Subject to / PACtrust Bankruptcy question... - Posted by Matt

Posted by JohnBoy on July 29, 2001 at 15:55:45:

I think there are some potential problems that would still exist with this.

One will depend on WHEN the property was transfered to a trust. If the property has equity worth going after the BK court could recind the transfer and force a sale of the property. That will all depend on the equity involved and how much time has passed from when the owner transfered to a trust from the time they filed BK. The court can go back and recind the deal if the property had transfered within a year from the date the owner files BK.

The next problem is if the owner files BK and claims the lender as a creditor in which they intend to have their debt discharged in the BK. IF the borrower has the debt discharged in the BK the lender could call the loan due and/or foreclose to take the property back so they can resell it to protect their interest.

The theory is that the lender won’t call the loan as long as the payments are being made and are current. That may be the wise thing for the lender to do, but it certainly doesn’t obligate them to do so! IF the lender calls the loan then one of the beneficiaries could step up and sign for a new loan with the bank, or get a new loan to pay off the bank foreclosing, or sell the property to pay off the bank.

But what IF none of the beneficiaries could get a new loan or couldn’t qualify with the existing bank to sign for a new loan or assume the existing loan? What could they do? Sell the property? What IF they couldn’t sell the propert in time? What happens then?

Does the lender lose it’s right to protect it’s interest by being able to foreclose after the borrower has been discharged from the owing on the debt, just because it’s in a PACTrust??? My guess is, NO, it would not. The lender has the right to protect their interest as a secured creditor by calling the loan due and foreclosing to get the property back regardless of what has been transfered to who or what!

If I’m wrong then explain it to me how a lender would automatically lose their rights to foreclose after the borrower has been discharged from owing on the debt???

If enough time has passed to where the transfer couldn’t be recinded by the BK court, then any equity that belongs to the debtor could be attached to where their equity would go to the court when the property is eventually sold. The court couldn’t force the sale because of the other unrelated beneficiaries in the trust. Their shares couldn’t be attached by the court. That still leaves the problem with the lender calling the loan if the borrower has it discharged in the BK.

But this will all depend on how much time has passed from when the transfer took place vs. when the owner filed BK.

Subject to / PACtrust Bankruptcy question… - Posted by Matt

Posted by Matt on July 27, 2001 at 12:49:08:

I understand how the PACtrust and Subject to deals work, and how profitable they can be. I’ve been studying them so much lately that I’ve come up with a problem that I don’t know the solution for. Suppose you buy a house pre-foreclosure as a Subject to, in a PACtrust, and L/O the house to a tenant. Everything is going well, but then the originl seller files for Bankruptcy. Because the original loan is still in their name, that loan is a part of the Bankruptcy (even thought the payments have been consistent), and the original lender will at least find out what’s been going on and potentially try to DOS or foreclose on the house.

All other problems aside, if a situation like this came up what would you do to protect yourself from losing the property and/or not being able to keep your agreement with the tenant/buyer ?

  • Go to the lender and ask to assume the remaining original loan yourself?
  • Immediately try to cash out the original seller and take the property, pying off the original loan? (But what if you don’t have the capital for this?)

Thanks in advance…

Re: Subject to / PACtrust Bankruptcy question… - Posted by Billm

Posted by Billm on July 29, 2001 at 14:30:10:

Quick issues to ponder:

  1. Property title was tranferred to Trustee and is no longer titled to “owner”. This will have been disclosed and approved by lender, if done the way Bill Gatten teaches.
  2. former “owner” is now a non-resident beneficiary (not on title)
  3. If that no-res beneficiary goes bankrupt, it doesn’t affect the title. (one big reason you went the PacTrust route to begin with)
  4. The decision to keep the loan in the “former owner’s” name was made at the time the PacTrust was established. Will stay in his name until Trust is terminated.
  5. My understanding is that the resident beneficiary is unaffected by non-res financial problems. Non- res beneficial interest may be part of the bankruptcy estate, but that does’t give a creditor the right or power to force a sale of the real estate itself.

Re: Subject to / PACtrust Bankruptcy question… - Posted by Scott

Posted by Scott on July 27, 2001 at 13:19:30:

I’d be interested in what others have to say on this too as I’ve got a VA loan, Sub-To that makes all the right business sense. However, I know for a fact down the road that this person will be going through b-ruptcy. If they get $1-$2K now, why would I think down the line after filing b-ruptcy that they wouldn’t want to truly start “clean” and to have no loans in their name. I’m not sure of the recourse that they could possibly do even though I’ve brought a loan current and as far is mortgage company is concerned this would now be a timely paying loan. I would be taking S2 in a land trust with my corp as the beneficiary.

Would be nice to see what others think a person could do if they absolutely didn’t want any loans in their name after filing b-ruptcy. Could they purposefully call lender and “rat” on me as, “hey this property was sold to this guy and here’s a copy of the deed”, etc… Just trying to think of worst case scenario.