Doing a Subject To with Seller in Bankruptcy ?? - Posted by Monique

Posted by B.L.Renfrow on May 11, 2000 at 21:57:43:

Hi Monique,

This isn’t really my area of expertise, but I can fill in a few of the blanks for you.

First, unless the seller moves for dismissal of the bankruptcy petition, he cannot legally dispose of ANY asset without court approval. And I would be willing to bet the judge would not look too favorably on a plan to put $10k cash in the seller’s hands, unless that cash was to go toward repayment of his debts.

Second, is the property in foreclosure, or is the loan current? I assume, when you refer to “fees” the loan is delinquent. If it’s in foreclosure, and the BK is dismissed, the lender will immediately move forward with the foreclosure.

If the seller sells the property, and pockets $10k in the process, then immediately files for Chapter 7, I would suspect the judge might reverse the sale faster than you can say “bankruptcy fraud.”

Finally, back taxes cannot be bankrupted away unless they are more than 3 years old. If the IRS has filed a lien against the property, as far as I know, they aren’t too likely to remove it unless they are paid. However, I have not done one of these, so hopefully someone with relevant experience will contribute.

Brian (NY)

Doing a Subject To with Seller in Bankruptcy ?? - Posted by Monique

Posted by Monique on May 11, 2000 at 19:53:10:

I’m new to the issues of bankruptcy and could REALLY use some advice on how to do this deal:

  • The seller is currently in Chap 13
  • He wants $10K to walk.
  • Seller says his attorney told him that he can get the Chap 13 released, sell the house and keep any cash that he gets ($10K)
  • He plans to then convert to a Chap 7 to get a totally new, fresh start.
  • He mentioned that he owes back taxes to the IRS as well.

I’d like to buy the house ONLY if we can do a subject to. We would sell the house to someone who can get a new mortgage, or we would offer owner-financing and sell the note to cash out the underlying mortgages. Here are the specifics:

  • Estimated FMV: $325,000
  • 1st Mortgage Balance: $180,000, principal only; $200,000 with fees ($1750/mo Payment)
  • 2nd Mortgage Balance: $75,000, principal only; $100,000 with fees ($1000/mo Payment)
  • Clearly, the deal is far more attractive if we could get the deed subject to the principal only balances ($255K) and not have to pay the principal and fees ($300K)

I have lots of questions:

  1. Even if he gets his Chap 13 “released” (not sure what this really means), can he sell me the house subject to?
  2. Will the subject to sale hold up if he converts to Chap 7?
  3. Any chance that I can negotiate a short sale with the 2nd mortgage lender since he is planning on converting to a Chap 7? If not, is it likely that I could negotiate with both the 1st and the second to pay only the principal balances and not the fees?
  4. Will the Chap 7 clear up the back taxes, or can the IRS attach a lien to the house – even after he gives me the deed?
  5. I’m sure I should speak directly with his attorney to verify what the seller has said. What should I ask the attorney?
  6. For folks who have worked BK deals before, how can I avoid some of the gotcha’s that I do not know enough to ask about?

Thanks, in advance!