Owner filed for bankruptcy. Short Sale still possible?

Question

If an owner files for bankruptcy can they still do a short sale on a property? I've run into owners who say they have filed for bankruptcy and are protected from the bankscoming after them. I never have an answer for that response. i would love to say "no worries. We can still short sale the property"

Ayo F. · Answer

Hello Michael,
You need to know the bankruptcy process if this is a situation you often run into.
First you need to know if it is a chapter 13 or chapter 7.
Chapter 13 is a reorganization of debt while 7 is a total discharge of debt.

With a 7, there little to nothing you can do.
With a 13, there's a lot you can do. I really like when homeowners have filed for bankruptcy cos thats a good ammunition when you eventually talk to the bank.

After a homeowner files for a 13, they have about 30-45 days before they are required to appear in court for a 341 (meeting of creditors) hearing.

during this period they are not required to make any pmts and the bank can never sell the property...so the bank will have to push the foreclosure about 45-60 days forward. regardless of whether the homeowner has filed a 13, they are still in foreclosure. After the 341 hearing, the judge determines how much the homeowners can afford to pay their creditors and puts them on a pmt plan. Now to the bank, this is a FORCED FORBEARANCE situation. The bank CANNOT sell the property unless the homeowner stops making that pmt. If they do stop making that payment, then the bank will file for "Motion to release from Stay". This allows the bank to take the house ALONE out of the bankruptcy. Once this is done, the foreclosure date becomes a HOT sales date. Keep in mind that during that whole process, the bank never took the homeowners out of foreclosure, they just kept postponing the foreclosure sales date by 30 days as long as they are receiving the pmts from the court.

It is erroneous for homeowners to think that they cannot loose their property just b/cos they filed a 13. If they do not stick with the pmt plan, then the bank is has the legal right to file that motion to release the house from the bankruptcy.

85% of homeowners default on that payment plan and the banks know this.

If you know the process, you can maximize it to your advantage and that can even help you negotiate with the bank. A good attorney can keep the bank from selling the property and the homeowner can live in the house for FREE for 1-2 years. Would the bank like to loose all that money?

PS: I am not an attorney and as such this is not a legal advice. Please consult your bankruptcy attorney

William D. · Answer

There are a lot of variables to the answer but the easy answer is that a bankruptcy filing does not prevent a bank from releasing their lien in exchange for a short payoff. The delay occurs because if the bankruptcy is pending then you cant do it without the bankruptcy trustee's permission.

To give you a practical response for when your proposed seller brings up the bankruptcy issue, you could respond by acknowledging that if the note was discharged in bankruptcy and not affirmed then they are correct, the only recourse for the lender is the property. However, if they help the bank liquidate the property instead of having to take it through a foreclosure then it may reflect positively on their credit score and their ability to get a loan in the future.

Maryann L. · Answer

You can do a short sale after a bankruptcy is DISCHARGED, provided the asset wasn't surrendered.

When a homeowner says they can't come after me, it means the lender cannot pursue the homeowner for the deficiency if it forecloses.

Joel Owens · Answer

The foreclosure process will vary from state to state.

File is transferred to the lender or servicers BANKRUPTCY department upon filing unless it is a smaller bank.The smaller banks generally have many things rolled into one department as they do not have the default volume to justify separate departments.

3 ways to dismiss in BK.

The filer motions to dismiss the case.

The trustee motions to dismiss the case for non-payment of the BK plan.

The creditor motions for a "relief from stay" for their asset.
In other words if they borrower is making the BK payment but not the regular mortgage payment the bank can ask for the asset to be pulled out of the stay.

This way the bank starts to foreclose again.How a bank views the foreclosure process will depend on time lines and process for that state.

From my experience banks do not like short sales while in BK as that can be viewed by the court as a collection activity against the borrower.

My experience also shows that sellers are motivated to do something up until filing BK.After filing BK they get a sigh of relief for awhile.

If you live in a property as your personal residence and filed BK you sure don't want to sell it.You want to milk the BK for all it's worth.The credit is usually trashed to because for many BK is a last resort after failed loan mods and many other avenues haven't worked out.

Oswin Grant · Answer

if the property is included in the bankruptcy you will not be able to complete the short sale, unless the seller releases the property from bankruptcy to close the short sale with you.

Michael G. · Answer

I dont understand. When does the delay occur? Is it because bakruptcy proceeding prevent the sale of assets? Does that mean I can take the preliminary steps toward the short sale? ATRI, bnk stmts, tx returns, hardship ltr, etc?

Rob Gillespie · Answer

Just a delay. Chapter 13 will be a longer delay, but it should all be a go. Good luck! :mrgreen:

Owner filed for bankruptcy. Short Sale still possible?

Owner filed for bankruptcy. Short Sale still possible?

Most Popular Reply

7 Replies