Client wanting out of the contract to file bankruptcy

I represent a seller on a short sale with a first and second with a possible short window of getting an approval.  I called to get another tax document that was not requested in the beginning from the second and the seller informed me they want to do BK.  I explained that is fine that we can to short sale and BK at the same time if their lawyer is experienced in this process.  The lawyer can even review the approval letter.  The client insists that the lawyer told them that the bank will go after them if they do a short sale and to put the home in the BK. Now the delima.....they don't have the money to file BK but still don't want to do the short sale for fear that the bank will come after them in the future.  I have exhausted all ideas and am up against a lawyer that keeps telling them a BK is the best option.  He wants 1100 to do this and they qualify for the HAFA relocation funds of 3000.  Hmmm does not make since to me.  They are in breach of contract because they don't have the money to file BK for another 4 or more weeks but won't cooperate in getting the short sale finalized. Seller and Buyer wont sign mutual release. Any suggestions.  Would you call the bank and tell them that if they don't approve the client is going to file BK..(I would think that is unethical) Do I just sit here and wait for the BK and the deal die....any advice greatly appreciated. 

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Permalink Reply by Stephen B. McWilliam on October 9, 2011 at 8:36am

FYI, the Seller gets "out of the contract" once they file a BK.  The pre-petition purchase contract become ineffective and will be discharged in the BK.  

 

Regarding references to liability on junior lienholders after a BK discharge: if the junior lienholder does not have any security interest in the property (ie. the superior liens are greater than the value of the property) the junior lienholder becomes an unsecured creditor and the lien is removed in the discharge; providing the BK attorney acted properly. 

Permalink Reply by Patti Lyles on October 9, 2011 at 1:37pm

I was under the same understanding but changed my position. Because in my case with PNC, the junior lien holder, on a line-of credit loan product, did have a lien on the property after BK.  Title was the first to look into this and the BK attorney and the attorney that recommended him all came to the same conclusion PNC can hold this SS hostage.  Please so much wrong information is out there I don't want to be stuck on stupid or blind sided again.

If you gave me evidence of the contrary to what happen to me I will be in your debt.

Permalink Reply by Paul Francis - Vegas Short Sales on October 9, 2011 at 1:02pm

Fun!

In Breach of Contract? Good luck on that in this situation... I'd avoid using that term or even going there with your sellers in this situation unless you want to potentially open yourself up for a bunch of headaches that are not worth it..

Of course... I don't know what your procedures are in the state you are in ... we use multiple disclosures in LV, NV. If the terms of the short sale don't satisfy the seller for any reason... the seller is under no obligation to go ahead with the transaction which is why it's so important to weed out the waste of time short sale sellers to begin with. Maybe it's different in your neck of the woods.

Regardless... You've got sellers being advised by a BK attorney... The information they are giving you may not be the exact information the BK attorney is telling them. I would advise getting permission to talk to that particular BK Attorney about this one directly. If it still does not jive with you... get the clients to get a second opinion -- preferably from an Attorney that's not part of a BK mill but knows how to do them as well as short sales.

(In the past when I've gone along with my clients who wanted to seek the advice of an Attorney.. the really good ones have said to BK after the short sale depending on what type of BK they would qualify for. I always go along to these meetings when possible and everybody's financial situation is different.)

From what I'm picking up on this one after reading this and the follow up comments ... I'm getting the sense that these sellers really do not want to sell in the first place or they are just trying to buy some more time. If they don't even have $1,100 to file the BK... then it sounds like they can't afford to move either. (Sure... $3,000 for relocation assistance would help under HAFA... but they probably think they can just do that at any time.)  Personally... I try to avoid these short sales but will send the sellers to the right Attorneys that are not just interested in making a quick buck by filing a BK... the time involved and liability is not worth it to me. Sounds like you feel the same way in one of your comments...

After they have exhausted all of their options... then I would take them on. Let them do what they want to do .... if it works out for them.. good for them.

I don't think you want to sit in some arbitration meeting somewhere down the road answering the "Why did you advise that?" question unless you have the "Because so and so Attorney Said to do that" answer...

Just my thoughts....

 

Permalink Reply by E J Howard on October 9, 2011 at 2:13pm

First I want to say Hello to everyone. I am a new member so I am trying to get familiar with this website. I am not an attorney nor do I pretend to be one on TV. But I have seen a number of situations that people get themselves into and there is no one-size-fits-all solution to any of them.

To Lisa: As a Broker I try to discuss with the client ALL their options as I listen to better understand their situation. I would never advise an owner to sell their home if I felt they wanted to keep it and they have every right to keep it if they think they can. However, there seems to be some vital BK information missing here that might be helpful. Chapter 7 and 13 are quite different regarding whether the owner's home is protected or not.

My experience in Illinois, Chapter 7 the home is not protected. Chapter 13 allows a repayment of the arrears, which means the owner needs to keep up current mortgage payments and the repayment plan includes the arrears as well. This is explained to the client by their attorney and they need to FULLY UNDERSTAND that the arrears are covered by the BK, but the current payments are not. Often times they come back and want to put the home on the market because they realize they just can't keep with the payments. Under Chapter 13, the client would need to go back to their attorney to petition the court to REMOVE the home from the BK to allow it to be sold. 

Take a breather and allow your client to do what they feel is best for them with advice from their attorney. There's a good chance you will still have a GOOD client down the road that will be loyal to you for being honest, appreciate that you truly have their interest at heart, and are a trusted, valuable resource.

Permalink Reply by Stephen B. McWilliam on October 10, 2011 at 1:35am
Obtain a copy of the BK. Presuming it was a Chapter 7 the PNC loan should be detailed on the discharge. If it was then the lien must be removed by PNC or they would be liable for substantial damages. First things first, obtain a copy of the discharge.
Permalink Reply by Victoria Frieberg on October 12, 2011 at 1:17am

I have run into this on both sides of the transaction.  My buyer, ready to close.  Sellers agent knew there had been a bk, and assumed 2nd had been extinguished.  Title company catches the lien and the games begin.  Two months later, the buyer finally gets the home, after the listing agents broker finishes the transaction and donates their commission.

I used to send my ss clients to an attorney who claims to specialize in short sales and bankruptcy..puts on some nice classes even.  After the second seller came back angry with the waste of their time, feeling pressured to just move to bk, I quit.  I was invited by another client to go with him to his initial meeting with another agent, and was suprised at the ability of the lawyer to say nothing for an hour!  He did request a retainer to be left for the second session though.

I know there are great attornies out there, I work with some on transactions in other capacities..but have been shocked multiple times when my clients believe they have been protected, only to find liens and other obstacles left.

 

Permalink Reply by Lorie Gould on October 13, 2011 at 12:49pm

They are not in breach of contract-  MARS protects them.

 

BK attorneys does provide advise other than file BK... the only way they get paid is to push people into bankruptcy... if they were truly advisors they would advise that they sell the property then file.  They are not advisors- they will push anyone who qualifies into a BK. And a BK attorney is really clueless on short sales.  Most short sales that I do are full forgiveness. HAFA gives full forgiveness and $3000 so if they then truly had the need to file BK they can take the $3000 and do it. 

 

I do not give legal advise; however, I do give factual data.  By sharing upfront with the seller the different things that can happen and talking about BK attornies upfront will usually avoid this issue. 

 

They need to do their research before they do BK.  It looks like they do not have money so BK is not an option... or is he an I take payments lawyer?

 

You can still do HAFA after discharge.

 

I think you need to bring facts to your clients... not your personally opinion. 

Permalink Reply by Katie Herley on July 31, 2012 at 6:57pm
I think your attorney does not have more experience about bk work. From my point of view you should choose another attorney who has experience about bankruptcy.
Permalink Reply by Joseph Alfe on August 1, 2012 at 9:34am

This is another in a long line of reasons why I REQUIRE that all sellers have a real estate attorney overseeing the process. Then, you could turn over the question to the sellers attorney with no liability of your own.  Basically, The BK attorney is correct in that in a BK the sellers have no liability.  IF they are accepted into a BK.  On the other hand, there is a very high chance that the seller can get a full release in a short sale, which may prevent them from needing filing for a BK.  They can let the short sale go through, and i they do not get a full release, they can then file BK.  Remind them that they are in control and do not have to close if the short sale terms do not work for them.

Permalink Reply by TOP END Properties on August 12, 2012 at 5:11pm

You should always require a 'Waiver of Deficiency' in all short sale approval letters.  However, if the seller has more debt outside just the property, bankruptcy might be a good idea. I believe it is supposed to be done prior to the Short Sale for best results.

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