Posted by JohnBoy on July 11, 2002 at 08:19:55:
If the seller transfers title and then files BK the seller will list the lender as a creditor and list that loan as a debt to be discharged in the BK so the lender cannot go after the seller later should the loan end up in default. The lender will be notified of the BK and when they see the seller is having the loan discharged in the BK that will obviously tip them off that something is up. If the seller is discharging the loan then who is making the payments??? WHY would someone be making payments when the loan is being discharged? Once the loan is discharged then the lender will have no one that is liable for that loan, yet SOMEONE is still sending in payments? Doesn’t make sense unless the seller transfered title to someone else. Get it?
If you take title before the seller files BK and then later when the seller does file, it will tip the lender off because the seller will still list the loan to be discharged in the BK.
Now you could TRY to get the seller to not list the lender to be discharged in the BK since you are taking over the loan, but don’t count on that ever happening. WHY would a seller even think about not listing the loan to be discharged if they file BK? They no longer own the house so what would the point be for them to not list it in the BK? WHY should a seller TRUST YOU to continue to make the payments? If they file BK and don’t list the loan and later YOU were to default the lender could still go after the seller. And if the seller filed a BK and didn’t list the lender to discharge the loan they would be on the hook to the lender and they can’t file another BK again for at least 7 years. So WHY should a seller even think about trusting YOU to never default on that loan? IF they are going to file BK anyway then they would be stupid to not list the lender!
If the seller is deeding over the property it would be stupid for them to file a chapter 13 just to work out a repayment plan for the loan on the property! They no longer OWN the property! So they might as well file a chapter 7 and have all their debts discharged and be done with it! There would be no incentive for them to not list the lender or file a chapter 13 unless THEY wanted to keep the property.
When this happens the big question is WHAT will the lender do about it once they do find out the property was transferred? If the payments are current and are being made on time the lender MIGHT do nothing. They might only threaten to call the loan and if you ignore them they MIGHT just let it lie as long as the payments are being made. They MIGHT call the loan and pursue it by foreclosing on the property if you ignore them. The problem is there is no way to know for sure what they will do about it, if anything.
So the thing YOU need to consider is can YOU qualify to refinance the loan IF you had to? Or qualify to assume the loan IF the lender will consider that? And IF you can qualify to refinance IF you had to, would you be willing to do that? Is this a RISK worth taking to get that property? If the property is worth $100k and the amount owed on the loan was $95k - $100k…would you be willing to buy it by getting a new loan in your name? Would you be willing to take the gamble of getting the deed and then later having to refinance it IF you had to?
Now if the balance owed was $80k where you were getting $20k in equity from the deal then chances are you would be more than willing to have a loan in your name just to get that $20k equity in the deal. But would would you be willing to put financing in your name on a property that has little to no equity IF you had to in order to avoid foreclosure? If you have someone else you put into the property where you were selling to them on a contract or lease option then you need to protect your buyer’s interest so they don’t end up suing you for breaching your contract with them! If you refuse to refinance or if you can’t qualify to refinance even if you wanted to, and the lender forecloses, then you will need to get your buyer financed before the foreclosure can go through or at least be able to stall off the foreclosure until your buyer’s contract with you expires. Otherwise if you sell to a buyer on terms where the lender calls the loan and pursues it by foreclosing, and should the foreclosure go through before your buyer’s contract expires, your buyer can sue YOU for not being able to honor your contract with them because you won’t be able to deliver clear title since you would have lost the property to foreclosure.
You could always try to find another property for your buyer IF you had to, but that will require your buyer to go along with that.
So these are some of the risks you need to know about and have a way to deal with it IF it should ever become a problem.
So if you KNOW the seller will be filing a BK no matter what, then make sure you can deal with the problem of having to refinance if the lender should call the loan and pursue it. If the payments are current and are being made on time then chances are the lender will do nothing. But you can’t just assume that is what the lender will do. You have to understand what the worst outcome can be and you must be in a position to deal with it SHOULD it ever become problem. If you can’t, then don’t do the deal!