Bankruptcy, Foreclosure and Short Sale

[Sam Leon]

There is a property I looked at, where a bank was originally scheduled to take possession of it via a foreclosure auction in Sep 2013, then the owner filed bankruptcy to stop the foreclosure, then the foreclosure was dismissed (so I was told), and now the property is on short sale.

Will this short sale be the "SAME" as any other short sale or there may be complications due to a prior bankruptcy filing which stopped a foreclosure?

[Dion DePaoli]

A bankruptcy filing will "stay" (halt for a time being) the foreclosure proceeding. It does not technically 'stop' it. A stay order is simply a pause in the process.

Many folks tend to use the word dismissal but do not mean it legally. Dismissal can come in two forms, (1) With Prejudice and (2) Without Prejudice. Essentially, without means the plaintiff can refile the same complaint using the same facts and that something more like a paperwork error caused the dismissal. With prejudice, means the court no longer will hear the case essentially. Sounds great, right?

Courts have ruled and upheld that a foreclosure dismissed with prejudice is particular to a default date. So, the following month when the borrower defaults, that is a whole new case not covered by the dismissal with prejudice. Point is, not even a dismissal is a safe haven for long in most cases.

A bankruptcy filing will involve the borrower either (1) reaffirming the debt owed on the mortgage or (2) surrender the home. In the event the home is surrendered, the Trustee becomes the legal owner and proceeds to market and sell the property to satisfy the debt on the mortgage. The owner will have very little to do with this process, if the home was surrendered. If the home was reaffirmed, the borrower agrees they owe the balance and must make payments on the balance moving forward. Sometimes this is done through the bankruptcy plan and trustee and sometimes it is done separate.

In both cases, the court is involved and so is the trustee. If the borrower or trustee wish to sell the home, a Order of Sale must be prepared and submitted for review by the court and trustee. A Trustee can cram down the debt, which means they can make the debtor take less than what is owed or the debtor can take less on their own accord. It does not happen as much as folks would think.

A Bankruptcy does not need to be discharged in order to settle an asset. The asset can be discharged during or after the BK plan is deployed.

In a BK there are many moving pieces and players and they can affect the process and outcome. A borrower is to make payments according to the BK plan that was approved. While the borrower does so, the plan to discharge the debts proceeds as designed. If the borrower defaults on the plan, the plan is vacated and no protections under BK are afforded. A borrower can be in BK, miss a mortgage payment (after reaffirming) and foreclosure can continue. There are other examples, you get the idea.

A Bankruptcy will not permanently cloud title. Any Lis Pendis from or related to BK assets or liabilities can be cured working with the title company and the seller. Not really a big deal.

If the asset is surrendered then the Mortgagee and the Trustee will work in unison to disposition the asset. This may result in the Mortgagee filing for Relief of Stay, which is asking the court to unbind the restraints the BK filing initially put on them with the Order of Stay. This allows the Mortgagee to continue the foreclosure process. A Trustee, if the home is surrendered can do a DIL, since they have a legal interest in the home upon surrender. A Mortgagee can choose to finish foreclosure to wipe out other liens.

Bankruptcy assets are not complicated to work with and can be pretty regimented if you understand the system properly. Most folks do not understand the system but act as if they do. As such many words get tossed out with improper legal meanings and people get misinformed. A Trustee is good to work with as they can be emotionally unattached to the property and can make objective decisions about value.

So, to answer the question direct, it will likely be the same or better depending on who is making the decision on the short. The trustee presence, if they are indeed present, might make for an smoother deal but no deal is without its hiccups. Good Luck.