SSP 009 : Short Sale Help: Does filing Bankruptcy matter?

The Short Sale Podcast for Real Estate Agents

During this episode we will discuss how understanding a little more about the effects of filing Bankruptcy will keep your sellers better informed.

Does filing Bankruptcy really matter in an ongoing Short Sale?

How does bankruptcy affect your sellers that may or may not be considering a short sale? Let me make a disclaimer, I’m not an attorney and there’s nothing I’m going to tell you in this episode that is intended to be misinterpreted as legal advice. But I do feel that for you to understand the impact that bankruptcy may have on your sellers would be incredibly helpful. Don’t worry you’re not going to get accused of practicing law. In fact, I suggest very strongly that as a real estate professional, you take a little bit of time, make a couple of phone calls to some local attorneys that are reputable that are in your market place and ask them if you could sit down with them and discuss how bankruptcy affects sellers, that may or may not be considering selling their home as a short sale.

Lawyers can give legal advice. And lawyers can give real estate advice. It’s one of those odd things that are written in most of our state statutes. But as a real estate agent, you can only give real estate advice. As a licensed real estate agent, you’re not allowed to give investment advice. You’re not allowed to give legal advice. And lawyers, just like real estate professionals, some are better than others, some are easier to trust. You’ve probably had some dealings with some reputable ones. But if you take the time to go look for a couple of good lawyers in your marketplace and sit down with them, you might find that it can turn into a mutually beneficial relationship.

Why do people file bankruptcy? Let’s answer that question, so that you have a basic understanding. In most cases it’s because they have too many bills or just too much debt. Maybe they ran into some catastrophic experience, loss of job, maybe an injury, a divorce, a legal issue, it’s hard to say why. But in most cases, bankruptcy is a provision provided to citizens, residents, U.S. citizens in order to help them overcome challenges that have to do with the absence of money or too many bills, things like that. I’m not advocating that people should irresponsibly manage their money and then file bankruptcy, but I do understand enough about bankruptcy to be able to give someone, not legal advice, but a little better understanding.

There are two common forms of bankruptcy; Chapter 7 and Chapter 13. The difference between the two is that a Chapter 7 Bankruptcy is what they’d refer to as a complete liquidation while a Chapter 13 is a financial restructuring. Think of a Chapter 7 as “I give up, I just want out, I don’t want anything to do with anything” whereas a Chapter 13 is “I just need a little breathing room to be able to put things back on a good footing”.

Filing bankruptcy should be done under the supervision of a lawyer you’re comfortable with. You’ll need to be prepared to pay your legal and filing fees up front since most lawyers tend to protect themselves.

When you file bankruptcy,what happens is you fill out a list of all the things you own, all the things you owe, what kind of expenses you have to determine any exceptions, and of course any income. Now in a Chapter 13, remember I said that’s a restructuring. The courts are going to look for your ability to be able to pay into the bankruptcy. If your income is less than your current living expenses, then they’re going to look at what you have available to pay, because the bankruptcy trustee needs to determine what your monthly payment is. So income, if it doesn’t even meet your living expenses, is probably not going to put you into a Chapter 13; because you’re going to be obligated to pay something each month into the bankruptcy. When you take out your living expenses from your income and you’ve got money leftover, well then the bankruptcy trustee will look at that and figure out how can that money be distributed between all of your creditors, those are the people you money to. And they will set up a payment schedule that that money goes into the trustees hands every month. The bankruptcy trustee will negotiate all your debts.

But in the case of owning a house when you go into a bankruptcy Chapter 13, all the back payments, the late fees, interest charges, are typically just determined to become unsecured debt. Verify that with a lawyer. But you’re still going to have to make current payments, the go forward payments. So if your income doesn’t support basic living expenses and mortgage payment, going into a Chapter 13 is not going to really be a good idea. Because they’re not going to reduce your mortgage payment. Just like a car loan, you’re still going to have to make payments or you’re going to lose the car. Now once your payment plan is established, then all the lenders will be agreed to take whatever your bankruptcy trustee negotiates. And for a period that may go as long as three to five years, you’ll make payments into the trustee and at some point they’ll released you and all of your debts.

A Chapter 7 bankruptcy is a total liquidation. It’s a lot different than a Chapter 13 because in a Chapter 7 you take everything you owe, everything you own, and you pretty much turn it over to a court appointed 3^rd party or trustee. This person’s job is to sell everything they can for cash, and then distribute the proceeds accordingly to the creditors. The debtors may get very little or nothing depending on what the trustee is able to liquidate. And after the assets have been liquidated and the funds distributed the filing party will be discharged and it’s all over, the end.

But what if you own a house? What if you have a house that’s say, worth $200,000 but you only owe $100,000 on it? Well, it’s not a very likely scenario to go into bankruptcy where you have substantial equity. Most people with equity in their home would have already tapped into the equity to avoid the bankruptcy. But let’s say you did have equity and you had to file a Chapter 7, what happens? The Bankruptcy Trustee would probably order you to sell the house to release the financial equity.

More than likely though the seller’s situation is the exact opposite; they have a house that’s worth $100,000 but they owe $200,000 or more on it. And what happens there? Well, depending on who you talk to, the court is going to treat the property as a secured asset; which means there’s a secured loan or mortgage against it. At some point the lender is going to ask the Bankruptcy Trustee to release the property from the Bankruptcy so they can begin or continue with the foreclosure process. The lender wants to sell the property and hopefully recoup some of their money but the lender can’t sell it because they don’t own it and in order to own it they have to go through the foreclosure process.

Even after filing a Chapter 7 Bankruptcy there are still issues to be resolved that could come back to haunt you. For instance; the Lender will still be required to file a lawsuit against you in order to proceed with the Foreclosure action. Until the property is out of your name anything that happens on and to that property could become a financial liability issue.

Here are some suggestions that I think you might want to make to your sellers. Again, we’re not practicing law with the sellers; all we’re doing is helping them understand all of their options. If it becomes an option, it should be treated as the last possible option; the one that you do when nothing else has worked, including trying to get your house sold doing a short sale.

My second suggestion is if your sellers may have to file bankruptcy make sure that you can recommend an attorney that will take the time to explain all the legal options to your sellers. You want to make sure that you refer them to an attorney that believes bankruptcy should be preserved as a last thing you do. Some attorneys lack a clear understanding of the Short Sale process and as such may offer a solution that contradicts what you’re trying to accomplish with the sellers. Before recommending an attorney make sure you have a good understanding of what kind of advice they’ll likely give to your sellers.

Homeowners considering bankruptcy tend to look to their lawyers for advice on what to do with the house. If your sellers have already filed bankruptcy they may not understand how involved they’re allowed to be in getting their house sold. The property may be under the control of the Bankruptcy Trustee even though it’s still in their name. I’m not attempting to give legal advice here and neither should you, but your sellers have the right to mitigate (or minimize) their own financial demise by helping to get the property sold. They may or may not need permission from the Bankruptcy Trustee to get the property sold but they’ll most certainly need the cooperation of the Trustee to transfer the title once the property has sold. The benefit to the seller is that they get the property out of their name faster and reduce further additional liability.

Keep in mind that you’re not an attorney so you’re not allowed to give out legal advice. But the next time a seller tells you that they’ve already spoken to their attorney about what to do, especially as it relates to getting their house sold, you should at the very least get them to meet with you so you can better understand their situation and advise them accordingly.

Thanks and Happy Learning,

Scot Kenkel, Instructor

P.S. What do you think? Leave your comments below. Thanks.

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