst-case
scenario described above. If proper
planning is done, the loss of the sale may be avoided.
Short Sales
The reason why many sales are
lost is because often the best type of bankruptcy for clients is a Chapter 7
Bankruptcy. This is most common with
short sales. When the client files for a
Chapter 7 Bankruptcy, all their assets become “property of the estate.” The Trustee then either sells the property or
abandons the property back to the owner.
For a broker working intimately
with the property, they are in the best position to continue to sell that
property so long as they are properly qualified. If the client still wants to sell, the broker
may be able to be hired by the Trustee to sell the property. Many Trustees work with particular brokers,
but can be persuaded if you either already have leads or are willing to work
with them.
The other option would be to
force the Trustee to abandon the property.
Once it is abandoned, your sale can continue unadulterated. This is a very fact specific scenario, but is
an option. Sometimes, the Trustee will
abandon the property on their own accord.
Homes with Equity
If your client’s property has
equity it gets a little trickier, but your client has more options to be
honest.
If the debtor resides in the
property and the equity is less than the homestead exemption, the debtor can
still file a Chapter 7. The Trustee will
not be able to sell the property because the homestead will protect it from
liquidation.
If the equity exceeds the value
of the homestead or the property is not the residence of the client, a Chapter
13 Bankruptcy will stop any pending sale and often gives the client time to
reorganize and sell the property successfully.
As Chapter 13 Trustees do not liquidate, the client is not at risk of
the property being sold by the Trustee.
If a buyer is found while the
case is open, the client will need to have the sale approved by the court
before it can be completed.
Summary
This is a summary of options
available designed to give brokers some insights into options on their
distressed sales. Only qualified
attorneys should make the determination as to which route is best for the
client. If you have questions about
utilizing bankruptcy to complete a distressed sale, please set up a
consultation with one of our attorneys.
Martin Prybylski
Attorney at Law
McFerran Law, P.S.
3906 S 74th Street
Tacoma, WA 98409
253-284-3811
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