Subject To and Bankruptcy

[Jeff Cardello]

I am new to the Subject To strategy and have been attempting to gather as much information as possible.  Most of it seems pretty positive but I was warned that a property that I purchased could be seized by a court if the seller files bankruptcy.  

Is this true?

How do I mitigate this risk?

Thank You for your time!

[Don Konipol]

@Jeff Cardello

I think the source of your information is confusing a subject to purchase with a land contract purchase.

In a subject to purchase full title is transferred so that even if the seller (who is still on the note) has filed bankruptcy, this does not DIRECTLY affect the buyer. I say directly because there may be problems indirectly as a result. When the seller files bankruptcy, he will have to inform the lender holding the mortgage note. Since the note is now part of the bankruptcy, the note holder will move to protect himself by filing a claim as a secured creditor, and ask the court for permission to foreclose, or doing a title search the lender will realize that title has been transferred to another party. Many lenders will conclude that it is in their interest to foreclose at this point, as they don’t want to be at the mercy of the bankruptcy court vis a vis their ability to enforce the mortgage lien.

In a land contract, equitable title has passed to the buyer, but legal title has not. It then becomes up to the bankruptcy court judge to balance the interests of the title holder, the contract holder and the creditor as well as other creditors. The results are more of a wild card than even the subject to deal.

In any subject to deal the buyer needs to be ready to pay off the mortgage on demand, or within the time frame of a foreclosure. In a subject to the transfer of title is a violation of the covenants of the mortgage or deed of trust with the remedy being the right to foreclose. Many judges have little regard for the buyer who buys via subject to as their experience with buyers who don’t obtain new financing are mostly the result of the seller trying to game the system by using a straw buyer to get it out of his name, even when this is not the case.

Bet all the people promoting subject to deals didn’t tell you that!