Bankruptcy - Mortgage paid off, Debt is less than Offer

Buying & Selling Real Estate
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Bankruptcy - Mortgage paid off, Debt is less than Offer

Kelly Beck
Member since 2022 · 33 posts · 13 votes

Does anyone have experience purchasing a property where the mortgage is paid off and the seller is going through bankruptcy, needing to sell the house to pay off the debt? This is in North Carolina.


The seller wants to sell now before the trustee sells so she can get something out of it herself. The debt is less than what we'd be paying for it. I talked with the bankruptcy attorney and the debt owed is $75K. Right now WA is $140K but we're hoping to get it down after the inspection. ARV is $287K.

I know our offer has to be approved by the court, but does the trustee still try to get as much as possible out of the house, even though the WA is almost 2x what the debt is? And if so, does the seller get that money above and beyond the debt? Or does someone else? 

Is it typical for this to be approved since we're offering more than what the debt owed is? We have no idea what might be involved in getting the sale approved so we're looking for anyone with any experience with this.

Thanks so much.

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    3y
    Quote from @Kelly Beck:

    Does anyone have experience purchasing a property where the mortgage is paid off and the seller is going through bankruptcy, needing to sell the house to pay off the debt? This is in North Carolina.


    The seller wants to sell now before the trustee sells so she can get something out of it herself. The debt is less than what we'd be paying for it. I talked with the bankruptcy attorney and the debt owed is $75K. Right now WA is $140K but we're hoping to get it down after the inspection. ARV is $287K.

    I know our offer has to be approved by the court, but does the trustee still try to get as much as possible out of the house, even though the WA is almost 2x what the debt is? And if so, does the seller get that money above and beyond the debt? Or does someone else? 

    Is it typical for this to be approved since we're offering more than what the debt owed is? We have no idea what might be involved in getting the sale approved so we're looking for anyone with any experience with this.

    Thanks so much.

    She could go to jail for fraud if she sells outside of court and trustee approval. Granted, that's the worst case scenario, but it got your attention didn't it. ;-)

    Your Comment: "The seller wants to sell now before the trustee sells so she can get something out of it herself."

    Once she filed bankruptcy everything she owns becomes part of the bankruptcy estate controlled by the bankruptcy court and managed by the bankruptcy trustee.

    If the trustee and the court approve of the sale, she can sell. Generally the attorney for the filing debtor (or bankrupt as some call it) will list debts in categories prescribed by the bankruptcy code. Those debts higher on the priority list usually get paid some portion of what is due. Whether she can sell and keep any of the proceeds is dependent on too many factors to discuss here, but it includes how much other debt is owed, and to whom, if there are other creditors on the property itself, if taxes are owed, child support, property taxes and a myriad of other considerations.

    If there is enough equity in the property, the trustee may chose to sell the property himself. And why not, he gets fat fees for selling properties to pay off debts.

    She has to talk to her attorney, openly and honestly, if only to avoid criminal charges, but even still, the title company won't provide clear title on the transaction until the bankruptcy is closed or there is an approval by court order. I've had judge take two months to sign the approval so we could complete the transaction. And you don't just call up a judge and ask to hurry up.

    Depending on the chapter filed, chapter 7 or chapter 13, the process can take months to work out and finally close. It isn't a swift process.

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  • Kelly Beck
    OP
    Member since 2022 · 33 posts · 13 votes
    3y

    Mike, thank you so much for your detailed response. I would never in any way want to be responsible for some one possibly being charged with fraud, so we'll avoid this one.

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  • Kelly Beck
    OP
    Member since 2022 · 33 posts · 13 votes
    3y

    My phone must have cut off the bottom of your post...So you've had success with this? There is a lot of equity in it, possibly over $100K. If we would decide to pursue it, what should we do as investors to take precautions to protect ourselves? What can we do to make sure the seller would avoid fraud? Just be sure she's being open and honest with the attorney? 

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    3y
    Quote from @Kelly Beck:

    My phone must have cut off the bottom of your post...So you've had success with this? There is a lot of equity in it, possibly over $100K. If we would decide to pursue it, what should we do as investors to take precautions to protect ourselves? What can we do to make sure the seller would avoid fraud? Just be sure she's being open and honest with the attorney? 

    There are a couple of ways to go and since I don't know the circumstances I'll just give an outline.

    First, you need to know if she filed chapt 7 or chapt 13. I presume she declared all assets and debts and income.  If she filed chapt 13 and has enough income to service the debt, it's a lot eaasier.

    I'll assume in this situation, she filed chapt 7 to discharge all debt. It depends on who she owes money to. The bank was listed as a creditor and they get a say in how things proceed. 

    You have to assume the trustee has done an appriasal or a broker's price opinion on the value of the property. The judge will primarily listen to the attorney of the bankrupt if there is a good case for selling to you.

    There are some background techniques that probably can't be done here, since everybody is inexperienced and the techniques require a fair amount of knowledge.

    So, you prepare a written offer to buy the property. You try to get the bankrupt's attorney to present it to the court. If the attorney doesn't want to deal with it, it means he isn't getting paid, usually about $500, to present it or he doesn't believe it will fly. Since he doesn't represent you, he represents the bankrupt, usually both of you would have to meet with him. He then schedules it for a hearing and puts it on the court calendar about 4 weeks to 6 weeks out.
    There is a way for you to present it to the court for a hearing without using an attorney. But you need to know a little about FRCP and procedures and local court rules. Keep in mind that the judge and the trustee see each other all day, every day and have a close working relationship. The judge relies on the trustee.

    The trustee & the bank review the offer. If the sale covers paying off the loan and any liens, it will usually be approved, which takes another month to get the signatue, depending on how busy the judge is.

    It can be denied for a whole lot of reasons. If the trustee thinks it is unfair and deprives others from being paid off etc he can squelch the deal. The trustee's costs include hiring a real estate agent, administrative costs and time to sell the property and they usually won't do that. But, if there is enough money in it they ill sell the house. The trustee gets compensation  per https://www.law.cornell.edu/us...  A trustee is a private attorney hired by the court, not an employee.

    I would read a well written piece about this at https://talkovlaw.com/chapter-...

    The bank can force a foreclosure depending on the circumstances.

    In some cases, the bank will accept a reinstatemnt; paying off the arrears and sometimes the trustee and judge will allow that. That frees the bankrupt to sell at the price they can get. 

    I haven't mentioned homestead, exemptions and reaffirming the debt because those require real knowledge about the actual situation. They are things to bring up with the attorney and see if they apply.

    1Reply
  • Kelly Beck
    OP
    Member since 2022 · 33 posts · 13 votes
    3y

    Again, thanks so much, Mike. I'll ask her what she filed. Sounds like it's a mess if it's 13. 

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  • Kelly Beck
    OP
    Member since 2022 · 33 posts · 13 votes
    3y

    So, she just told me it was Chapter 13. How would that change things and the process we should go through? Her debt is $75K, she does not have a mortgage and has been making $500 payments each month. ARV for the property is about $250K. Should we start by getting an inspection to determine the repair costs needed, so we know what our offer is? Thanks again.

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