Posted by JohnBoy on March 23, 2002 at 15:19:31:
One “potential” problem is with the BK Court recinding the sale. When a debtor files BK, any assets they sold within 1 year prior to filing BK “could” be recinded if the asset was sold if there was a lot of equity left in the deal. In this case it looks like you got about $25k in equity on this deal. You need to check and see what the exemption amount is for on a debtor’s personal residence. After figuring in their exemption amount, the cost of selling the property, there may not be enough equity involved for the court to justify recinding the sale. I would guess the chances of the court recinding this would be slim to none.
IF the court was to recind the sale then try to work out a settlement amount for the difference that they would expect to clear from all this and just offer to pay them off for that amount. You could refinance the property or take out a second to cover it if it came to that.
The Lender. The lender can’t just “make” you hand over the property. Chances are the debtor WILL file against the lender to have themselves discharged from owing on the mortgage since they are filing a BK. You could “try” and see about getting the seller to NOT include the mortgage in the BK since you are making the payments on it, but don’t count on it. Unless the debtor has a real idiot for an attorney, his attorney is going to advise him to file against EVERYONE and EVERYTHING he owes any debts to!
The worst thing the lender could do is call the loan due when they find out about the transfer, especially since they will end up with no one being personally liable on the mortgage. They “might” let it slide as long as the payments are being made and the loan is current. They might call it due. If they call it due and you refuse to pay it off then the lender MUST foreclose to get the property back. So depending on how long it takes to foreclose in your state to get a property back, your lease option with your tenant/buyer could be long expired or they could have exercised the option and paid the lender off before the foreclosure goes through. You could refinance it and pay the lender off IF it came to that to avoid losing the property to foreclosure. The lender may even just ask you to come in and sign on the loan to take it over OR offer to refinance you to avoid having to foreclose. All they usually care about is getting the payments on time. So as long as you are in a position to be able to refinance then you don’t have anything to worry about as far as losing the property to the lender IF they called the loan due AND followed through with actually starting the foreclosure process if you don’t pay them off. Heck, you’re only looking at 55% LTV to refinance and pay the lender off IF push came to shove! You can pretty much finance the DEAD at that LTV!!! So worrying about the lender getting the property back is probably going to be the LEAST of your concerns.
You could even get your tenant/buyer financed for 60% - 70% LTV with the worst credit and carry back the difference of your equity as a second just to get the lender paid off IF you had to go that far. So I wouldn’t worry about the lender in this case since you have a ton of equity here to play with which gives you a lot of options to take care of anything IF it came to that.
I “assume” if you set all this up properly then you did disclose everything to the tenant/buyer that the property was being purchased subject to an existing mortgage and there is a “possibility” of the lender calling the loan due??? You should be disclosing this to your buyers the same as disclosing these risks to the seller when buying this way. But in this case whether you did or didn’t I’d say you’re in a good position to deal with any problem because of the equity involved by giving you plenty of room to take care of anything “should” it become a problem.
So I would guess that your biggest potential problem here will lie with the BK Court as to whether they would want to enforce recinding the sale to get some of that equity left in the property to pay towards the debt the debtor owes to all his creditors. IF that were to happen then just try to make a settlement with the trustee for an agreed upon dollar amount and then pay them off to protect your interest in the property IF you had to go that far.
As far as suing the seller, sue for what??? They are filing BK. They have NOTHING to sue for and if his BK attorney has half a brain he will have the seller list YOU to be included in the BK anyway, which means you couldn’t sue him if you wanted to just for the heck of it!
All in all, I’d say you’re OK on this one with having a lot of options to deal with it IF it even becomes a problem. The court may not bother with it since title has transfered. You might try to get the seller to at least hold off for a few more months if possible before filing to allow some more time to pass just to add less risk of having the sale recinded. Heck, he’s going to file anyway, so what difference does it make if he files now or in another 3 - 9 months from now? Offer him $1,000 cash if he will hold off another 9 months to allow a year to pass from the date of the sale when you purchased the property. But don’t pay anything until after the time has passed otherwise he might take your money and file anyway. If he has a creditor coming down on him hard where they are ready to go to court and get a judgement against him then find out how much he owes on the debt and try to buy the bad debt from his creditor for ten cents on the dollar or something to get them off his back! If they hear he’s going to file BK anyway then they may be more than willing to take SOMETHING rather then ending up getting ZIP in the end!
The bottom line is, IS there anything he is going to be trying to keep out of this after filing the BK? Like his car or something? Is he behind on those payments? If you brought his car payments current for him so he could keep the car and continue paying on it while blowing all the other debts off for now, would that help to delay filing the BK for several more months?
Find out what exactly his immediate PROBLEM is and see if you can offer a solution to solve it for the time being to delay filing the BK. That way you can buy a little time to allow the sale of the property to season and avoid any “potential” risk of the court recinding the sale. First check to see what the debtor’s exemption amount is on a personal residence. That may be enough right there to where you won’t have to worry about anything anyway. Whatever the exemption amount is, that amount can’t be taken away from the debtor in a BK to pay to any of his creditors. So you may be in a much better position than you think.
Forward all gratuities in care of JohnBoy. LOL