Topic: Bankruptcy question
Kuangting_Liu_MI - 08-22-2005 @ 7:15 AM
I just signed a Purchase Agreement. The owner was awarded the house from her divorce settlement. The husband has just quit-claimed the house to her last week. He is now filing bankruptcy. Would his bankruptcy affect my deal with the wife? Should I close the deal before his bankruptcy, or after, or doesn’t matter?I am buying the house subject-to and the loan is in both names.
Thanks!
William_Bronchick_CO - 08-22-2005 @ 9:05 AM
If he has already deeded the property over as part of his divorce agreement, I would not think his bankruptcy would affect you, since he no longer has any interest in the property. If the husband filed for chapter 7 bankruptcy BEFORE he deeded the property, that would be a problem, since he would need the permission of the bankruptcy trustee to transfer any assets AFTER the filing.
Theoretically, the court can overturn a transfer done before the bankruptcy filing as a “fraudulent conveyance”, but I doubt that would happen here, since he was required to deed it to the wife per the divorce settlement. Assuming that divorce settlement was approved by the court and converted to a divorce decree, I can’t see how this would happen. However, if the husband is entitled to anything from the resale of the property as part of the divorce decree, this may affect your deal. I would make sure the divorce settlement doesn’t entitle him to anything further.
Kuangting_Liu_MI - 08-24-2005 @ 11:45 AM
Bill, I am having a problem with this deal. The husband’s bankruptcy attorney said he can’t have the mortgage still in his name. His wife needs to either refinance the mortgage to her name, or the buyer (I) needs to get a new mortgage. The husband is concerned if I later default on the loan and with mortgage still in his name, it would affect him. And since he quit claimed the house to the wife, there is nothing he could do if that happens.
They are trying to back out of the deal. What can I do?
William_Bronchick_CO - 08-24-2005 @ 2:08 PM
Amazing... attorneys can sometimes give out wrong advice! If the husband files for chapter 7 bankruptcy, the loan IS out of his name once he receives a discharge order.
Paula_Chess_CO - 08-24-2005 @ 4:31 PM
Bill,My sellers are also about to file for bankruptcy after my purchase/sub2. I always thought the Bankruptcy simply postponed the mortgage debt rather than absolve them of it? Aren’t those payments still due at some point - and therefore foreclosure would loom somewhere in the not-so-distant future if it went unpaid?Can you clarify what you mean by the loan is “out of his name” ?
Paula Chess
Kuangting_Liu_MI - 08-24-2005 @ 6:05 PM
I checked with a local bankruptcy attorney and Bill was right. If payments were not made, the lender could foreclose on the wife and take the house. But the lender could NOT go after the husband personally. But he also said the lender could require the wife to refinance. This brings up another question. The bankruptcy may alert the lender and cause them to find out the house has been sold. That increases the chance of them calling the loan due. What’s your thought on this, Bill? If it was you, would you feel comfortable to proceed with the deal?
Paula_Chess_CO - 08-26-2005 @ 11:08 AM
So Bill, If both husband and wife were filing BK, is the debt really absolved - or simply postponed? If I’m taking it sub2, and it’s named in the BK, can the loan be called due during the BK period?
Paula Chess
William_Bronchick_CO - 08-26-2005 @ 12:41 PM
The debt is absolved as to the borrower (the husband, in this case) who is discharged of the debt in the bankruptcy proceeding. The lender still has a valid lien on the property, even if the debtor is not PERSONALLY liable on the underlying note anymore. Once a borrower files a petition for bankruptcy, there’s an automatic “stay” order issued by the bankruptcy court. The “stay” stops all proceedings for collection of debt against the debtor, including foreclosure.What happens next is the lender will petition the bankruptcy court for “relief from stay”, which is generally granted. Once that happens, the lender can proceed with foreclosure against the property. So, for the lender, it’s justice DELAYED, not justice denied. However, the lender cannot seek a deficiency against the debtor who has been discharged of the debt (the husband). The lender will only be entitled to the property.The other issue is the subject-to... if you keep paying the lender, they can and likely will keep accepting your payments. Remember, the STAY does not apply to you, it only applies to the borrower, so the lender can legally keep taking YOUR payments.However, the lender may choose to refuse your payment and call the note due. This is not likely, since they would rather have their loan being paid than in default. You should be prepared for a “plan B” if this happens, such as negotiating a waiver with the lender or refinancing the existing loan with a new one. If there’s enough equity in the property and the deal makes sense, I would think it is worth taking the risk. If this deal buys you six months of time before the lender decides to accelerate the note, you should have no problem refinancing based on appraised value at that time. It’s all about understanding the risks and weighing your options in the deal.
WB
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