The seller can sign all the written promises in the world and it won’t hold up in a BK. What will happen in my “opinion” assuming the BK attorney is on top of things, is the have the seller file not only against the note, but to also list the buyer in the BK also. This way, whether any promises or not have been signed, the seller will be relieved of any future potential lawsuits the buyer may possibly have against the seller. When filing a chapter 7, the BK attorney will tell the client to list EVERY possible thing they can think of that they may owe anything to and leave no stone unturned! Otherwise, if someone or something wasn’t listed in the BK, and after it is discharged, the creditor can come after you. At least that’s the way I understand it.
Also, I don’t think by putting the property into any trust, or any other type of entity would matter in the case of a BK. The reason being, no matter what is done with the property, the seller has personally signed the note to the lender and the lender has a right to foreclose on the property regardless of who or what owns it. It doesn’t release the borrower from being liable on the note without the lenders release except in the case of a BK or paying it off.
I wonder if anyone here has ever had to deal with this in a “subject to” deal where they couldn’t qualify to refinance and what the out come was??? Did the lender foreclose? Did they let the new owner assume the note or refinance them anyway? Did they have a tenant/buyer in the property to deal with that couldn’t get a loan yet? And what was the result in the end from all this? Anyone???
I’m negotiating with an owner that’s three months behind on the first mtg, and has left the city. I have suggested making up the arrears and buying subject to, and the owner may be interested. But, the owner has stated that he will probably declare bankruptcy this year, due to other debts.
So, if I understand this correctly, I get the deed, but if he declares BK sometime after, the bank will still get the property back. If I had already put money into the arrears, and maybe sold on L/O, I am in a very precarious position (read no control) and so are my buyers. I can request to be excluded from the BK, I seem to remember. But what assurances do I have that this seller won’t want to erase THIS debt as well as all his others with his future BK?
Now that I think of it, doesn’t every “subject to” purchase leave open the possibility that the seller will declare BK and cause the property to be lost? How do I assure myself that if any seller’s life happens to change months after the sale, I am protected?
Re: Aren’t all Subject-to Deals at risk of future BK? - Posted by Bill Gatten
Posted by Bill Gatten on June 07, 2000 at 12:58:25:
Quite candidly, I’ve done several (maybe a dozen) transactions over the past seven or eight years, wherein the “seller” in a PACTrust filed BK after creating the trust and assigning A PORTION of its beneficiary interest to a second party (Resident Co-Beneficiary), who took over all the payments and responsibilities for the property. And never has there been a single question (albeit, no attempts either) of a mortgagor’s coming after the property, whether the debtor declared the property or not (assuming the payments, insurance and property tax were up to date.
The concept behind a “co-beneficiary 3rd party trustee, land trust conveyance (PACTrust)” is that since the trust’s beneficiary interest is clearly Personalty and Not Realty (real estate interest been converted to personal estate interest); and Personalty is virtually armor-plated when it comes to Partition: the property itself is protected from the untoward actions of the BK court…even though the creditor himself…were there to be lots of equity in the property…could be charged with fraudulent conversion with/and an intent to defraud the bankruptcy court (BK fraud leads to jail time in some cases when the BK court can?t get to the converted assets).
In you scenario, I would feel very safe in taking the property this way (PT), and would suggest even further sealing up the cracks by taking my beneficiary interest as a 2-party LLC.
I could post codes and cites on this issues all day long; but that’s about how long it would take to dig up the references again (I’ve done it a number of times so far here on CREOL): check the archives if you have the time.
You get the deed. Its not his property, so the trustee cannot attach it.
Unless – the trustee can show a fraudulent transfer. This depends on the amount of time from deed to BK, and if there was sufficient consideration for the conveyance. Also, if you are related to the debtor, it can be easily undone.
Im not sure how your deal would look. Since (i assume)you are not giving him anything for his equity, it could be demonstrated that it was a sham. If you could document that he had no equity, then you should be OK.
Im not sure if a land trust would help either. Bill Gatten says it would, but Bronchick disagrees. I don’t think that has been settled here to anyone’s satisfaction.
Thanks for the feedback. Maybe I’m not understanding one thing, though, having to do with BK. If the seller, 5 months from now, declares BK and wants the underlying trust deed & note (loan that he still owes to the lender) to be wiped-out, what position am I in with the deed? My understanding is that the lender still get’s back the property no matter who owns the deed.
You mention that because the seller doesn’t own the deed (or the house) it cannot be attached to the BK. But certainly the note is still in his name, secured by the house.
See what I mean? It doesn’t sound as though just owning the deed protects me and my buyer. Am I getting something wrong…since I don’t understand all the procedures involved in BKs?
Well my view on this is, if the seller files BK, and assuming the BK attorney isn’t an idiot, he will advise his client to BK on the note. If he doesn’t, and the buyer were to default on the payments later, the seller is held liable on the note and can not file another BK for 10 years leaving him wide open for the lender to come after him for any monies owed on the lenders loss.
But if you have the deed and since you’re the legal owner, you can refinance the property to pay off the underlying loan. If you could not qualify to refi., then you could have some problems. Or you could sell the property also. But if you have a tenant in there with an option this could create a problem unless the tenant could refi at that time.
You could always try to get the lender to allow you to assume the note by saving them the expense and time involved to foreclose, but that doesn’t mean they will go along with it.
You could try to get the seller to not file against the note since you’ve been making the payments, but I would think that would be unlikely for the seller to go along with that and seriously doubt the BK attorney would advise his client to do anything except to have the note discharged. Why would the seller want to risk having to deal with this in the future, especially on a 30 year note?
My feeling is, bottom line, make sure you’re able to get refinanced when taking over a property “subject to”. Otherwise there will always be a greater risk involved.
Okay, I’m lousy at deception. For those of you who caught it, I didn’t post under my correct name & city to avoid tipping my hand…some competitive goings-on regarding this house in my city.
I agree. Bronchick question? - Posted by Stacy (AZ)
Posted by Stacy (AZ) on June 06, 2000 at 18:16:10:
I think you’re right, JohnBoy. If I was the investor, I think I’d miss a few night’s sleep wondering about my buyer’s position.
But, I’ve always wondered if there was a way to get the seller to sign a promise that he would NOT include this note in any future BK actions. I have no idea if anything like this would hold-up in court if he went right ahead and included it in a BK, anyway. After all, he promised to pay off all those other debtors, too.
I hope Bill Bronchick reads this and gives an opinion.