Bankrupt Partner, (a little long) - Posted by Michael Stuart

Real Estate Investing Real Estate Law
1

Posted by JohnBoy on March 27, 2005 at 12:24:58:

Depends on how much equity is in the property?

What is the equity?

If there is enough equity involved the court could go after that if the property was transferred within the past year prior to filing BK. They could go back as much as 4 years but in most cases only look back one year.

There would have to be enough equity involved that after selling the property and paying all costs associated with selling the property, 6% - 7% realtor commission, closing costs, etc., that there would still be a considerable amount of equity left that the court could go after to pay towards other creditors owed money.

If there is little to no equity then the court will not mess with it. Since you stated you would need a 95% LTV to refinance then it sounds like there is not enough equity here to be a concern.

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Bankrupt Partner, (a little long) - Posted by Michael Stuart

Posted by Michael Stuart on March 27, 2005 at 01:22:34:

Here is the situation:

I purchased a property in Homewood, IL in 6/2004 with a partner. Early on
the Partner could not meet his obligations to the partnership, all bills &
expenses. My responsibilities where the closing costs & initial repairs. The
partnership agreement was amended to say he was a 0% partner for 2004 and
the partnership was terminated at the end of the year. The Deed to the
property was moved into a Trust (9/2004) and I was made the sole
beneficiary of the trust, the Mortgage to the property was still in the partners
name (since he was supposed to be responsible for it). I have been making
the Mortgage payments since 8/2004 and at this time do not have a problem
continue to make the payments.

Here is the Problem:

The partner has notified me that he is planning on filing bankruptcy and is
concerned that this will affect the property that I now own, but the mortgage
is in his name. Some people have told me as long as I keep paying the
mortgage this is not a problem other people have told me the property is at
risk.

I?m looking to determine if I need to get the mortgage out of the Partners
name, to avoid problems with the bankruptcy or if that is not a problem as
long as the payments are being made. If I need to get the Mortgage changed
how can I go about doing that. Refi options have been very costly needing
95% LTV to cover existing loan.

Any Advice would be greatly appreciated.

Thanks

Mike Stuart

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Re: Bankrupt Partner, (a little long) - Posted by John Merchant

Posted by John Merchant on March 27, 2005 at 10:59:23:

You seem to understand that the mtg obligation is yours, as a BK partner’s debts are due & payable by ALL partners.

As the law says, all partners have Joint & Several Liability for P’ship debt and obligations.

So what exactly is your question?

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Re: Bankrupt Partner, (a little long) - Posted by Michael Stuart

Posted by Michael Stuart on March 27, 2005 at 11:53:46:

Can bankruptcy Court go after the rental house to meet other
obligations of the bankrupt partner?

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Re: Bankrupt Partner, (a little long) - Posted by JohnBoy

Posted by JohnBoy on March 27, 2005 at 11:51:37:

John,

He said the partnership was dissolved. The mortgage on the property was and remains in the dissolved partner’s name. So legally I don’t see where Mike is liable for the dissolved partner’s debt on the mortgage, other than to protect his own interest in the property. Since Mike never signed on the mortgage and note he would not have any legal obligation to repay the mortgage, with the exception of protecting his interest in the property since he is the sole beneficiary of the trust that owns it.

His question seems to be, what can happen in this case if the dissolved partner files BK discharging his debt on this mortgage since the dissolved partner doesn’t own the property and Mike does and Mike has been making the payments?

It depends!

It appears there is no equity here to speak of that would concern the BK court, so as far as the court wanting to take the property to repay any creditors of the dissolved partner won’t be a concern.

That leaves the lender left to deal with. What will the lender do once the dissolved partner has this debt discharged in the BK even though the mortgage is current and Mike continues to make the payments?

Again, it depends on the lender. They may just continue to accept the payments being made or they may want to call the loan and enforce it by foreclosing on the property since no one is liable for the debt.

At this point all you can really do is keep making the payments and wait to see what the lender will do. If they call the loan wait and see if they stop accepting the payments and if they pursue with foreclosing. If they don’t then all is well and continue making the payments. If they call the loan and pursue it by filing a foreclosure then your only options are to refinance and pay off the lender or sell the property and pay off the lender or just let it go to foreclosure and cut your losses.

Either way, Mike has no legal obligation to the lender since Mike never signed on the note and mortgage. His x partner did!

So what does Mike want? Does he want to keep the property? If so, keep making the payments and wait to see what the lender does. If they call the loan and pursue it by filing a foreclosure complaint then Mike will need to refi and pay the lender off or sell the property to pay the lender off before they can foreclose. He will have a lot of time to deal with this issue if the lender did pursue calling the loan since he is in IL. In IL. it will take a MINIMUM of 9 months to foreclose and that’s if the foreclosure is uncontested. If Mike contests the foreclosure it will drag out a lot longer and could take up to 2 years for the lender to foreclose. So Mike will have a lot of time to refinance or sell the property if the lender calls the loan and pursues it by filing a foreclosure complaint to enforce their rights.

In the mean time, nothing will likely happen here for several months. If his x partner files BK in most cases the lender won’t do anything until after the BK is discharged, especially since the payments are current and are being made. It will take at least 90 days for the BK to be discharged from the time of filing and could take longer depending on the court.

So as long as the property has little to no equity to speak, assuming it could be subject to the transfer being reversed depending on how long ago it was transferred from the x partner’s name prior to filing BK…I’d estimate Mike has at least a year to deal with this issue if his x partner was to file BK tomorrow. As long as there is no threat of the court recinding the transfer due to any equity involved and/or due to how long ago the property was transferred to Mike prior the the x partner filing BK, the only issue here would be what the lender chooses to do after the BK is discharged.

Will the lender continue to accept payments from Mike? Or will the lender call the loan and if they call it, will the actually pursue it by filing for foreclosure to enforce their rights? Who knows! Depends on the lender. Meanwhile, just keep making the payments if you want to keep the property. Until the lender stops taking the payments and until they actually call the loan, I wouldn’t worry about it.

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Re: Bankrupt Partner, (a little long) - Posted by John Merchant

Posted by John Merchant on March 27, 2005 at 14:23:03:

Yup…at least the BK’s interest in the RE…but half interests being almost impossible to sell, your offer to buy will probably be the ONLY offer they get.

And in my opinion, BK courts around the country are getting more savvy in looking hard at the RE in an effort to squeeze more juice from the lemon.

Whereas they used to pretty much just let the RE go to anybody who’d agree to make the payments, this is no longer so, and for you or I to buy cheap, we’ve got to sell the court or trustee that our offer is fair and reasonable.