Sub2 & BK

I can see that a sub2 seller facing foreclosure might file (or have already filed) bankruptcy. I understand that this would slow down, but not stop the foreclosure process.

But how would filing for bankruptcy affect the sub2 deal? Would it kill the deal, or just postpone it? Does anyone have any experience with this situation?

Hey Mark…

Clarify something… Is the Sub2 transferred or just under contract?

In the one case I have seen, the bank exercised its right to call the loan via the due on sales clause.

Hi Michael:

It’s hypothetical at this point, but I am concerned about anytime a Sub2 seller files for BK. I suppose if just under contract I could walk away from the deal. I’m guessing its a more serious situation if the deed has already transferred to my name.

I’m happy to hear, BLL, that you have only seen one case.

The bankruptcy courts can simply cancel your sale and pull that house back into the assets.

The underlying mortgage is severelty affected by the bankruptcy, so that is going to cause serious problems for you.

I suggest that you find financing, and get permission from the bankruptcy courts to go ahead and purchase outright and take title.

At any rate, I wouldn’t be comfortable putting any of my money against the mortgage if the mortgage is either going to be called by the bank or modifified by the bankruptcy courts.

If a homeowner is going into bankruptcy, your better stategy is either short sales or to approach the bank and see if the bank will allow you to assume the mortgage openly. The bank does not want to be caught up in a bankruptcy, so they might be flexible.

On a purchase which was fraudulent the trustee can sue the recipient up to two years later, it may be a year, but I think 2, to recover value… However if it isn’t fraudulent then you’re fine… BTW a fraudulent purchase is a purchase where you paid a far less than value for the house. Typically if it is a normal transaction you should be fine but ask your attorney… And this applies to all exchanges, not just real property nor subject to transactions… and is really looked at negatively if the buyer is a relative…

As for buying a property Subject to while in BK you’ll need trustee approval. I have purchased with a seller in BK and they cancelled their position and once released I purchased.

As long as it was an “arms-length” transaction, the only thing that would bring to question would be the amount of equity in the sale. If the property was taken over at around 80% or more, a “look-back” would not be asked for. Trustees understand wholesale vs retail and the fluff in RE values. So do most disgruntled creditors who could challenge it.

Remember, if you got the deed before he filed BK, it won’t even appear on his assets statement.

I own several homes where the sellers, after selling to me, filed BK, and where discharged.

The sellers sold to me, because they were in financial trouble, and thought selling their house would fix their problems.
Unfortunately, the bad financial behavior/habits, were not corrected after the fact, and they remained in, or got back into, trouble.

Most of the sellers used local cheap BK services to file, and did include the house loans in their BK.
EVERY single one I own like this, was discharged, and now, I own a bunch of SFH’s, with no personal recourse.
Sure, should the loans default, the lender can foreclose, and take the house.
However, because of the discharged BK, the sellers have no credit liability any longer, and neither do I, since I never signed for the loans in the first place.

I love those properties, and they are all keepers. (rentals).

Never once have I had a lender kick up their heels, as long as the payments were made…which of course, are considered “voluntary” by the lenders.
All statements come out with remarks about how this is not an attempt to collect a debt, merely for information and account management purposes.

my two cents, keep the change,
Jim FL

Dang, Jim. This is something I never thought about and is good info to know.

Personally, I will always make the payments on a Sub2 come hell or high water. But I can think of a lot of applications for this. ---- Good for keepers. Good for a timid newbie. Good for trade equity. Good for assignment. Good for risky situations. Good for…

Thanks for the info. Years later, I’m always learning.


No problem.
We are always learning.

This BK thing, I figured out sort of by accident.

The first one, we had a house for a while, and the sellers just used a paralegal service locally to file their BK.
I got something in the mail, listing me as a creditor, about a hearing/court date.
I called my lawyer, who said, ‘your not a creditor’, no need to go, and frankly, we blew it off.
I just got busy and really, forgot about it.
The lender was still accepting payments, so no issues there.
I knew if it did get foreclosed, we had time to refi or sell.
Especially back then, as houses were flying off the market in days/hours.

Thing is, the loan was discharged, which made me think the whole BK process, was just that, a process. I was told later by the seller, when we met in a local grocery about his BK, and how not a single person showed to his hearing, except him.

Anyway, the lender kept taking payments, and then added the line to the statements how ‘if you have previously filed BK, this is not an attempt to collect a debt, merely a statement of account status etc’…or something like that.

I did have a couple lenders later on, who refused to send statements, claiming this was against BK law, as it was collection etc, and even one that cut off the online access, due to the loan being in ‘BK status’ and ‘voluntary’.
I simply talked to MANY people on the phone, until we rectified that, by gathering info over the phone, or getting statements resumed.
Always telling them, ‘yes, we intend to keep the house and continue to make the payments’.

Now, I have SEVERAL of these homes, all where sellers later filed BK.
And yes, they are single mortgage properties, all but one, it has two.
That one, the second, was a HELOC, that we had the sellers, prior to our sale, convert/close to become a second only.

I have had and still do, loans/sellers like this, with MANY large lenders and servicers.
Wells Fargo, Wamu, Countrywide (most of them frankly are countrywide), Option 1, HouseHouse Beneficial, Equity one, Beneficial, and a couple local banks.

Basically, what I’ve found is, as long as we keep sending in payments, etc, and the houses are occupied, (inspectors have been know to drive by and check), then lenders rarely take any action, aside from shifting the loan to their ‘bk department’.

I have had folks tell me, ‘oh, that happened once, and the loan was called’, but not a single one was able to give details, and most, later confessed, they’d simply ‘heard’ from another of this happening.

Sorta like the lawyer that spoke at my local REIA club, about 5 years ago, who swore ‘in over 20 years of law practice, he’d NEVER seen a successful subject to deal’.
He claimed, ‘sure, you’ll get houses this way, but, the next year, when the tax bill gets sent to a new title holder, the lender will 100% call the loan due’.

At that point, I was well over 100 subject to deals into my carreer, and had been at it for 5 years…
By his reasoning, I should have had tons of loans called yearly, for the 4 years prior.
That was the last meeting I attended at that club.

I’ve since lightened up a bit. :biggrin

For me personally, the best use of these deals, is holding, or selling with installment contracts…like you do with your owner financing.

By the way, caught some comments about that online, somewhere :anon, I’m impressed.

Take care,
Jim FL