BE CAREFUL WITH PROPERTIES IN BANKRUPTCY

September 22nd, 2012 at 7:13 pm

As you know, given the economy of recent years, it has become more common for us to see transactions involving the Bankruptcy Court. Most commonly, our seller has filed bankruptcy in order to delay a foreclosure or stop some legal proceeding against him, and the property we have been asked to sell is now subject to Bankruptcy Court jurisdiction. While I do not want to go into too much detail about what this means, there a couple of warnings I would like to pass on. First, as with any property subject to a court proceeding, selling a property in bankruptcy is much more complicated than the normal deal. For example, after a bankruptcy is filed, the court appointed trustee can disavow any of the debtor’s (usually the seller) contracts. So, the trustee can terminate our listing agreement and hire a new broker. She can also disavow a purchase agreement that the seller has already signed. So, the most important thing for you to remember with a property in bankruptcy, is to be in contact with your client’s bankruptcy attorney or the bankruptcy trustee and follow their instructions. They will tell you who needs to approve any action you take, and what sort of court proceedings will be necessary. And remember, all bankruptcy issues are legal so you should not be advising your client concerning those questions. Always have the client consult with their attorney.

Next, I wanted to warn you about what happens when a debt is “discharged” in bankruptcy and specifically how such a discharge will affect the typical real estate transaction. In a few transactions we have had recently, our seller’s debt to a lender was discharged by the Court. Based on that discharge, our agent believed that the property could be sold without dealing with that “discharged” lender. Of course, when the title report was ordered, that lender’s lien was still shown. So the question arose whether the “discharge” eliminates the lien or not. After much research, we discovered that even with the discharge of a debt, a lien against the property still remains in place. As odd as that may sound, the discharge eliminates the debtor’s personal liability for the debt. In other words, the lender cannot sue the borrower for repayment. However, when the debt is also supported by a lien against real property, the lien continues after bankruptcy and must be paid off at sale of the property.

So, if your client tells you not to worry about their mortgage because the debt has been “discharged,” tell them you believe it still exists as a lien and send them to their lawyer for advice. More importantly, don’t be a bankruptcy expert. In almost all instances, a client in bankruptcy will have a lawyer who you can use for direction. That lawyer becomes a great resource for you and can make sure that you handle things right and make no mistakes in your transaction. And, of course, that is what we all want.

As always, give a call if you have any questions

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