Is Seller Better Without Bankruptcy Protection?

Question

I'm about to meet up with a seller who is on her way to being dismissed from BK (chap. 13) due to her inability to make the payments. She thought the payments would be cheaper when she filed but of course she was taken in by those who make money on her filing.

In any event, her letter from the Trustee says that if she doesn't pay x amount of dollars by 7/21/10 she will be dismissed. She doesn't have the money anyhow (and actually has some equity in her primary home) to make the payments. My thinking is that at this point she is better being dismissed from BK so that any deal she and I make won't have to be approved by the Trustee. Am I correct in my thinking here (generally speaking)?

Ibrahim Hughes · Answer

I posted this on another site where a person I know who is extremely knowledge about real estate legal matters, especially BK, had this to say:

Yes, you must wait to sign the contract because any contract dated while her assets are part of the Bk estate, (prior to closing of the Ch 13 case), would not be enforcable, even after the case would be closed. She can't agree to sell what is not hers, and technically the Trustee now owns her assets.

It was followed by another knowledgable investor in this area who stated the following:

You can have your seller complete and file the BK form "Petition for Order for Voluntary Dismissal" along with getting an Order for same signed by the BK judge.

Or, if you're impatient or have control issues, it may be even odds as to whether the Trustee's Request for Dismissal or Petition for Voluntary Dismissal gets signed first, but it's good to know that you have tools that you can use and a basic understanding of the BK system/documents.

Ibrahim Hughes · Answer

Yep Tracy. It seems like you were dead on. Thanks to you and everyone else who answered.

Tracey B. · Answer

see what I wrote Ibrahim. What they said is true and I have been in this situation before. The seller actually backed out of the deal and I had no legal recourse. Trust me on what I said.

Bill Gulley · Answer

Hi, IMO, a seller can enter into a binding contract, but it must be subject to court approval if the contract is to be closed prior to discharge. A contract that is entered into by a seller in bankruptcy can contract, but he can only perform after the bankruptcy is discharged and he should inform his attorney and the court that a contract has been enterd into; if it is not to the disadvantage of other creditors, and it is for an amount acceptable to the court, the contract can be closed. The petitioner can not incur debt or do anything to dispose of property or assets after filing. They can agree to sell, but they can't do anything until the court approves it or the bankruptcy is over, discharged. Good luck, Bill

Tracey B. · Answer

Exactly what Steve said, you cannot have a legally binding agreement to purchase a home from someone in BK because they don't have to honor the contract if they are in bankruptcy. As I said, if you plan to buy the house and you have checked out the liens and such on the house and made sure you want it, then when the seller is out of BK you put it under contract.

Steve Babiak · Answer

Ibrahim,

Here is some info I posted that might give your seller some insight into their situation:
http://www.biggerpockets.com/forums/105/topics/40365-looking-to-help-a-friend-property-auction-date-set-3-weeks

Not sure abo t your question on getting under contract; I believe that the sale cannot close until the BK is dismissed.

Ibrahim Hughes · Answer

Thanks Tracey. So you are saying that I shouldn't get under contract with her until AFTER she is officially dismissed from BK?

Tracey B. · Answer

Yes, once she is dismissed you can enter into legally binding contract. But of course, after she is dismissed the creditors can also come after her. DO NOT tell a homeowner to get out of bankruptcy unless you have done a title and lien search on her home and are 100% sure you are buying the house or you can get in trouble.