When a Bankruptcy case is filed, the property owned by the debtor becomes a part of the Bankruptcy Estate, under the control of the Bankruptcy Trustee (Chapter 7), or by the Debtor, subject to Court Approval (Chapter 13, and Chapter 11). Here is a brief summary of how the process works.
Immediately upon the filing of a Bankruptcy Petition, an injunction is imposed. This is called the “Automatic Stay”. Any action taken by the Debtor(s), or Creditors in violation of the “Stay” is void, and of no legal effect. This means that the Debtor cannot sell, convey, encumber, or otherwise dispose of any asset. Creditors, cannot take any action to collect debts. This includes any foreclosure action. If a Bankruptcy Petition is filed 5 minutes prior to a foreclosure sale, the sale cannot continue.
A Creditor can obtain relief from the “Stay”, by giving notice to the Debtor, Trustee, and filing a motion with the court. The Motion would be subject to a hearing. If the Motion for relief is granted, the Creditor can proceed with collection action, including foreclosure, or repossession.
POWERS OF THE COURT:
The Bankruptcy Code enables a number of actions, with respect to real property, that state law might not allow. The Bankruptcy Code is Federal Law, and is superior to any state statute. These powers can be used, to make the sale of a property possible, where liens or disputes, might otherwise have prevented the sale.
Sale free and clear: a sale of Real Property, can be ordered free and clear of liens. This might be done in the case where a lien is being disputed, or proceeds from the sale might not be sufficient to satisfy all of the secured liens in full. In this case, clear title to the property is conveyed, and the liens are attached to the proceeds from the sale, until the dispute can be resolved.
Avoidance of Liens: Judicial Liens become secured liens against Real Property, once the Judicial Lien, or an abstract of the Judicial Lien has been recorded. A discharge in Bankruptcy does not remove the Judicial Lien from the property. However, the court can issue an order to void the lien from the real property.
Void preferential Liens: Liens granted or imposed to secure pre-existing debts perfected within 90 days of filing the case, or one year if the lienholder is related to the debtor, can be voided as an unfair preference.
PROFESSIONALS OF THE ESTATE:
A Realtor’s employment must be pre-approved by the Bankruptcy Court. The Realtor must be a “disinterested” party. Which may preclude the Realtor from simultaneously representing any prospective buyer. Any simultaneous representation must be pre-approved by the judge. These approvals are usually obtained by the Attorney for the Debtor. Full disclosure is an absolute must. Any failure to disclose potential conflicts, can result in disallowance of compensation.
PROPERTY NEEDS A FACELIFT:
Taking on new debt requires court approval. If the property needs sprucing up, painting, carpeting, staging, the court will need to approve these costs, if the expenses will be in addition to the sales commission.
STATUS OF TITLE IS IMPORTANT:
Contact your Ticor Representative immediately, to obtain a Title Report. In order to determine any issues, that will require court intervention. Court Orders related to the special powers of the court, can take time to obtain. To avoid delays, be sure to provide a completed Statement of Information for the Seller, when requesting the Title Report. Let your Representative know that there is an active Bankruptcy, and that you will need all lien information, including General Index Liens.
*This is just a brief overview. For every bullet point provided, there is more than likely an exception, or variation. However, this should get you started understanding the basics. Be sure to contact your Ticor Representative for information relative to a particular transaction.
To learn more, download Ticor Title’s informational flyer, below: