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
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