The Short Sale Investor’s Bankruptcy Guide

Every real estate professional who works with homeowners in default needs to know a little about bankruptcy. At the very least, you should know enough to join the conversation because bankruptcy and foreclosure often go together.

Keep in mind that you’re not there to advise them on whether or not they should do it. Stick to talking about the facts related to how bankruptcy affects homeowners in foreclosure, and advise them to take that information to a bankruptcy attorney. You don’t want to let them think you can help them file, or be accused of practicing law without a license.

This is about learning the difference between what a bankruptcy can and can’t do for a homeowner in foreclosure. You don’t have to become a bankruptcy expert, but you should learn just enough about a few key terms that you can be a part of the conversation if it comes up. When you can relate those terms to the foreclosure process, you will be better equipped to help homeowners explore their options and decide if they want to speak with a bankruptcy attorney.

Bankruptcy Stay: A judge can order a stay to freeze the progress of the foreclosure. It doesn’t prevent the foreclosure from ever happening, but it does prevent the lender from taking further action for a while – even an hour before the sheriff’s sale. This has the effect of giving the homeowner more time to work things out.

Motion for Relief of Stay: This is the lender’s response to a bankruptcy stay. Mortgage lenders will often file a Motion for Relief of Stay with the bankruptcy court, which may or may not allow that lender to continue or restart the foreclosure process.

A motion for relief of stay may be justified in one of two ways. First, if the property has negative equity, the homeowner will receive nothing from the sale of the house anyway. Since there will be no proceeds from the sale to distribute among the other creditors, the court may see no point in freezing the foreclosure process. Second, the homeowner may already be in trouble with the court because they can’t keep up with their repayment plan. The court will see no point in giving most homeowners a second chance to save the house if they aren’t cooperating in good faith with the bankruptcy process.

Abandonment of Assets: An abandoned asset is one with such little value (such as a house with negative equity) that no creditor, besides the secured lienholder, could possibly be interested in including it in the bankruptcy proceedings. As far as the bankruptcy court is concerned, the asset (the house) is said to be abandoned.

Discharge: In bankruptcy court, a debt is said to be discharged when the Chapter 7 or the Chapter 13 proceedings are over and the court is satisfied. The judge’s discharge order means that the person who filed bankruptcy doesn’t owe anything else on that debt.

Bankruptcy Dismissal: Most frequently used in a Chapter 13 bankruptcy, the term “dismissal” means that the individual has lost the ability to file bankruptcy papers and have his debts discharged. The court dismisses a bankruptcy when the individual fails to comply with either the court’s request for paperwork or the trustee’s payment plan. The legislative reforms that became effective in October 2005 limited an individual’s ability to refile bankruptcy in the event of a dismissal.

When you work with homeowners who are in default on their mortgage, there’s a good chance you will talk to someone who is considering bankruptcy to end their financial problems. Be prepared. Talk to one of the real estate professionals at Strategic Real Estate Coach about handling that conversation. The more you know about bankruptcy, the more you will be able to help a homeowner think through each of his options.

You may want to speak with a bankruptcy attorney yourself to get the details about how this works in your state. In the meantime, just remember this: When a homeowner files bankruptcy, the court won’t stop the foreclosure permanently, but it could delay the auction temporarily and buy the homeowner some time to work things out another way.

Need more information about helping homeowners in default on their mortgage? Visit the Strategic Real Estate Coach website, and check out our free report about the new Real Estate Rebel. Dare yourself to follow our ethical, proven strategies for growing your real estate business beyond your imagination!