More on Bankruptcy and Short Sale Negotiation

I posted two blogs in bankruptcy yesterday and several people contacted me with questions so I thought that it made sense to expand on this series of blogs. I mentioned that you do not necessarily need bankruptcy court approval in most bankruptcy short sale scenarios because the debtors are probably in Chapter 7 and the home has no equity so the trustee will likely “abandon:” his or her interest in the property since there is no equity to distribute to creditors. The trustee’s duty is to the creditors and NOT the debtor (as many erroneously believe). I also noted that the real estate agents must be approved by the court in order to receive their commission in matters that require court approval. This is an easy, but essential step. Typically a CV and affidavit will suffice. There is one substantial issue that bears mentioning. When you are working with a client on a short sale, it is not a bad idea to ask them whether they are contemplating bankruptcy. Note, I am not suggesting that you ever SUGGEST bankruptcy. PLEASE do not do this!! However, their home sis underwater and there is a pretty good chance that they are contemplating bankruptcy (or they have already filed and not notified you). This is critical information because when a short sale is in negotiation and the home owner files bankruptcy, the short sale negotiation on the servicer side will be transferred to the bankruptcy department. You guessed it, you are probably starting all over again!! That is why it is critical to ask because it may be prudent to not begin the short sale negotiation AFTER the petition is filed. Of course you can always wait until the debtor is discharged too. However, if you are inclined to wait, I would only do it if it is a Chapter 7 since they are typically of short duration. Having to interrupt a short sale negotiation during a bankruptcy is disruptive for the agents, negotiator, bankruptcy attorney, lender negotiator and debtor. A little information on the owners’ situation may prove to be invaluable. Be careful how you ask about bankruptcy in these politically correct days in which everyone is hyper sensitive!! Padraic Deighan J.D. Ph.D