For Savvy Realtors: How Bankruptcy Can Make a Short Sale Work for Your Clients
In today’s economic climate, it is not uncommon for a Realtor to work on the short sale of a home while their client is in personal bankruptcy. For many Realtors, it is a frustrating situation. But it doesn’t need to be. Bankruptcy Law Professionals of Colorado is here to help you! If you are a Realtor selling a property that is involved in bankruptcy, give us a call for assistance.
Advantages of the Short Sale
For the homeowner facing financial difficulties, a short sale is better than foreclosure in many situations:
- The sellers will not have a foreclosure on their credit record.
- The seller may be able to qualify for another mortgage loan more quickly—typically 3 years from the date of the sale.
- The seller can prevent further accumulation of HOA dues.
- The short sale provides the seller with more control than they have with foreclosure.
- The sellers have the opportunity to maintain their pride and leave the property on their own terms.
Advantages of Bankruptcy with a Short Sale
If the homeowner opts to avert foreclosure with a short sale, bankruptcy offers several advantages:
- Bankruptcy stops foreclosure. That can give a seller more time to negotiate a short sale. At a minimum, the sale will be delayed 30 days in Chapter 7 bankruptcy and up to several years in Chapter 13 bankruptcy.
- Bankruptcy discharges any mortgage loan deficiency caused by the short sale.
- The seller also avoids income taxes on the forgiven debt. This is not true with the ordinary short sale. For more information about this issue, see IRS Publication 908.
- Judgment liens against the property can usually be removed by the bankruptcy court in 2-3 weeks. There is no need to negotiate them off title. And, if the seller filed for bankruptcy some time ago and their case is now closed, it may be able to be reopened to avoid the judgment liens.
Closing on the Short-Sale in Bankruptcy
When an individual files for personal bankruptcy, everything he/she owns is immediately placed under the care and control of the assigned Bankruptcy Trustee. The Trustee is an attorney appointed by the Bankruptcy Court to represent the individual’s unsecured creditors and collect and liquidate their non-exempt assets to pay creditors.
To close a short sale, the Trustee must officially determine that there is no equity in the real estate that could be used to pay debts. Since a short sale assumes that there is no equity, the Trustee will formally “abandon” the property. That releases it back to the seller.
Timing is very important in this process. The Trustee cannot legally abandon a property until after the sellers appear and are questioned at their Meeting of the Creditors. This meeting is typically held 30-60 days after the bankruptcy filing. Until this meeting, the sale of the real estate cannot be closed.
Closing on a Real Estate Short Sale in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the Trustee will usually voluntarily abandon real estate. But, if the Trustee doesn’t, abandonment can be obtained by drafting a letter of abandonment for the Trustee to sign.
Even when there is equity in real estate in Chapter 7 bankruptcy, the Trustee will typically abandon the property when:
- The property is the primary residence of the individuals filing bankruptcy AND
- There is less than $60,000 of net equity in the property. For filers over the age of 60, the net equity can be up to $90,000.
If the home is not the primary residence of the individual filing bankruptcy and there is some net equity in the property, the Trustee will not abandon it.
Closing on a Real Estate Short Sale in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, it is almost as easy to close on a real estate short sale. To do this, the seller must obtain approval for the sale from the Bankruptcy Court before the sale closes by filing a Motion to Approve Sale with the court. The approval will take about 30 days to be granted if the motion is uncontested, which is usually the case.
Contact Bankruptcy Law Professionals of Colorado for counseling. on short selling a home while filing for bankruptcy. We have the experience and expertise to make the real estate sale easier for both the seller and the Realtor.