Should My Client File Bankruptcy?

This is a very common question. Our advise is to always have your client contact a Bankruptcy Attorney for advise.

Many sellers will file chapter 7 Bankruptcy, forcing a "Stay of Foreclosure." Some sellers do this simply to buy time sufficient to close a current escrow, and then dismiss the BK application. This is known as "Stopping the Clock" of the three month process. Once a bankruptcy is accepted, a bank IS NOT ALLOWED to offer a Short Sale to the seller, and will be sold at a BANKRUPTCY SALE.

The bank then hires attorneys to file for a "Relief of Stay" which allows them to continue foreclosing even though the clients are in a Bankruptcy.

However, courts are reluctant to approve this, and prefer a BANKRUPTCY SALE in order to pay off more creditors than a NON-JUDICIAL FORECLOSURE would, provided there is more equity over and above paying off the lien holders. Other "Non-Secured" creditors may be able to be paid off.

Example (does not apply to a short sale): If 250k is owed on the home, and the home can sell for 400k, the courts know the bank will "under price it" to recapture just the loan and costs - but not a penny more, especially in a declining or even a flat market. Banks want to "cut their losses." Courts want to realize the MAXIMUM RETURN, where Banks want only the note value and costs.

The homestead act may apply in this example.

(In a rising market, banks are willing to price REO's along side the competition, going with the upward trend.)

Bankruptcy is very risky and may be the very last resort prior to a foreclosure. A Bankruptcy will stay on a persons credit for 10 years. Selling the home can the BEST choice for the seller depending on their specific situation.

If you have a question please call 1-800-480-1917 or email it to ZOOMLossMitigation@gmail.com.

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