What happens if they file BK after I buy the FC? - Posted by js-Indianapolis

Real Estate Investing
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Posted by John Merchant on July 09, 2003 at 21:48:57:

They are two separate issues, as a Trustee might send a paid-creditor a notice to immediatly return the moneys paid him on his debt to the trustee, as it amounted to an “unauthorized preference”, and is not acceptable, etc. Those are the ones to contest, as usually, as per the stats, rarely is that creditor required to reimburse the BK “res” (assets), either partially or fully, and it’s quite common for that creditor to be able to retain the entirity he was paid.

Now, FC is a “whole’nother deal” and, while it’s sure a claim that the creditor had better defend, it carries a much bigger burden of proof, and the folks making that claim had better have their ducks in order. Much more difficult to prove FC than a simple preference, and the BK court doesn’t take such a claim lightly. Real proof is required & I think I’d normally enjoy defending claim of FC more than trying to prove it.

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What happens if they file BK after I buy the FC? - Posted by js-Indianapolis

Posted by js-Indianapolis on July 03, 2003 at 01:36:33:

I’m working with another investor right now who has a foreclosure deal. The owners have previously filed Chapter 13, and it was dismissed 10 months ago. It might be worth noting, the BK court said, “It appears there were assets in this case.” So I figure they included the house, and the BK court knows what it’s worth. I’m wondering what would happen if they file again, 13 or 7, after they sell the house at a large discount. Also, how might you protect yourself? It’s not known if they are planning on it, just wondering what if they do.

The numbers are as follows:

$29K 1st foreclosing
$6,700 in arrears
no other liens known (yes, that is going to be confirmed)
$80K FMV

The owner wants $10K to walk. So it’s looking like $45,700 purchase total right now. For simplicity, let’s assume net after sale is $75,700, to make it a nice round $30K profit. Again, this is all speculation, just go with this for now.

The real question is what happens if they decide to file again, somewhere down the road? The amount of knowledge I have is limited to, “That would be bad.”, and Ron Star’s Article. That states the BK court could reverse the sale up to 3 years after, and you’d become a creditor. OUCH! Can this possibly happen this way?

Now, to throw one more variable into the equation, this house is going to be sold to a new owner. Who might the BK court go after? The investor, or the new owner?

My thought on proceeding forward was to get a P & S signed, a deed if they can get it, give a shot at shortsale (why not?), but start into the close, ASAP. First step, title search, make sure it’s clear. If that’s clear, all I could see is getting a seller’s disclosure (ala Joe Kaiser) and adding a place for the seller to acknowledge “I will not file BK for 3 years affecting this transaction.” Maybe not worth much, besides getting the seller to promise they won’t. Maybe there’s an honest person left, that won’t go back on their word?

So sign it up, close it, sell it, and pray? That about cover it, or could you do more?

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If they file BK after I buy the FC? - Posted by John Merchant

Posted by John Merchant on July 03, 2003 at 22:27:49:

This clause would be as worthless as anything I’ve ever heard of. Can’t enforce such a contract, and you’d be making a big mistake if you took anybody’s agreement for it. Could be written on the Family Bible in blood, no matter, it’d still be as worthless as if scratched on loose sand. My gosh, the things I’ve heard desperate debtors promise! Sometimes the day before the BK is filed.

Be aware though that any money you or any other creditor might get out of a BK before he files, or while it’s pending will, in 95% of the time, NOT have to be repaid.

Even if the creditor has received such money, and he then gets a Notice from the Bk Court Trustee demanding he return that money…DO NOT comply, but immediately file an “answer” and contest that Trustee’s order. Only very, very rarely is the creditor required to pay any of it back, and even if so, the amount can be worked way down to a fraction of the sum the creditor received. This info comes by the way, from a BIG national association of bill collectors’ printed advice to its members. So it’s not just my opinion.

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Re: If they file BK after I buy the FC? - Posted by JT-IN

Posted by JT-IN on July 03, 2003 at 03:50:42:

Josh:

The above events can certainly be a train wreck, if it occurs as you describe. What you must do is due diligence and evaluation to determine what is the perpensity on the part of the seller to actually file…? Folks don’t file BK for NO reason, and if after evaluating the circumstances, there are flashing red lights, bells and whistles all going off, like an old K-Mart blue light special… pointing to the fact that “they will be filing BK”, then you stay away from the temptaion to do the deal. If on the other hand, it simply makes NO good sense for them to file a BK, then that would be a pretty good indication that they won’t.

The trick is, in doing honest and impartial due diligence and forgetting the fact that you are potentially staring at a 30K profit. All too often folks are unable to focus on what is the obvious, and are blinded by the potential deal… and the emotions of “the payday” get into the decision making process. What is advised is to look at this and other deals as if you are evaluating for a friend… a third party, who has asked you advice, and your answer will determine what they might do. It is simply cleared to see the pitfalls if we are NOT counting the profits at the same time we are thinking of the numerous twists and turns of how the train jumps off the tracks.

The look back period in an arms length transaction, (especially where there is no prior relationship, nor blood ancestry), is likely to be lots less than 3 years. The statute says it can actually be up to 4 years, but in reality for an arms length deal, you are more concerned about a 1 year period, and the larger lightning rod is 120 days. Of course wth that much equity, who knows. It would also depend on who and how much the other creditors were, IMHO. Whille 30K profit is quite a lot, I have seen BK discard equity of that amount as too little to conserve or convert. Each case is unique and seperate.

One last thing… I would not add that statement to the same seller’s disclosure form, that has all their other representation and acknowledgements. The inlcusion of a 3 year period on that form acknowledges to the court that you fully understood the risk of the set aside by the BK court, in a scenario of transfer of equity. You may want to have a seperate form dedicated solely to that issue, which will never be seen by a BK Judge, no matter what… The Seller signs it and it stays in the file, worthless and meaningless. The only potential for this statement is that maybe it influences the future actions of the seller and may cause them to honor their word… but doubtful. If it doesn’t, the form will only incriminate you at a later date, no help you.

Just the way that I view things…

JT-IN

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Re: If they file BK after I buy the FC? - Posted by JT-IN

Posted by JT-IN on July 03, 2003 at 23:00:34:

John:

“Notice from the Bk Court Trustee demanding he return that money”

In the example, Josh is not getting moneies, but equity…; maybe one and the same, viewed by the court. In the case of the example, Josh is most concerned with a Judge recinding the sale, due to fraudulent conveyance, if the Seller were to file BK… say within 6 months, after giving away a pretty snappy sum of equity.

In your experiences, have you seen these scenarios reversed due to fraudulent conveyance…? In most cases, F.C. is deemed when your Brother-in-law buys the house for 1/2 or less, hence not being an arms length deal. In the case of an arms length investor, and a notoriously frivilous Seller, evidenced by his poor financial accumen and lack of any restraint, is it OK for him to sell for way under the market, to an arms length third party, w/o fear of reversal of the deal by the BK Judge…?

Am I understanding these (your main point, and mine) as two seperate issues, or are they really one and the same…?

JT-IN