L/O and Bankruptcy - Posted by Ric

Real Estate Investing Real Estate Law
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Posted by JohnBoy on November 21, 2004 at 20:58:04:

You can’t. It is part of the risk you take. If someone decides to file BK there is nothing you can do about it. But the risk isn’t any different than if the lender finds out about the transfer of the property. If the lender finds out they have the right to call the loan due.

Your only problem in this case is if the lender finds out and elects to call the loan due. Then you have to deal with it. Refinance, stall off the foreclosure if you can’t refinance, get your buyer to exercise the option and pay the loan off, etc.

If you do not have the means to refinance when something like this happens then you shouldn’t do subject to deals. This is a risk you take buying property this way. Putting the property in a trust does not prevent a lender from finding out. It only helps to hide the sale to help prevent them from finding out. But sometimes they still find out. Sellers sometimes slip up and inform their lenders. They decide they want the loan out of there name and think by telling the lender it will force you to refinance. They sometimes file BK as in your case with your deal. There is no bullit proof way to prevent a lender from finding out. You can only take steps to help keeping the lending from finding out.

But in most cases, even if the lender finds out they won’t pursue it if the payments have been made on time and loan is current and the payments are being made. They may threaten to foreclose by trying to call the loan but when it comes down to it they won’t pursue it by foreclosing if you ignored them and continued to make the payments. In some cases they may still pursue it. You have to be ready to deal with it if they ever did pursue it.

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L/O and Bankruptcy - Posted by Ric

Posted by Ric on November 21, 2004 at 17:15:48:

I bought a house Subject-To about a year ago and resold it on a L/O, the tenants are paying on time, everything is fine there. What’s happening though is one of the previous owners (it was a couple who got divorced just after I bought the house) is filing Chapter 7 BK to blow off all his consumer debt. This in itself doesn’t seem to be so bad but he’s including the loan on this house in the BK filing “just to be on the safe side”. I told him not to do it because there was no need, the payments are current and always will be until the loan is paid in full. He’s not listening though and is going ahead with his Chapter 7 anyway (the divorce was, and still is, pretty ugly).

Has this happened to anyone here? What are the negatives I should be looking for? Are there any pre-emptive measures I can take to protect my interests (title is already in a Land Trust) and those of my tenant-buyer?

BTW, payments are current, always have been, and property is insured with dwelling policy in excess of the loan balance.

Any feedback would be a great help.

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Bk filings… and advice - Posted by JT-IN

Posted by JT-IN on November 22, 2004 at 08:25:01:

Ric:

JohnBoy thoroughly answered the situation as to your dealings with the seller… and Lender. The only comment that I wanted to make was about your advice to the seller about NOT including the loan in his Bk estate… I would recommend that you NOT give such advice to a Debtor… as this amounts to dispersement of legal advice, and with you not being an Atty, this can be problematic.

Let’s look at the negatives for the Debtor of not including the Mtg loan into the Bk estate… Lets say that you or your tenant at some point in the future, default on payments… The Lender could come back to the original debtor for liability of the loan. If someone is going to file a Ch 7, they sholuld certainly include any and all debts in the Bk, and only if they are planning to continue to own and live in the property, should they re-affirm the debt… Otherwise, what is prudent for the Debtor is to NOT remain liabile for any debts, even a current Mtg that has been taken subject to…

Sometimes when we are the folks who might be minimally disadvantaged by some reporting of a loan to Bk by a Debtor, the tendancy might be to advise otherwise, due to personal preferences. However, this is truly BAD Advice to the Debtor… So I would only suggest that you refrain from providing such advice in the future, to avoid any potential conflict for yourself… and the Debtor. The potential future filing for Bk by the Debtor is simply one of hte risks that a purchaser such as yourself, risks when doing Subject To deals… I suggest that you have a fall back plan for refying such mtgs in the event that a loan is called due, over such circumstances… My guess is that if the loan remians current, that most lenders would NOT call the loan due… There are several of the larger lenders that might be an exception to that approach, and exercise their DOS clause, but again, most won’t. So hopefully you are with a lender who won’t get excited as long as their share keeps coming their way… Good luck on it.

Just the way that I view things…

JT-IN

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Re: L/O and Bankruptcy - Posted by JohnBoy

Posted by JohnBoy on November 21, 2004 at 18:09:43:

Title is a land trust and I assume you or your entity is named as the beneficiary of the trust or the seller was named beneficiary and the they assigned the beneficial interest over to you or your entity, correct?

With this being the case then the seller would have no legal interest in the trust or property and the only thing happening would be the seller discharging their liability on the loan.

What about the other spouse? Are they filing BK? If not, then they would still remain liable for the loan, assuming they were both on the loan.

How long ago did you take over the property? How much equity was in it when title was transferred to the trust? If there was any equity to speak of the trustee handling the BK could recind the sale if it took place within 12 months of the seller filing BK. If it was over a year prior to filing BK and/or if there wasn’t enough equity in the property to speak of then there shouldn’t be any problems there to deal with.

Then the worse thing that can happen is the lender finds out about the transfer and calls the loan due.

The lender could find out and call the loan but they may just threaten to call it due and not pursue. The lender would have to pursue it by foreclosing on the property if you ignored them if they call the loan due.

Then it depends on the state the property is in and how long it takes to foreclose in that state. In my state a foreclosure takes a minimum of 9 months and that is if you don’t contest it. If you contest it then it could take up to two years to foreclose.

If the tenant’s L/O has less than 9 months to go before expiring to exercise their option then they could buy the property before the lender could ever foreclose on it. Longer if I contested the foreclosure to drag it out to buy more time.

You could just refinance to pay the lender off if push comes to shove and protect your interest in the property.

If you don’t have the ability to refinance then you would need to contest the foreclosure to drag it out if need be to protect your tenant/buyer’s interest until their L/O expires. Then they can either exercise the option and the loan gets paid off or they can walk away.

Do you have the ability to refinance the property if you had to? If so, you have nothing to worry about since you can pay off the loan if you had to.

No matter what happens just continue making the payments. The bank may or may not call the loan due. Even if they do they may or may not pursue it and just threaten to pursue it if you don’t pay it off. If they pursue it they will file a foreclosure suit. Then drag it out and contest it. That will delay the process and buy you time to give your tenant time to run the course of their L/O and get financing to buy the property.

How much time is left on their L/O?

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Re: L/O and Bankruptcy - Posted by Ric

Posted by Ric on November 21, 2004 at 19:50:57:

How do i avoid this situation in the future.