Bankruptcy! Does it effect a current mortgage? - Posted by Jim LaVerdi

Posted by JohnBoy on June 14, 2000 at 16:10:02:

So basically make sure you are in a position to refinance if it came to that just to protect yourself from any potential liability from your tenant/buyer or buyer if you sold on a contract. Otherwise you decide on whether the risk involved is worth taking or not? See my response to Stacy below.

Bankruptcy! Does it effect a current mortgage? - Posted by Jim LaVerdi

Posted by Jim LaVerdi on June 13, 2000 at 18:49:17:

I have found a house (Pre Foreclosure) Vacant! I contacted owner and they informed me that they have filed for Bankruptcy. My question, Can I take this loan over subject to or is this one that should be avoided? I also have a buyer looking to buy in the area that this house is located! I would like to take over this property and carry paper for a little bit for some positive cash flow. I will check into the numbers part as soon as I know it’s a safe one to chase here for a 1st deal!
In other words, does a bankruptcy have any effect on a mortgage as long as it is paid current? (By the way $0.00 equity in the property)
Thanks for helping !

Jim LaVerdi

Just to add another wrinkle - Posted by dew

Posted by dew on June 15, 2000 at 21:20:03:

I believe there are 2 states, though, where the loan on a primary residence can be kept out of the BK. However, if there is no equity, there most likely wouldn’t be a reason to do this if you were in one fo those states. One state is Florida (the “dead beat” state, sorry Floridians!) and don’t remember the other one.

Re: Bankruptcy! Does it effect a current mortgage? - Posted by Soraya(SanDiego)

Posted by Soraya(SanDiego) on June 14, 2000 at 01:04:30:

My suggestion is to find out from the seller the reason for him going into bankruptcy (BK). Is it a last ditch effort to save the house? If so, have him recind the BK and do your deal.

And I also agree with Stacy, Bronchick and Gatten, if there is “zero” equity in the property and you can make a profit, go for it, because it would definitely cost the bank more to foreclose and resell than it would to just keep accepting the payments.

ALSO, make sure you disclose to your buyer that there is a possibiliy that the lender could call the loan.


Re: Bankruptcy! Does it effect a current mortgage? - Posted by Bill Gatten

Posted by Bill Gatten on June 13, 2000 at 21:16:52:


Go for it! If there is no equity, the debtor doesn’t have to claim it. If he does claim it and the payments remain current, the lender won’t do a thing about it and will feel fortunate. And, once you’ve placed it into a co-beneficiary 3rd party trustee-type land trust (whatever they call those things), holding your beneficiary interest as a Ltd Ptrsp or 2-person LLC: it would prove most difficult to get to anyway. Alhough theoretically the BK court could set it aside, I’m told; but for the bankruptcy court to proceed under the Uniform Fraudulent Conveyance Act, they’d have to prove that their wasn’t fair consideration, that the divestiture is what made the debtor bankrupt, and that the conveyance was done to deprive, allude or deceive creditors (See BK code Sec. 548; and a case between Georgia Pac. Corp. & Lumber Prods of Oklahoma, 490 P.2d 661, 665, 1?A.L.R…3d 1) .

Jim, especially if there is no equity showing anyway…then go for it, if it?s a good deal otherwise (If you don’t, I’d be pleased to).

Bill Gatten

Re: Bankruptcy! Does it effect a current mortgage? - Posted by

Posted by on June 13, 2000 at 18:58:55:

You may want to review the following thread regarding Subject-to and BK:


Re: Bankruptcy! Does it effect a current mortgage? - Posted by JPiper

Posted by JPiper on June 14, 2000 at 01:34:44:

Hey Bill:

You say ?If there is no equity, the debtor doesn’t have to claim it.? While I?m not an attorney, I would say that not including the loan in a bankruptcy filing would be perjury on the part of the borrower. Check it with your attorney though. Have him take a look at 18 USC Sections 151-157, the Criminal statutes concerning bankruptcy. I?d hate to be advising a guy filing bankruptcy to perjure himself?call me conservative.

Now how about this one: ?(5) knowingly and fraudulently receives any material amount of
property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11;? This is a part of 18 USC Section 152. And by the way, I understand that bankruptcy fraud can be used to support a RICO claim. Again, I?m no lawyer?.so check it out.

There?s got to be a better deal out there than a guy in the midst of a bankruptcy. Go find one who is only ?contemplating? it? have a much better chance.


Re: Bankruptcy! Does it effect a current mortgage? - Posted by JohnBoy

Posted by JohnBoy on June 13, 2000 at 23:10:08:

Hi Bill,

Ok, lets forget about the BK court pertaining to the Judge reversing the sale or assignment or whatever for a moment. The debtor claims the mortgage as part of his debt and the BK court discharges this. Now the lender has a discharged mortgage with no one being held liable for this note. The lender can foreclose on the property if they choose to do so in order to sell this thing and satisfy the debt.

Heres my question? Is it more likely that the lender will just sit back and collect payments from someone or some other entity that is showing up on title as the legal owner while they only have a lien secured against the property on a note that no one is legally responsible for paying the mortgage off?

At the very least wouldn’t the lender at least try to get the new owner on record to come in and assume the existing note or sign for a new note by threatening to foreclose to protect their interest?

Even though the payments are current and the payments are still being made on time, I can’t see where the lender would just sit back and do nothing just because payments are being made. They have a lien on the property, but no one to hold liable for the mortgage since the origional debtor was discharged from the note. The bank could foreclose and cut their loses now or sit back and gamble that the person making the payments at the moment will always continue paying and risk that the property doesn’t get destroyed in the meantime since they would have no recourse against the current owner with the only exception being that they can foreclose at anytime in the future and risk a bigger loss if the property gets destroyed.

Do lenders just say, “Oh well, as long as someone keeps paying we will just sit back and let it ride, while keeping our fingers crossed that everything works out since we have no one to go after in the event they stop paying down the road somewhere”?

What am I missing on this that I’m not understanding here?



Re: Bankruptcy! Does it effect a current mortgage? - Posted by Bill Gatten

Posted by Bill Gatten on June 14, 2000 at 15:25:20:

You’re probably right. If the guy is IN bankruptcy ow, and is dumb enough to declare the property, knowing that you’re standing by to take it off his hands, I’d be cautious. However, as J. Piper apparently mentioned (quoting Stacy), look for those who are trying to avoid filing, and or those who are looking for a way to deal with the property BEFORE filing.

If the property has been sold to you prior to BK (by any means), the actual debt is no longer the debtor’s (as far as the BK filing is concerned) and the debtor would have no reason to declare it as a debt, asset or liability. If you are the one who owns (by any means) it and he does so anyway, it is most unlikely that a bank would do anything about it if they are receiving their payments (however, do remember that it is I who screams loudest about how lenders DO use the DOS as a reason foreclose if they ever want to).

It’s just a risk that I have no problem in taking. I’m not worried about the BK court coming after the property–at all…but you’re right…theoretically the bank could. Though they’d probably do so under the rights implied in their Due on Sale Clause. And, if the property has not been sold, but only placed into a land trust and leased out with 100% of all payments being made by the tenant…and not made a part of the BK: that then waters down their Want-To pretty good. And, though I’m not an authority (Bronchik is the attorney), I’d still say the risk in what you’re alluding to is minimal at best.

Though I do think in a case like this it would be prudent to assure that the owner has received, completed and returned the necessary “permission” froms from the lender for placing the property into the trust. Which trust, of course, must be an inter vivos, revocable borrower directed trust ?in the the borrower is and will remain “a” beneficiary. I.e., he assigns most of the beneficiary interest to you, with an agreement to forfeit the rest at termination.


Re: Can I take a guess? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on June 14, 2000 at 24:40:22:

JohnBoy, from my prior post regarding BK and subject-to sales, as you’ll recall, I was concerned about the same things you mention in your post. As a matter of fact, it really put a damper in my thining about all subject-to transactions that I planned to hold…via land contract sale, L/O, or rental. That BK seemed to throw a monkey wrench into my ability to control the destiny of the property (and I’m a control freak).

But I think I know what the Bills (Bronchick and Gatten) are trying to convey. For properties that have little or no equity, it would cost the bank more to foreclose and resell than it would to just keep accepting the payments. Sure, there is no person on the hook for the mortgage after the BK. But, some “angel” has decided to cure this problem by making all the payments. I think the bank would foreclose in no time if the payments stopped comming in. They ALWAYS have that option in the future. But I think the Bills are trying to say lenders aren’t stupid…why would they look a gift-horse in the mouth and incur unneeded expenses, instead of just collecting payments on the debt?

Anyway, this is what I got out of the answers from Bronchick on his site, and Gatten here.