Approaching Someone Who Has Filed Bankruptcy

11 Replies

I have found a property through Bigger Pockets that is owned by someone who has filed for bankruptcy (at the end of August). I have found through other forum posts that the best means of contacting the owner would be to skip trace and find their phone number. I have already found the owners on Facebook and plan on finding the phone number soon to contact them. My question is, what do I need to know when attempting to buy from someone who has filed chapter 7 already? I read on other forum posts when trying to buy a property with a tax lien that you should check to make sure they haven't filed for bankruptcy. I have also read that you should check the title to make sure there are not extra liens on it. I'm very new to investing and am curious, how do you search titles to ensure the lien status? Thanks for any and all input!

This is where a great relationship with a title company comes in to play, or taking a great course on title research.  In this case I would think you would want to go thru a title company for advice on what they will need to issue title insurance.

#1 Question is if the seller plans to keep or sell the house as part of the bankruptcy....If they want to keep it and pay the mortgage and have the ability to do that, then it stays with them.  If they want to sell, then they will need court approval to sell.  So typically both parties will agree to price and terms on normal contract with special provisions that it must be approved by the court.  Their bankruptcy attorney will likely handle this part for you.  This could take a couple of months or potentially more.  

That's part of it....of course than can be a lot more to it if there are mortgage liens, tax liens, or more.

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I suggest you look up the bankruptcy case in PACER, the online portal to the Federal Court System, including Bankruptcy Courts.  There you will be able to identify the Trustee of the Bankrupt's Estate and/or his/her attorney since unless the property is exempt property it no longer belongs to the Bankrupt but to the estate.  I assume you want to contact the Bankrupt to buy the property however I believe that is futile since as I wrote, he doesn't own it.  I doubt a title company is going to invest the time to locate this information for you however they may be willing to tell you in general what they would require to issue a title policy without an exception for a bankruptcy or creditors of record.  This is a pretty complicated area of real estate investing and recommend you tread carefully.

Originally posted by @Blake Morton :

I have found a property through Bigger Pockets that is owned by someone who has filed for bankruptcy (at the end of August). I have found through other forum posts that the best means of contacting the owner would be to skip trace and find their phone number. I have already found the owners on Facebook and plan on finding the phone number soon to contact them. My question is, what do I need to know when attempting to buy from someone who has filed chapter 7 already? I read on other forum posts when trying to buy a property with a tax lien that you should check to make sure they haven't filed for bankruptcy. I have also read that you should check the title to make sure there are not extra liens on it. I'm very new to investing and am curious, how do you search titles to ensure the lien status? Thanks for any and all input!

In my experience a borrower who files a bk7 generally wishes to keep the property. If they succeed in the bankruptcy and get discharged, generally all of their unsecured debt gets wiped giving them a better chance of salvaging their mortgage.

Any real estate transaction would have to be approved by the court, which would require the debtor or their counsel to file a Motion to Sell Real Estate. Once the judge signs the order, then you are good to go.

A Ch 7 BK is a liquidation. If the debtor sold the house to you, he or she might not get a benefit from doing so since any proceeds will be used by the trustee to pay the other debtors. So, what might be an incentive for the debtor to sell the house to you? That's a question to ask yourself.

If I were you, I'd go ahead and contact the debtor to see if they're interested in selling to you. You are not a creditor so there's no automatic stay in place for you. If they are interested in selling to you, keep in mind that you may have an uphill battle because you'll have the attorneys & courts to deal with.

I'm pretty sure in a Ch 7 Bk the debtor's property now belongs to the estate and is controlled by the Trustee unless the property has been set aside as exempt.  In the case of non exempt property a deed from the debtor is void and of no effect.

@Blake Morton

As Chad mentioned many times borrowers want to keep the home. You can check pacer to review the BK case and see what they put for the property(retain or surrender)

If they wanted to retain it they may have executed a reaffirmation agreement which reaffirms the debt owed (so for the lender it’s like ch7 never occurred)

Until it has been discharged there is not much you can do.

I would start by researching on pacer

@Peter Walther I've only seen a debtor get an Order to Sell Real Estate in a Ch 13 case. The judge allowed it because we let the debto do a short sale and he was able to use the proceeds to pay off a lot of other debt and improve his reorganization under the Ch 13 BK.

I don't see why it couldn't be done in a Ch 7 case as well. If the debtor could show that selling a property was to the advantage of creditors, I think judges and trustees would buy off on that. However, most investors would be trying to get the property for a discount, which means that this would probably not work.

As far as I understand it, in a BK, whatever the debtor owns of value is considered his estate and he or she loses control and the ability to transfer or sell these assets without the permission of the judge (who relies on the trustee's discretion in most cases.)

Just because the owner filed Chapter 7, does not mean they are looking to get rid of the property. Before you put more time into this - approach the owner and ask if they want to sell. If they do, the easiest way to buy the home will be after the Ch 7 is discharged. Unless the home has significant equity (Which I've never seen in a Ch 7), they will still own it after the discharge, and you wont need to deal with the courts.

Originally posted by @Andy Mirza :

@Peter Walther I've only seen a debtor get an Order to Sell Real Estate in a Ch 13 case. The judge allowed it because we let the debto do a short sale and he was able to use the proceeds to pay off a lot of other debt and improve his reorganization under the Ch 13 BK.

I don't see why it couldn't be done in a Ch 7 case as well. If the debtor could show that selling a property was to the advantage of creditors, I think judges and trustees would buy off on that. However, most investors would be trying to get the property for a discount, which means that this would probably not work.

As far as I understand it, in a BK, whatever the debtor owns of value is considered his estate and he or she loses control and the ability to transfer or sell these assets without the permission of the judge (who relies on the trustee's discretion in most cases.)

Perhaps I wasn't clear, I believe in a Ch 7 the Trustee, not the debtor can ask the Court for permission to sell the property since basically the debtor has turned all non exempt property over to the estate and is walking away for responsibility for the debts and assets.  In a Ch 13, the debtor believes there is some equity to be salvaged and submits a plan to the Court to explain how (s)he's going to discharged the liabilities and while there is a Trustee to oversee the debtor's compliance with the plan, so long as the debtor is making payments as agreed in the plan, retains an interest in the assets of the estate.

Why not the debtor? The debtor can ask the Court whatever he or she wants. Ultimately, it's up to the Court to make a ruling, not the debtor or the trustee. The Court more often than not will ask for the Trustee's recommendation and will go with that unless there is a conflict of law. I've seen BKs convert from Ch 7 to Ch 13 or from 13 to 7 so it shouldn't matter which chapter it is.

Any attorneys out there who can chime in?