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Martin Prybylski
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Martin Prybylski
Martin Prybylski

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Selling a House Despite a Bankruptcy

Many of my clients are involved with a real estate broker before they meet met to discuss bankruptcy options. One common issue is that a sale of real property is in process while the lender is attempting to foreclose on the property. The broker has made many good faith efforts to delay the foreclosure to complete a sale. Unfortunately, the lender is unwilling to continue the foreclosure any further to accommodate the sale.
Many brokers simply walk away at this point chalking up the sale as dead in the water. They know the client probably needs to file a bankruptcy proceeding to delay the foreclosure and resolve any future liability after the resolution of the sale. The broker also believes that the bankruptcy will terminate their ability to sell the property and receive their commission. Therefore, the broker moves on to other potential sales.
Is the broker correct in this circumstance?
Absolutely Not!
In these kinds of cases, the first thing a broker should do is have their client meet with a qualified bankruptcy or distressed property attorney in preparation for the worst-case scenario described above. If proper planning is done, the loss of the sale may be avoided.
Short Sales
The reason why many sales are lost is because often the best type of bankruptcy for clients is a Chapter 7 Bankruptcy. This is most common with short sales. When the client files for a Chapter 7 Bankruptcy, all their assets become “property of the estate.” The Trustee then either sells the property or abandons the property back to the owner.
For a broker working intimately with the property, they are in the best position to continue to sell that property so long as they are properly qualified. If the client still wants to sell, the broker may be able to be hired by the Trustee to sell the property. Many Trustees work with particular brokers, but can be persuaded if you either already have leads or are willing to work with them.
The other option would be to force the Trustee to abandon the property. Once it is abandoned, your sale can continue unadulterated. This is a very fact specific scenario, but is an option. Sometimes, the Trustee will abandon the property on their own accord.
Homes with Equity
If your client’s property has equity it gets a little trickier, but your client has more options to be honest.
If the debtor resides in the property and the equity is less than the homestead exemption, the debtor can still file a Chapter 7. The Trustee will not be able to sell the property because the homestead will protect it from liquidation.
If the equity exceeds the value of the homestead or the property is not the residence of the client, a Chapter 13 Bankruptcy will stop any pending sale and often gives the client time to reorganize and sell the property successfully. As Chapter 13 Trustees do not liquidate, the client is not at risk of the property being sold by the Trustee.
If a buyer is found while the case is open, the client will need to have the sale approved by the court before it can be completed.
Summary
This is a summary of options available designed to give brokers some insights into options on their distressed sales. Only qualified attorneys should make the determination as to which route is best for the client. If you have questions about utilizing bankruptcy to complete a distressed sale, please set up a consultation with one of our attorneys.

Martin Prybylski
Attorney at Law
McFerran Law, P.S.
3906 S 74th Street
Tacoma, WA 98409
253-284-3811

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