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5 Things Your Bankruptcy Lawyer Won’t Tell You About a Short Sale
A bankruptcy lawyer in Sacramento who dabbles in Sacramento short sales once shared with me that being a bankruptcy lawyer is like representing the bottom of the barrel as far as clientele is concerned — but I suspect what the lawyer really meant was the speciality itself carries its own stigma. I’m fairly certain bankruptcy clients come from all walks of life and all income levels. If bankruptcy lawyers are wrong about that, it might make one wonder what else they could be wrong about. Here are things that a bankruptcy lawyer is probably loathe to disclose to potential clients contemplating a short sale.
#1) You Should Probably Do Your Short Sale First and the Bankruptcy Second. However, if you go that route, you might not need the services of a bankruptcy lawyer, and I won’t get paid. Most of the debt accumulated by stressed out borrowers is mortgage related. In California, a short sale for your residence not only wipes out the debt but it wipes out personal liability and short sale taxes on the canceled debt, both federal and state.
#2) Your Mortgage Loans Don’t Vanish After a Bankruptcy. Unlike a foreclosure, in which the home reverts to the first lender and any subsequent loans are released, a bankruptcy leaves all of those loans still in the public records and still filed against the borrower, which can prevent the borrower from obtaining another loan to buy a home. Ever.
#3) Your Mortgage Lenders Will be Tougher to Deal With After the Bankruptcy. If you thought your lenders were relentless before the bankruptcy, wait until it is over and you then try to short sale. For starters, your financial situation will be improved and you might not even qualify for the short sale. Lenders are not required to grant a short sale. If that hard-money second lender was initially unreasonable, just wait, the collection department will be even more harsh and difficult after the bankruptcy. There will be no cash for a short sale for you.
#4) I Have Little Experience in Bankruptcy Law and Won’t Personally Handle Your Case. Lawyers have it tough making a living, just like anybody else who is self employed, and when they fail at one specialty, some will turn to bankruptcy law. But one thing doesn’t change, and that is the paralegal will most likely prepare and process your paperwork. You will talk to your lawyer when you write a check and when the bankruptcy has closed, not during the process.
#5) Your Real Estate Agent Knows More About Selling Homes and Cares More About You More Than I Do. Veteran real estate agents often are empathetic because it comes with the territory. On the other hand, bankruptcy lawyers do not as a rule sell short sales and have little to no experience negotiating with short sale banks much less fully understand the process of selling homes in Sacramento. A home that has been abandoned during bankruptcy proceedings becomes much more difficult to sell 6 months to a year down the road, if it will sell at all. HOA dues pile up, property taxes remain unpaid, utility bills accumulate and often the home is vandalized — none of which the bank will authorize for payment from the proceeds. A buyer won’t pay it, either.
Note: If the investor for that loan is Fannie Mae or Freddie Mac, it’s just about impossible to get the same sales price as a home that is fixed up, shining and ready for occupancy, but trust this Sacramento short sale agent, that’s exactly what the investor will still demand after a borrower completes bankruptcy.
Sellers who are considering bankruptcy would be wise to talk to an independent legal counsel, a CPA, and most likely wait until after the short sale before filing bankruptcy. As always, this agent does not give legal nor tax advice.
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Bankruptcy and Short Sales in Sacramento
The number of Sacramento short sales in bankruptcy seem to be declining since passage of SB 458, which amended California Civil Code 580 by adding paragraph E. This all-important piece of legislation passed in July of 2011 and, ever since then, banks that agree to a short sale must release a seller from liability, providing the seller did not commit fraud and the property involved was 1 to 4 units. This piece of legislation pretty much eliminated the need for many upside-down sellers to file a bankruptcy over a hard-money loan, providing the banks were agreeable to the short sale and there weren’t any other debts the sellers needed to discharge or rework.
Of course, if lawyers told you that, they wouldn’t get paid to do a bankruptcy. I don’t know of any lawyer who specializes in bankruptcy who would tell a person in debt not to file bankruptcy, but that’s not to say they don’t exist. It’s no different than asking a real estate agent if one should sell a home. I’m telling you that, and I am a Sacramento real estate agent. The answer is gonna be yes. Most of the time. For example, I am not a financial planner. Neither is your bankruptcy lawyer. If a person wants financial advice, a person should ask a financial advisor, an individual with no skin in the game — not a guy who works for American Express or a woman employed by State Farm Insurance — ask an independent advisor.
But people continue to rely on the advice of those in professions who get paid when the answer is yes, hell yes, do it.
There are basically 3 ways to deal with filing bankruptcy while contemplating a short sale. First, know that filing bankruptcy does not relieve a person of title to the property. A person will still own that property and need to deal with the sale of the home in some manner — the easiest most likely is a short sale. Here are 3 things an underwater seller on the brink of bankruptcy can consider:
- Short sale the home before filing bankruptcy
- Short sale the home during bankruptcy
- Short sale the home after bankruptcy
They are all difficult but #1 is generally a bit easier. It’s also the one in the middle that can cause complications and should be avoided because it can’t close, plus sellers would have to pay extra to the lawyer and they generally won’t. For starters, the short sale bank will probably not agree to a short sale unless the Trustee of the bankruptcy either sells the property or releases the property from the bankruptcy. Did you know that the Trustee can get paid a fee for selling a short sale? Yes, in some situations, a Trustee can receive $15,000, all the way up to $50,000-plus, depending on the sales price of the property. Do you know who pays that fee? The buyer.
It’s a premium paid by the buyer. Do you know any buyers who want to pay another $15,000 to $50,000 on top of market value? I don’t, but I suppose they are on the loose. These deals have to be cash, too. That requirement limits buyers as well. Doesn’t bode too well for the seller who just wants the property sold and gone.
I have a handful of homes in bankruptcy right now in which I represent the seller, as a Sacramento short sale agent. The short sale banks require written authorization from the sellers’ lawyer to do the short sale. In one bankruptcy short sale, the discharge was ordered in November of 2011. We are still waiting for the final discharge — 16 months and counting. The sellers’ lawyer promised the release would take 21 days in early February and she expected receipt on March 1. We are still waiting. Escrows are on hold. The short sale approvals are on hold. We are lucky we chose steadfast buyers. I hear lawyers are promising 4-month turnarounds, but I’m not seeing that promise materializing on this end of the business.
It might be better to either do a short sale before filing bankruptcy or after the bankruptcy has been discharged. Trying to short sale in the middle of a bankruptcy appears ripe with problems. But I’m not a lawyer, and I can’t give legal advice. That’s what the bankruptcy lawyers are for.
If you’re considering filing a Chapter 7 or a Chapter 13, make sure you thoroughly understand your options by consulting with a bankruptcy lawyer. For some, once the property is disposed of through a short sale, there might not be enough debts to qualify for a bankruptcy.
