How does bankruptcy affect a short sale and how could you lose thousands of dollars?

The owner is bankrupt

You never want to offer legal advice to a homeowner in the first place, unless it is in the rare situations where you are a qualified attorney. Let’s discuss the two typical types of bankruptcies you may encounter.

Chapter 7 – known as Liquidation

Chapter 13 – known as Reorganization

With either type, you will have to contact the bankruptcy trustee to get the property released.

You will need to get a letter called “Affidavit of Abandonment of Real Estate and Assets”

This letter will allow you to obtain a clear title so that you can close the purchase of the property with your buyer. Bankruptcy suspends or “stays” the foreclosure process or any other period of debt collection. This will continue until it is completed or the judge issues a “stay release” for the lender or lender’s trustee to proceed with the foreclosure.

If you try to do something with the homeowner while they are bankrupt, it can be considered “fraudulent conveyance” since the asset (the property) you want to legally purchase is not under the owners’ control at the time. In fact, there is a federal law that states that ANY transfer while the property is in bankruptcy will not be valid! Bankruptcy has control over it. You see, when a person files for bankruptcy, the bankruptcy court will appoint a trustee/attorney to manage the homeowner’s debt situation until it is discharged or discharged.

The only way you can get the deed legally is to stop the bankruptcy or have the Bankruptcy Court Trustee agree to release it. You will need to contact the bankruptcy court trustee or attorney and tell them that you are interested in buying the house. Most of the time, if they deem the property to have equity, they will NOT release it. That is why it is vital to contact them about doing a short sale and the property is not worth what it is owed. Therefore, your equity is essentially negative. I’ve been through this process many times and I can tell you it’s NOT EASY… but doable. You will need to have all of your contractor’s reports, appraisals, and supporting documents ready to send to the bankruptcy court trustee at any time.

In my experience, it usually takes a minimum of 20 days before I get a response. That is, of course, if they’re not backed up with other files in front of yours, which is like… never. Before attempting this, make sure the property you are dealing with has a significant advantage. I’d say at least $30,000 profit or you’re probably wasting your time. It can be profitable, but you have to pick and choose your battles. Be sure to check how much time you have before the sheriff’s sale as well.

If the Bankruptcy Court Trustee agrees to release the property from bankruptcy, you can expect the foreclosure process to begin very quickly. Keep a pulse on how long you have to close it. It is best to have the buyer ready before you release the property.

In bankruptcy cases, I usually get the deed and all other documents signed, but DO NOT FILE THE DEED until I know the bankruptcy is complete or dismissed.

One other thing: EVEN IF…the BK has been dismissed, some title companies still need the above mentioned “Affidavit” filed by the attorney who filed the BK for the owner…or use another attorney to get a clean title .

I hope this helps.