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.
March 20, 2009 at 10:41 am
Darren….just complete a short with this issue…really no big deal if as you said the release is filed with bk.
question: In a current short sale, there are liens from different “charge offs” now showing up on the property. They seem to be by the same local attorney. What process gets them there, how do you get them off – are foreclosure, BK or settlement the only ways?
March 20, 2009 at 11:31 am
Are you saying there are liens on the real property from other debt liability other than the deeds of trust (mortgage); yes those remain and carry with the title (title insruance will not successfully issue) and must be removed by settlement or bankruptcy of seller.
March 20, 2009 at 11:51 am
Thank you…I will share the happy news with the sellers….
April 24, 2009 at 8:19 pm
Should we worry that the seller won’t pay the broker’s fees and closing costs and that there is some liability to the buyer?
April 25, 2009 at 10:49 am
Not understanding the question. The matter will not close escrow without the commissions being paid, if sent through title/escrow.
April 25, 2009 at 3:47 pm
Under the original short sale contract, the seller is required to pay the broker commissions and closing costs. But if the seller files for bankruptcy, are they still required to pay these fees as stated in the contract or does the buyer have to take on these costs in order to close?
April 25, 2009 at 3:51 pm
Ok, I understand, yes, there would be a chance the client/seller would be able to get out of paying the commission, however, agents are allowed to be retained to sell assets of the BK estate. My hunch is to not worry about it, it’s too complicated, if escrow allows closure, they will allow payment to agents. Due to their not being any monies going to the estate, in a sense the agents are competing with another creditor (the bank) and if bank allows closure, by definition they allow payment to agents.
April 25, 2009 at 3:55 pm
Thanks. How do you find out who the chapter 7 trustee is to get consent for the sale?
April 25, 2009 at 3:57 pm
within the bk filing on PACER, but you likely will not need it, if there are no assets, email me darrenw@americanagrp.com direct
April 26, 2009 at 6:54 am
Currently in process of buying in a short sale. The day after the contract was signed, the seller filed Chapter 7. Seller’s agent contacted the Trustee and Trustee approves the sale and is filing an application to abandon the property from the bankruptcy estate. An acknowledgement of the existence of the Chapter 7 has been added to the contract. Do we need it in writing from the trustee,himself that he approves the sale or is the addendum to the contract enough. The Trustee did not sign the addendum, just the buyer, seller and both agents.
August 4, 2009 at 9:54 am
Hi Darren,
As you already know, I handle a lot of short sales. I had this situation come up, however it lasted about a year to close the short sale. The seller filed BK and the bank would not move forward with the short sale. So we ended up waiting until the BK was released and bank finished the short sale instead of foreclosing. I was completed, just very dragged out.
October 12, 2009 at 4:48 am
We are in the process of buying a short sale and the owner filed for bk . The bank approved contract but it has now expired because we could not settle because of bk. Now the bank says they will not approve contract until Motion for Abandoment waiting period is up. Is the bank likely to approve this contract or should we move on from this sale ? Would a letter of hardship from us to bank help at all?
October 21, 2009 at 4:39 pm
Letter shouldn’t help. But the fact that you are in the process of getting the Motion for Abandonment on calendar and approved is a good sign. The lender is likely to allow your sale onc the BK Court give their approval (by Trustee Abandoning).
October 16, 2009 at 11:50 am
[…] Short sales When Seller Files BK […]
January 21, 2010 at 3:16 pm
I’m currently in Chapter 13. I have two multifamilies. My wife filed for divorce and one of the multifamilies is now my primary residence. Can I ask the trustee to allow me to short sale the other multifamily and convert my Chapter 13 to a Chapter 7. I just do not see how I can pay child support and make it under Chapter 13. Are their any hidden problems that I might not see?
January 21, 2010 at 11:16 pm
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January 23, 2010 at 12:46 am
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February 24, 2010 at 6:33 pm
In regards to the last paragraph “Safe Harbor for Sales”
What does “good faith purchasers who give value” mean? Please help. My seller decided to file a BK 2 weeks before a closing date 2/26/10. His creditor meeting is on 3/5/10.
The house owes $1.1 million short selling for $627,000.
What is ramification if we close without Trustee approval?
February 27, 2010 at 2:19 pm
The “Safe Harbor for Sales” is more or less an exemption. So, if the home has no equity, the other creditors cannot be upset due to the fact that they would not get any monies from the sale any way. You can motion to the Court to approve the sale. That is the best way, but it takes some time and more fees.
February 27, 2010 at 8:06 pm
So, whats Worst/Best case scenario if it closes before the 1st BK creditors meeting?
March 22, 2010 at 5:40 am
If we’re in a short sale process and decide to move into a rental and leave the current home because we can’t afford the mortgage, can the mortgage company say we’ve abandoned the property, then say since we’re paying rent somewhere else, although significantly less, they won’t do a short sale….?
March 22, 2010 at 7:40 am
The terms of the Note and Deed of Trust will rule. Whether the lender will do a short sale, an internal agreement (not Federal HAFA which requires occupancy) will not depend on occupancy.
March 22, 2010 at 10:54 am
Brian,
This typically will not matter to most lenders in order for them to agree to a short sale. I specialize in short sales and most of my clients do not live in the home we are short selling. It mainly comes down to your income/expenses per month. You would still consider the mortgage payment as part of your monthly expenses for approval purposes. Feel free to call me and I would be happy to help you with your situation at no cost to you. I will explain the entire short sale process along with all of the benefits to you. My cell is (702) 203-6688.
July 29, 2010 at 2:51 pm
Hello,
My closing date was May 19 2010. But seller file BK on May 17 2010. Today’s date is July 29 2010. I paid for inspection & apprisal. Now the listing agent was telling that, If I want i can cancel the escrow. Can you please tell me, how long this process will take to close the home.
Thanks
Mahes
July 30, 2010 at 10:11 am
Now that the Seller has filed bankruptcy (and provided the Home at issue is listed in the bankruptcy) you will require court approval before you can close. If this is a shortsale, the Lender (a creditor in the bankruptcy) will also need to approve. You should ask your salesperson to ask the listing agent if the Seller desires to continue with the sale as a result of the bankruptcy. If yes, the Seller can work with their bankruptcy attorney to effect the close. If the Seller rejects the current escrow (and they can) then you no longer have a contract.
September 24, 2010 at 2:57 pm
I recently listed a property as a short sale and received a contract, which the seller accepted. The buyer’s agent opened escrow. One week later the seller calls me and states they want to file chapter 7 BK and their attorney suggested they “put on the breaks” and not proceed with the short sale. Does the buyer have any recourse if they still want to proceed with the property? Can the seller still sell the property as a short sale with a chapter 7?
September 26, 2010 at 12:05 pm
No recourse, as any damages sustained by the Buyer would be released as to the Seller within the Bankruptcy.
September 29, 2010 at 10:24 am
HUSBAND N I BOUGHT HOME IN CA FOR 319,000 ABOUT 3YRS AGO. SELLER CARRIES NOTE. SHE NOW RESIDES IN RENO, NEVEADA WHERE SHE HAS PURCHASED ANOTHER HOME. HUSBAND N I TRIED TO GET A LOAN SO WE COULD PUT THE HOUSE IN OUR NAME BUT NO ONE WILL LOAN US THE $ BECAUSE HOUSE ISN’T WORTH WHAT IS NOW OWED..SELLER JUST LET US KNOW THAT SHES FILING BANKRUPTCY.WILL OUR HOUSE BE EFFECTED? IF SO HOW. DO WE NEED TO WORRY PLEASE HELP!
September 29, 2010 at 12:46 pm
I cannot offer you legal advice. The Reno person is a Lender. The Lender’s bankruptcy should not affect your rights as a home owner. You must still make your payments. If the Lender’s note is the only note on the property, perhaps work with the Lender to a.) lower the principal amount b.) to allow for you to get a loan in line with the true value of the home. These proceeds would however, have to be paid to the Bankruptcy Estate of the Lender (the Reno person.).
October 27, 2010 at 5:21 am
I have a question my daughter has a house on a landcontract the seller filed bk 7 we got a letter from trustee that she forthied the contract did not here from any body for yr now her daughter is saying she owns the home !! and is taking my daughter to court for the house back
February 7, 2011 at 7:13 pm
I have a question, couple of friends borrowed money from me and they co-signed each other. Each of them made only 2 payments instead of 6 payments each. One said that she will renew the contract and pay for the other person and that make it a longer term so the payments is not too big. What happened was,I agreed to this to avoid hassle. She signed the new contract and found out later that she had file bankruptcy 2 weeks before she signed her new contract. Is the new contract valid? Can I go back to the old contract and sue the co-signer?
February 26, 2011 at 8:20 pm
Hello, I have been involved in a short sale since August 2010. At first, the trustee wanted a 5% commission ($20,000) to sign the deed if the deal went through. I instead, worked with the owners, had them sign the deed and asked the trustee to release it. He was mad and is refusing to sign the affidavit of abandonment. Do I have any recourse? Can you explain the “Safe harbor for Sales”? thanks!
February 22, 2012 at 6:48 pm
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[…]TGIF Legal Tip: Short Sale Seller Files Bankruptcy « Nevada Residential Real Property Law[…]…
April 7, 2012 at 12:54 pm
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[…]TGIF Legal Tip: Short Sale Seller Files Bankruptcy « Nevada Residential Real Property Law[…]…
April 18, 2012 at 5:31 pm
we were days away from a signed contract in a short sale in MN when the owners filed BK. We are already in the home thru a rental agreement with the owners The short sale is now null and void and a sheriffs sale is set for May 8th the redemption period is 6 months and the house will then be placed for sale (again) at that time. The question is can we continue to live in the house thru the redemption period and buy the house when it is over?
June 28, 2012 at 7:41 am
Hello,
We put a contract on a ahort sale home. It was approved by Chase Bank but we cant’t get approval on yet because seller filed BK and bank is waiting for letter from trustee. Please explain what bank needs? How long will it take? What can we do?
July 21, 2012 at 11:53 pm
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October 5, 2012 at 3:08 pm
[…] This is a follow up to my March 20, 2009 post Short Sale Seller Files Bankruptcy. […]
October 5, 2012 at 3:48 pm
[…] This is a follow up to my March 20, 2009 post Short Sale Seller Files Bankruptcy. […]
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July 3, 2013 at 10:10 am
I closed on a short sale on June 13, 2013. i have all closing paperwork and approval letters fromthe bank. Now 3 weeks later we recieved a call from the sellers attorney stating that the seller has filed bankruptcy and now the bank is not accepting the short sale and their will be a lien placed onto my house. How is this possible and what does it mean for us, the new buyers.
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