Bankruptcy and Homeownership
Updated: Aug 2, 2021
Let us start here. Chances are that if you have filed or will be filing bankruptcy in the near future you have likely fallen behind on your home payments. Often times that is one of the largest reasons for people to file for bankruptcy, along with job loss or medical debt.
Having worked for the mortgage industry for almost a decade of my legal career I can tell you this. The bank does not really want your house! What the bank is looking for is to be repaid for the loan that you borrowed. If there is anyway to allow you to repay the debt and keep the house they will try to work with you through the bankruptcy process to ensure this.
In a Chapter 13 Bankruptcy you can elect to save your home by continuing to make the full monthly payment amount and entering into a repayment plan to catch up all missed payments over 5 years. However, if you are so far behind that you will not be able to catch up your payments over the five years of the Chapter 13 bankruptcy and finish the bankruptcy with your mortgage current, then there is a chance that the bank may push to take the house.
If you are thinking about filing a Chapter 7 bankruptcy then this changes things. In a Chapter 7 you must be current on your mortgage in order to reaffirm the debt for the house and maintain ownership. This would be more applicable if you are not delinquent on the mortgage but have overwhelming other debts.
The next big question is: How important is bankruptcy status to the buyer or seller of a home and why should it be the business of your Realtor to find out? There are two extremely important questions that a Realtor should be asking each and every client, it may not seem like something crucial, but it could have a great impact upon the sale or purchase of a house.
The questions are:
1. Are you currently in an active bankruptcy? 2. Have you been in a bankruptcy action at any point during the time in which you owned the house that you are attempting to sell? Why are these questions important? I will explain. If someone is in an active bankruptcy, the Bankruptcy Code, which is a federal code, states that all property owned by the individual who files the bankruptcy then becomes part of the bankruptcy estate and is thus under the control of the Trustee of the bankruptcy action. Any action taken to change the status of the estate other than day-to-day expenses of living is controlled by the Trustee. If someone has not received permission from the court to sell or buy a property then that could put them in violation of the rules of the bankruptcy code and endanger their bankruptcy plan. If a person desires to sell a home while in bankruptcy it is best to start petitioning the court for permission to sell before putting the house on the market or at least as soon as possible after putting the house on the market. I suggest before, simply because the standard real estate closing takes roughly 30 days and it can take 30 to 60 days for the bankruptcy attorney to file a motion, give notice to all parties, have a hearing, and get an order signed and entered with the court. This could be a potential for delaying the closing.
Additionally, the closing attorney will be performing a title search and reviewing all applicable judgments, liens, and any other things that may cloud the title to the property. If there is a lien that the seller believes was paid off in bankruptcy, but is still unreleased, then the attorney will need to know so they how to handle this.
All this is to say that much more goes into the home selling process than most are probably aware and I would like to share what I can with others. It is important to have a Closing Attorney who is familiar with all aspects of the law and how it may affect your client. Before becoming a Closing Attorney, Jeremiah McGuire spent almost a decade representing the rights of Mortgage Lenders in bankruptcy, foreclosure, evictions, collections, and complex litigation actions.
If you feel that this information may help you or a client, please reach out. It is my mission to help others.
Jeremiah L. McGuire