If you are a real estate professional in the San Francisco Bay Area, knowledge of some bankruptcy basics is tremendously helpful in dealing with distressed home sellers, or homeowners who have negative equity.
Because of the dramatic increase in foreclosure rates and decrease in home values in parts of California, such as San Jose, Campbell, Milpitas, Hayward, and other parts of the Bay Area, many homeowners may benefit from bankruptcy relief. And realtors who help them should be aware of how bankruptcy can help or hurt real estate transactions.
It is well known that bankruptcy can help stop foreclosure. Consequently, realtors who are negotiating a short sale and are facing a foreclosure deadline are sometimes tempted to file a bare-bones bankruptcy petition to temporarily stop the foreclosure. In other words, rather than filing a complete bankruptcy petition, with necessary schedules and statements, a debtor is sometimes advised to file a 4-page bare-bones document. This is practice is also known as filing a “ghost petition” or “shell petition” or “skeleton petition.” But filing a skeleton petition is almost never the best choice of action, as discussed below.
Basically, a skeleton petition:
- damages the homeowners credit,
- is only a short-term “band-aid” solution, and
- impairs the ability of the homeowner to obtain full bankruptcy relief in the next 12 months.
You can learn more about how skeleton petitions affect consumers by clicking here.
But a skeleton petition doesn’t just have negative consequences for the homeowner. It may also have negative consequences for the realtor. In many instances, banks are hesitant to negotiate a short sale if the homeowner is in bankruptcy protection, unless the court issues an order authorizing negotiations. Even if the bank negotiates a short sale, the sale must be approved by the court. Obtaining court approval requires filing a motion, which is usually too complicated for most realtors.
Worst still, in some instances, realtors help the homeowner by preparing the skeleton petition for the homeowner. This is an extremely bad idea, because the realtor might be practicing law without a license. The United States Department of Justice has a special division, called Office of United States Trustee that monitors bankruptcy filings. This office routinely investigates skeleton petitions that are filed without attorney representation.
The proper way to save a short sale
Realtors who are facing eminent foreclosure while negotiating a short sale do have an option. A properly prepared bankruptcy petition can not only stop a short sale, it may also be helpful in finalizing a short sale.
Using bankruptcy to remove judgment liens
Often, a short sale is obstructed by judgment lien holders that demand exorbitant funds on a completely unsecured or “underwater” lien. Bankruptcy can remove the lien from title, paving the way to an easy short sale. This can be done either through a chapter 7 or chapter 13. A chapter 7, however, is much quicker, and often will result in elimination of the lien in about three months.
Using bankruptcy to remove second or third mortgage liens
Due to dropping home sales, many homes in the San Francisco Bay Area in California – particularly San Jose, Salinas, Fremont, Oakland and Hayward – are now valued less than their first mortgage. In this situation, the second mortgage can be removed through chapter 13.
A chapter 13 typically takes three to five years to complete, and the lien is not removed until completion of the plan. However, once a proper chapter 13 petition is filed, a chapter 13 plan is proposed to allow “stripping” the mortgage lien. If the court approves this plan, the realtor is in a much better position to negotiate with the lien holder.
Short-selling a home when the owner is in bankruptcy
Contrary to popularly-held belief, selling a home while the owner is in bankruptcy is not very difficult. In fact, Fuller Law Firm, PC, routinely files motions with the bankruptcy courts to authorize short sales. If the debtor is in a chapter 13, all that is needed to prepare a motion to authorize short sale is:
- a copy of the purchase offer and counter offer,
- the short sale agreement from the lien-holders, and
- a proposed closing statement or HUD-1.
The process of preparing a motion to authorize short sale, filing and serving it, setting the matter for a hearing, and obtaining an order to authorize short sale typically takes approximately 30 days. In the San Jose, Oakland, San Francisco, and Santa Rosa courts, the process might be completed in about 21 days, without the need for a hearing.
If the debtor is in a chapter 7, the process may become slightly more difficult, because the trustee’s cooperation is usually needed.
What to do if you are representing a distressed home seller
If you are representing a distressed homeowner, you should carefully evaluate the situation.
If a Notice of Default has been recorded, or if the homeowner has a second or third mortgage, or if judgment liens are recorded, the homeowner may benefit from a bankruptcy consultation. Our office will be happy to provide a free initial evaluation to advise the homeowner about his options. Don’t wait until a sale date is fast approaching. The sooner your homeowner obtains a consultation, the more options he will have.
Fuller Law Firm, PC, regularly provides seminars about bankruptcy law to real estate offices. The seminars are targeted towards experienced real estate professionals. Therefore, the complexity level is intermediate to advanced, and the discussions are in-depth and thorough.
If you are a real estate broker in the San Francisco Bay Area, Sacramento, or Modesto region, and are interested in having a seminar for your associates, please feel free to contact our office.By Sam Taherian
About the author:
Sam Taherian has helped over a thousand Northern California consumers wipe out their debts, wipe out second mortgages, or re-organize tax obligations through chapter 7, chapter 11, and chapter 13 bankruptcy. Sam is also a member of the board of directors of the Bay Area Bankruptcy Forum, a non profit organization dedicated to public service.