You are in a successful short sale (bank has approved and you are moving towards close) and you are informed the Seller just filed bankruptcy, or has been in bankruptcy this whole time, what to do?

What Happened:  Here is what is going on, the Seller (the debtor) is no longer in control of the property, it is controlled by the “estate of the bankruptcy.”  The seller (consumer) is likely in a chapter 7 or chapter 13.  There is a trustee that will be appointed.  The trustee is important.  The chapter 7 trustee and the chapter 13 debtor/trustee should seek court approval before selling property.

 Plan of Attack:  When in a short sale where any one of the title holder is in or files for bankruptcy protection, the seller should contact their attorney so that the seller’s attorney can contact the trustee to gain approval of the sale.  If there is no objection by the Trustee, the Trustee will “consent” to the transaction. 

Trustee Consent: After being contacted by the Seller’s attorney, if the trustee consents to the sale, an “Affidavit of Abandonment for Real Estate & Asset” can be signed by the Trustee or a “Notice of Proposed Abandonment,” under Rule 6007 and Bankruptcy Code §544.  (Abandonment Or Disposition of Property).  Once acquired some title companies require this to be recorded at the Clark County Recorder to present to the escrow company.

Time.  If done by hearing, this can take three weeks or more. If the Trustee simply executes and files the abandonment, it can still take much precious time to get all the parties on the same page.

Foreclosure:  Remember, once the property is released from the bankruptcy, it can be foreclosed upon. Know, review, call, check, double check, your time frames for sale if the property is in foreclosure.

Safe Harbor for Sales:  If the seller sells without court approval the sale is not authorized, and could be voided under the Bankruptcy Code §549.  But there is a safe harbor for good faith purchasers who give value.  That safe harbor may be closed if the trustee records notice of the bankruptcy upon the trustee’s appointment, but that rarely happens.  So the practical answer is that if a sale closes without court approval to a good faith purchaser, the sale should stand.