My friend (lives in Orlando) is pursuing a BK and wants to be relieved of a condo she owns in Orlando (investment property). She has been told by multiple BK attorneys that the chapter 7 will “wipe everything out”. I can see this being true if she signs over the deed during the process, but how likely is this to happen? Will Bank of America (the servicer of her 1st and 2nd mortgage) take the property back as a part of the BK discharge?
Or, will they foreclose after the discharge and file a deficiency judgment for the entire amount cancelled?
I have a buyer for her condo if she pursues a short sale, but I want to suggest the best thing for her. She claims
four bankruptcy attorneys have told her the BK will take care of everything for
her, with the bank taking the property back as a result.
Thoughts?
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"Question: As I understand it, a bankruptcy only relieves a
property owner of the note obligation, NOT the mortgage and NOT ownership of the
deed."
You got it: BK strips personal liability.
"Will Bank of America (the servicer of her
1st and 2nd mortgage) take the property back as a part of
the BK discharge?"
Yes, eventually if the person is not making payments. That's the remedy provided to the 1st lienholder by law.
You can still do a short sale though. In fact I am doing one right now with BofA on 1st and Chase on 2nd.
The short sale will result in a release of lien only to allow the transfer of title to the new buyer.
"Or, will they foreclose after the discharge and file a deficiency judgment for the entire amount cancelled?"
Foreclosure proceedings will continue after discharge if the borrower is not making payments. They won't file a deficiency judgment because the borrower is no longer personally liable.
"She claims four bankruptcy attorneys have told her the BK will take care of everything for
her, with the bank taking the property back as a result."
BK attorneys are right from their point of view and the bank will eventually (depending on the foreclosure time line) take the property back.
No BK attorney needs to be consulted after the discharge. If you want to do a short sale as part of the BK then obviously permission needs to be gotten.
Doing a short sale after BK Chapter 7 is doable as long as the numbers (short sale vs foreclosure) make sense and there is still enough time to get this done.
The one I'm doing has a divorce on top of all this so double the fun :-)
Doing a short sale after a BK is a possible way of buying the homeowner more time in the property.
Is there any equity in that investment property? If NO, then she files the Chapter 7, let the Trustee know we have a buyer or an offer on the prperty for a short sale and they want him/her to abandon the asset. Then the short sale can go through for the investment property.
If there is equity, its a loss. Once she files the Trustee will liquidate the property and keep the $ for the creditors.
The Deed: transfer of title for less than full value can be voided by a bankruptcy trustee.
SHE CAN do a short sale if the bankruptcy court allows it but you need to get the BK attorney involved and let him know throughout the process what is happening with the short sale. If you can show the court you're making a reasonable effort to sell, I've had three processed this way. The problem is not every BK lawyer is keen on short sales or cares for that fact. It's a bit more of a hassle for some, but if the BK lawyer has a real estate background you should be good to go. This is of course my own personal experience. I can't speak for everyone else.