When a client / seller is involved in a bankruptcy, the bankruptcy attorney should always be consulted before listing a home. It’s definitely possible to successfully sell a home while the seller is going through a bankruptcy but everyone must follow the proper procedures, so always keep the bankruptcy attorney involved.
For an individual, the main goal of nearly every bankruptcy is to limit the individual’s personal liability. This means they can’t and wont be pursued by creditors to repay the debt. With that understanding, a bankruptcy does not mean a lien on the home will be extinguished. Creditors still have a legal right to be compensated for those liens. In a home sale situation, the goal is for the seller to obtain a high enough offer to pay off any and all liens. Otherwise, it could be a short sale situation. It is still possible to short sale a home in a bankruptcy, but it adds another layer of complexity.
Types of Bankruptcy:
There are two main types of bankruptcy for individuals; Chapter 7 and Chapter 13. The Chapter 7 acts like a reset of the individual’s finances. Chapter 7s are based upon numerous factors including the seller’s income and amount of consumer debt. Chapter 7s are typically finished after several months. Chapter 13s are more of a repayment plan by which the seller enters into a plan to pay back his/her creditors over the course of several years. At the conclusion of each, the bankruptcy is discharged. In either situation, clients can elect to keep or surrender their home. A surrender means the client decides to walk away and the lender ultimately forecloses. If the client elects to keep the home, they are able to preserve the ability to sell it a later date.
Selling During Bankruptcy:
If the seller later decides he/she would like to sell the home, then court approval is required. Side note, this must be disclosed in any real estate purchase agreement since third party approval is required. The bankruptcy attorney will need a copy of the ratified contract along with a preliminary settlement statement in order to submit said items to the court. In both a Chapter 7 and Chapter 13, this process can take several weeks between filing the motion to sell and waiting for the judge to sign the order. There is sometimes also a 14-day stay period (or appeal period) that can cause an extra delay in the closing. Again, it’s vitally important to stay in communication with the bankruptcy attorney to make sure all parties are following proper procedures.
Selling After Bankruptcy:
After the bankruptcy discharge is issued, a seller may sell the home without obtaining court approval. The parties can carry on as if it’s a traditional and regular home sale. The seller will need to obtain a mortgage payoff as normal. To be safe, the bankruptcy attorney can still be consulted just to make sure there are no other formalities to deal.
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