Chapter 13 and Preforeclosures--What's your $0.02? - Posted by Loren (FL)

Posted by Natalie-VA on May 18, 2006 at 15:29:27:


If the sales proceeds pay off her house and her BR creditors, the rest is hers. As I mentioned earlier, she probably hasn’t got a clue how it works. I would ask her permission to speak with her attorney.

It can get complicated. For example, I had one recently where the guy’s atty had negotiated his debts down to 10k from 40k. He priced his house to pay off his mortgages plus that 10k of debt. Well, guess what…since he had been paying on his BR for less than 36 months, he had to pay the entire 40k in order to sell his house and end his BR early.

I learn more every time I do one of these. I would go for it. It’s worth the education.


Chapter 13 and Preforeclosures–What’s your $0.02? - Posted by Loren (FL)

Posted by Loren (FL) on May 18, 2006 at 08:40:50:

Greetings All,

I just got a bite from my preforeclosure efforts. The fly in the ointment is this: The owner of the house has filed for Chapter 13 bankruptcy. She’s making regular payments through the trustee to the private lender who financed her.

There’s some potential here. She claims that her total lien amount runs to about $260,000. After repaired value for the house would likely be about $375,000 to $400,000. The property does need a fair bit of work (e.g. roof, new carpeting, significant landscaping), but that’s still a fair chunk of equity.

Before I jump in with both feet and run my comps, do my title search, call my CPA, conduct an inspection and ring the lawyer’s phone off the hook, I’d like to here all your opinions about dealing with folks in foreclosure who have filed bankruptcy. Is it worth the effort? What things should I look out for? Are there any glaring pitfalls?

Many thanks,


Re: Chapter 13 and Preforeclosures - Posted by Natalie-VA

Posted by Natalie-VA on May 18, 2006 at 11:44:01:


The biggest thing that I have found with these is that the homeowner knows nothing about how the bankruptcy works. They think their house isn’t in the bankruptcy and that they don’t need court approval, etc. etc. etc.

Don’t take their word for anything. Your best bet is to talk with their BR attorney and confirm that court approval will be required for the sale.

By the way, if she’s in pre-foreclosure, she apparently is not making her payments to the trustee as she says.

I hate to be jaded, but I’ve found that many people in foreclosure have challenges with telling the truth about their situation. When you add bankruptcy to this, they have even bigger challenges. I don’t know how else to say it and be politically correct!

Also, be advised that she will not be able to walk away from the house sale with money. I believe that this will vary by state so double check me here. Any excess proceeds will need to go toward her chapter 13 payments.

Anyway, start with her attorney and see what you can find out.


Re: Chapter 13 and Preforeclosures- - Posted by BTI

Posted by BTI on May 18, 2006 at 10:37:57:


I would want to know why she filed BK in the first place. I don’t know how far you have to travel but reviewing the file at the court will provide you with a lot of info you should have before jumping in anywhere.


Re: Chapter 13 and Preforeclosures - Posted by John

Posted by John on May 18, 2006 at 09:08:23:

I am by far not an expert on this thing. But here is my take.

The bankruptcy trustee would have to approve the sale. With that much equity there it would seem unlikely at a price you would want to buy for.

However you said it was financed thru a private investor. This raises possibilities. You could track down the investor and buy the note at a discount. When the BK is discharged you could foreclose yourself if payments went south. If the trustee sold the property you would get full face value of your note.
I will be interested to see what more experienced investors come up with. I think you have alot of possibilities here. Good luck

correction - Posted by Natalie-VA

Posted by Natalie-VA on May 18, 2006 at 12:21:21:

I previously said that if she’s in pre-forclosure, she apparently is not making her payments to the trustee as she says.

This is incorrect. She could be making her payments to the BR trustee, but not to her lender.

Sorry for the error.


Explanation and Other Considerations - Posted by Loren (FL)

Posted by Loren (FL) on May 18, 2006 at 13:24:54:


From what I could gather via my conversation with the property owner (and it was rather scattered, to be honest), she had a mortage for about $240,000 on the property and took out a second interest-only loan for $20,000 at 12% in order to make some repairs after hurricane Wilma last year. Somehow she got delayed in paying off the balloon and went into default. (She says this was due to the lender not following through with her communication; I take this with a block of salt.)

Some further points of concern that have popped into my mind today:

  1. The property owner has had an appraisal and also has a realtor friend, and is therefore convinced her home is worth $425,000. As we all know, preforeclosures are simply worth less than other properties in the marketplace because of the fiscal situations of their owners. Plus, this one does need work that others in the neighborhood don’t.

  2. I don’t like the idea of a third party like a trustee having to sign off on a sale. A trustee lacks the motivation an individual in default possesses.

  3. The property owner seemed less than thrilled when I mentioned I’d need to get an estoppel letter from her lender if we were to proceed any further. She said this was because she didn’t trust her lender. (See the aforementioned block of salt.)


Re: correction - Posted by Loren (FL)

Posted by Loren (FL) on May 18, 2006 at 13:28:29:

Hello Natalie,

Don’t worry about it. That’s probably my fault, since she’s techincally not in preforeclosure anyway.

This buyer does seem to realize that her house is included in the bankruptcy proceedings, but not that she can’t take any money away from the sale of it. (That’s news to me and I’m darn glad you told me.) She seemed to want a large hunk of her equity. Then again, who wouldn’t?

Any suggestions as to required reading for dealing with bankruptcy issues? I suppose I’d better learn the nuts and bolts if I’m going to stick with this business.