I have read (with some dismay) about the issue of Bankruptcy and Subject 2’s. in this forum.
Frankly it seems alarming.
John Cash Locke has pretty much nailed the issue in past posts by stating that if a person has a mortgage and decides to claim BK, then the mortgage company or Bank can sell the house to satisfy the other debts on order of the BK trustee.
So here is the scenario:
Joe Doe gets a house deeded to him - sub2 the existing loan. Every thing is hunky dory, and he even records it in a trust and his company is the beneficiary. Title is in Joe Doe’s name now through the private land trust.
He then turns around and within 10 days has the house sold, “owner financing” the new buyer with a $10,000 down payment and make payments that pay the existing loan. See? Everyone is happy.
-Five Years Later-
The original seller to Joe Doe claims BK. Now from what you are saying, the new owner of the house that bought it from Joe Doe with no qualifying and $10,000 down will have to give up his house on order of a BK trustee so the court can sell the house to pay the debts???
IS THAT TRUE??
John Cash Locke (or anyone who know the answers to this), is that what can happen? How many of your sub2’s has done this?
The reason I am asking this “well-worn” question, is I have a seller, with $15,000 equity that will sub2 the house to me for $500 walking money. BUT - he has told me he wants to use the money to claim BK after we do the deal.
Please let me know, what kind of trouble am I getting into? Should I walk away from this deal?
Thanks for the help. I think that this very issue is a real possibility with almost any sub2 because the same folks that make good sub2 motivated sellers, make good BK possibilities.
What you have laid out above can happen. If the court feels there is no equity and the lender is not protected they could order the house sold to pay the lender.
In my personal case I had sold 25 something properties on contract for deed where I borrowed the money. The buyers only put down a few thousand each. The trustee bent over backwards to make sure the buyers were protected from the lenders. He made deals and got court approval to make up back payments in the Chapter 7 case and not sell the property put from under the good folks that now owned the house. Property that was abandoned by the trustee was eventually sold at foreclosure sale. These were properties where the new buyer had defaulted and vacated the house. There are still several houses left in my Chapter 7 case that was filed in 6/2000. The trustee is actually trying to sell the contract for deed to pay off the lenders. On some of them the new buyers refinanced and paid off the lenders.
In a Chapter 13 case the court would probably let the borrower keep the loan in their name and let the new owners keep making the payments. It is not the lender and court against the homeowner. Anything can happen in BK. Your folks should not file unless they have some asset to protect. Phone calls and letters are annoying but they will eventually write off the debt and go away. If they cure the house default or there is no default then why else file BK.
If they file you are taking a chance but with only $500. The lender may file a motion to lift the stay and ask to be able to foreclose. They may say there is no equity and the loan is in default either because of the missed back payments or an (Illegal sale). They will probably use both reasons and even some more. In my case the lender and trustee worked out an agreed order and made a repayment plan and let the property stay under the BK protection.
You can object to the lenders motion and have a hearing also. It is better to get the agreed order worked out with the lender and trustee and the buyers and you all agreeing to the arrangement. It is not all grab and sell and many work out plans are successful. You can go to the hearings and represent yourself if hearings are necessary and all it will costs if parking fee money and some gas to get there and back.
I hope this helped a bit. LOL
Thank you for your answer and wisdom. Way back in time I have done the BK thing but never was in a “thinking” position during that time. I just wanted pressure relief and didn’t care what happened to anything at all. I had a house and it went away. I don’t remember the details. Not soon after that came a divorce. It was 15 years ago so I naturally block a bunch of the memories.
It seems you have paid attention (to your BK) and I appreciate you giving insight on what can happen when properties are involved.
I think I will decline on this offer, simply because it all can get so messy, or do you have a way to approach it differently?
What the funny thing is - this very subject never comes up in any sub2 articles or talks.
All tutoring and talk mostly centers around the “Due on Sale” clause and whether or not to put the property in a land trust, for the most part, and not the issue of bankruptcy with a sub2 seller.
Fortunately, this forum addresses it several times.
It seems like a central issue - don’t you think that most “cases” where people are likely to deed their house to you (sub2) is also where there is a high possibility of BK and therefore the swampland of “who owns what where and what do I do” that has to be dealt with?
Seems strangely absent from the sub2 articles and should be a big issue with sub2s, IMHO. (or I just missed it)
Again, Thank you so much for your candid reply.
Thanks for your kind words. With only $500 at risk it may be worth the ride to gain possibly $15,000 equity. I would want to know a little more before jumping in like what chapter is he planning on filing and what are the other debts. Also are they planning on moving out of the house. I assume it is their homestead and this will have an affect on how it is handled it the each different case. It can get confusing but you can study the laws and get the answers you need. If nothing else you will get a crash course in BK and maybe come out with $15,000 equity to boot.
Glad to meet you.
To answer your question, yes several of my sellers in my Subject To deals have filed bankruptcy, were any of these houses taken back by the court, NO and here is why.
What is being overlooked here is a matter of fraud or were these houses tranferred to hide assets from the court and the answer here is also NO. What the court looks at is the person who purchased the property a friend or relative who was taking the property to hide the sellers assets from the court and then selling the property off and giving the money to the bankrupt or giving the property back to the seller after they are dismissed from the bankruptcy.
In your case you would be a “third party innocent”, you purchased the property in good faith and were not connected with the seller, so in real life the court could conclude that this was a viable transfer. If you take a little time to read the bankruptcy laws concerning transfer of assets you will find what constitues fraud in transferring assets and as an investor as long as you are not connected with the seller except as an investor the court will understand your position in the tranfer.
John $Cash$ Locke
John. Thank you. I know that you typically advise against doing a land trust (especially in the Carolinas, yes?) but in this case would that be a problem? I am in OK and so far, the only sub2 I have done is with a land trust.
Would you advise to just blatantly put our names on the title and just start making the payments? (After our due-dilligence with title check and lien check, of course)
And thanks again and good to meet you too.
I would recommend that you use a corporate entity to hold title to your properties, specifically an LLC will get the job done for you.
You do not want to use a Land Trust in North Carolina or you may be explaining why to the Attorney Generals office as they consider it fraud. At this point in time, NC has no problem with someone using a corporate entity to hold title and it is my recommeded way to deal with a Subject To property.
John $Cash$ Locke
Thanks again. I have a company - an LLC that I do business with. I guess I shouldn’t have said “our names” - I do business in my company name anyway.
I have done a subject 2 with my company name as the beneficiary of the land trust. Just putting it on the title should be ok with the bank?
Now, don’t get me wrong, I am not wringing my hands over the DOS with the mortgage, but I haven’t done a sub2 with my company name on the title.
No problems when you do it this way (with the company name on the title when you do the sub2)?
Did over 500 Subject to deals without a DOS problem and used corporate entities to take title, so maybe I am biased. :
I personally don’t see a problem putting properties in a corporate entity, of course I figured I never needed to hide anything, so a trust was something I felt sooner or later would be a problem somewhere, just so happens it was North Carolina.
John $Cash$ Locke