Buying Properties In Bankruptcy – Some Tips For Investors


Julia Wei

by Julia Wei on July 7, 2014

in Bankruptcy, Real Estate Law

What if you find the perfect house but the owner-seller is in bankruptcy?

Sometimes it can be challenging to navigate the bankruptcy system and understand who the decision-maker is in the transaction. If you want to make an offer on the home, here are a few things to consider:

1. What type of bankruptcy did the debtor/homeowner file?

In a Chapter 7 bankruptcy the property is the asset of the Chapter 7 estate and falls under the control of the Chapter 7 Trustee—who is NOT the owner of record, but is instead the person legally empowered to sell the property. The Chapter 7 Trustee is not likely to engage in an off-market transaction. Instead, to carry out his or her duties to all the creditors, and maximize the value of the asset, the trustee will likely list it with a broker and possibly have the property appraised as well.

This means that the property will follow a fairly traditional marketing model by the broker. But of course, the sale will be subject to Court approval (see more on that below).

However, in a Chapter 7, the debtor is usually entitled to the homestead exemption and if there is not enough equity above the liens plus the homestead exemption amount, the Trustee has no incentive to sell the property.

In a Chapter 13 or 11, the issue becomes more confusing. A Chapter 13 or 11 is a reorganization, and the purpose is for the debtor to restructure their debt by proposing a plan of how he, she, or it will pay all their creditors over a prolonged period of time (e.g. 3 or 5 years). The plan can include the sale of an asset and again, any sale would require court approval. In a Chapter 13, the property is an asset of the estate under the Chapter 13 Trustee’s dominion, but could re-vest in the debtor upon plan confirmation. That is a long way of saying that depending on how far along the bankruptcy is, the debtor may not have control over the property to list it or sell it until later, or at least until they have the consent of the Chapter 13 Trustee.

2. How long will the transaction take to close?

Once you have a signed contract in hand, the Court will have to approve the sale. This is usually a regularly noticed motion and can take up to a month to get on the calendar, depending on the type of motion brought and the court’s calendar. However, the sale is not a done deal because it is usually subject to overbid. That means that an auction takes place the day the sale order is supposed to be approved. Usually this is in the courtroom, but on occasion it can be informal and take place at the Trustee’s office.

Additionally, the transactions usually go through escrow and on occasion the title company/escrow officer will reject the Court Order and require an amended order with additional language that makes it possible to close escrow. That can add a couple of weeks to the transaction too.

TAKEAWAY 

A house that is an asset of the bankruptcy estate will likely be priced close to fair market value. However, the competition falls away only when one considers the pool of people willing to wait 60-120 days to close a sale and live with the uncertainty of having to pay even more in an open bidding session after the initial offer is accepted. In a rising market or for certain income producing properties, this can still be a deal with upside to the buyer who is willing to navigate these pitfalls.

If you or a friend is seeking real estate legal counsel regarding a California based property, don’t hesitate to contact our law firm at (650) 327-2900 x 10 or to learn more about our firm and read attorney bios, visit us on the web at www.BrewerFirm.com.

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