I have had to sellers that I have been going back and forth about short sales finally decide to go into bankruptcy. There is a couple of points they threw at me that I was not confident in there validity. I wanted to throw this out to the group so I can get a better understanding.
I would definitely love to hear what people have to say about bankruptcy and how it affects a potential foreclosure and a homeowners ability to keep their home.
You are right about restructuring mortgage debt. It is not a viable option for most people because they have to pay more then what they were paying before Mortgage + arrears.
Seconds in Chapter 13 can be stripped if there is no equity in them. This is called a lien stripping. Sometimes a fraction has to be paid back, sometimes not.
Each state has different laws. We have a judicial state foreclosure and we are recourse state. If sellers go through foreclosure they could be liable for difference of what they owe minus what home sells on courtroom steps.
Please keep in mind that auctioned homes go for 65% of market value. Foreclosure in the state of New Mexico is a serious matter.
Natalie Arndt BS, MA, CDPE, CDRS,
Often the issue with a BK and a short sale is that the Seller will need to "re-affirm", or, again be "responsible for" the debt....tread carefully, best to know or have a good BK attorney on your team.
Make sure your Seller has a good BK attorney. I just closed a SS with BOA where the Seller filed BK to stop foreclosure. He did not consume the BK and attorney asked for dismissal once BOA had agreed to a non deficiency letter of approval . Once BK was dismissed, we provided paperwork to BOA (you also have to provide not only to negotiator or closing officer but to BOA BK Dept) to allow us to proceed to closing. Debt on house does not dissolve in BK. Bank will foreclose once BK is released unless Seller has a short sale contract that meets investor requirements or the trustee determines that they will be able to make their mortgage payments from then on.
If anyone says BK avoids foreclosure (and yes attorney's will say so) then they are gravely mistaken. Imagine the foreclosure process as a movie. BK simply pauses the movie until it is discharged. Once the BK is discharged the bank will still need to get their house back and so they will finish the foreclosure and take it back at auction (or let it sell to someone at auction). All the BK does for a homeowner is remove themselves from the debt of the mortgage(s). Therefore, the bank(s) cannot legally hound the the homeowner for any of the remaining balance once the foreclosure is complete and the house sells to someone. Basically, BK guarantees full satisfaction for the homeowner, but, at a very costly price. The homeowner will have (1) a foreclosure on their record and (2) a BK on their record. How awesome is that? If a homeowner is doing BK ONLY because they cannot pay their mortgage, advise them NOT TO until after the short sale. If you can get full satisfaction on the short sale then there would be no reason to file BK. Even if you cannot get full satisfaction, the banks are not suing for the deficiency (yet).
Moral of the story is not to file BK if the only reason is the house issue. However, BK might be the way to go if the house problem is only a small problem of the debt issue and the homeowner is drowning all over the place.
Now, its important to be honest with the homeowner and tell them everything. Unlike BK lawyers who lie all day to homeowners (at least down here in SW Florida) and tell them the BK will solve all their problems. I actually had a BK lawyer tell the homeowner to just let the bank take the house. I wanted to END that lawyer in a bad way. Anyway, back to the point. If the homeowner does do a BK and the lawyer does the right thing and let the house be sold via a short sale, then the BK makes the short sale easier because a letter of approval with full satisfaction or not, it doesn't matter.
Here's another twist about BK in certain circumstances. Example (This is a REAL example):
Former husband and wife divorced shortly after they refi'd their 1st and 2nd. In the divorce declaration, one of them was awarded the house. They have remained good friends which is really wonderful. Of course, both names are on Title but more importantly both names are on the loans. The one who did not get the house has moved on with their life and moved out of state. The house is significantly under-water and was placed on the market as a short sale. An acceptable offer comes in, and the short sale approval is moving along a a normal pace. The one who is living in the house hasn't made a payment for 3+ years, is not happy with the approval process, and is going to file BK the day before the Trustee Sale which is fast-approaching.
Here's the interesting part; If the one who's living in the house files BK, the lender has every right and will go after the other person on the loan which will probably force them into BK too.
This actually happened to a relative of mine and now the same thing again with a client.
Our job is "interesting", are we REALTORS or Psychologists?
Newport Beach CA
First of all I agree with the attorney Sign NO promissory Note. Old Republic knows and understand that they get absolutley Nothing if the first Forcloses on the property. They will test each and every real estate agent to see if there more focused on the seller or their commission. they are far better off to take B of A settlement than nothing. you have to understand that the 2nd has no position to negotiate they have no equity. Tell them that the seller has moved out of the home and that they are more than prepared to allow the property to go back to B of A. they get the B of A settlement or nothing. Be a strong negotiator for your client/friend and your commission. Tell them this, and you will be moving forward to a payday. and the white elephant off your friends back. BE A BULL DOG!
Barbara McCormack said:
Well, we had a complication with our approval with BOA. We supposedly had approval, and were ready to close...and suddenly BOA determines that Old Republic insures the second mortgage so we need their approval to release the lien. And Old Republic is demanding nearly full payment ($5K cash and a $44K note on a $53K second mortgage) She has no cash...and her bankruptcy lawyer advised her NOT to sign a promissory note with Old Republic. I thought that obligation would go away if she signed the promissory note and then filed bankruptcy so thought that would be decent option. But her BK lawyer says NO...don't sign anything and get out of short sale negotiations. Very frustrating because I still have a very motivated cash buyer offering full market value. She has already moved out and is renting...and has lots of other debt so BK is probably a given regardless of what comes of the house. Seems like no good options. She is a client but also a friend.