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6 Things Agents Need to Know about Bankruptcy

Dec 5, 2016, 07:00 AM by User Not Found

Sooner or later, every real estate practitioner encounters a property involved in a bankruptcy. Bankruptcy laws and the discharge of debt both provide debtors with a fresh start. But mortgage loans, unlike some debts, are secured by collateral. In this case, the collateral is the home itself, with the lender as the lien holder. While bankruptcy will typically wipe out the debtor’s personal obligation to repay secured debt, the lien itself – the lender’s legal claim on the home – generally survives. Bankruptcy does not eliminate it.

This can complicate matters for buyer and seller and for the agent or broker. The more you know about what is entailed, the more equipped you will be to guide clients through the sale process, and to decide whether you want to get involved.

Issues surrounding bankruptcies can vary by state or specific circumstance. A bankruptcy attorney is the right source for information about the details. In general, however, here are some common issues agents and brokers should know:

Brokers must be pre-approved by the bankruptcy judge. The Bankruptcy Code requires that professionals working with the estate in bankruptcy are ‘disinterested,’ or free of conflicting loyalties.
The court must approve pre-sale repair costs. Vendors extending credit post-filing will want assurance that their bills will be paid ahead of debts that existed when bankruptcy was filed.
A sale must be approved by the court. Once in contract, creditors must be notified. They will have a limited amount of time to file an objection. Also, when the court issues orders approving the sale, or avoiding a lien, the orders are generally not final for 14 days (so that parties may have time to file an appeal, if they would like).
‘Upside down’ sellers may be good ‘short sale’ candidates – If the market value of the home is less than what is owed, the lender may agree to accept less in exchange for releasing the mortgage to facilitate a sale at market value.
Sellers with equity can be good news or bad news. On one hand, the workings of the bankruptcy can buy the broker time to find a buyer and close a sale. On the other hand, sellers in bankruptcy may be in denial about how much their home is worth.
Bankruptcy timing can impact sale. If a seller files bankruptcy after a contract has been signed, the buyer may elect to back out of the deal. But if the seller and the bankruptcy trustee seek to close on the sale, you can help it to happen. Consult a bankruptcy attorney to explore the options for keeping the deal together.

Barbara Pronin is an award-winning writer based in Orange County, Calif. A former news editor with more than 30 years of experience in journalism and corporate communications, she has specialized in real estate topics for over a decade.

Published with permission from RISMedia.