Subject to Buyer needs to file bankruptcy

I have 3 Subject to properties all held in individual land trusts. The mortgages are all current and we have no problem keeping them current. They are all currently rented with “tenant buyers”. We also have another business completely separate from the Real Estate that I run and work full time at. However it’s not doing very well and my husband has been unemployed since Feb so our personal finances along with our failing business are looking very bad for us right now and we are looking at filing Chapter 7.

Each property has about $15-20K in equity and valued around $125-$145K. What will happen to our Subject 2 deals? Will the lenders find out and call the notes due? Will the Sub 2 Seller find out, which will cause them to worry about our ability to continue paying the note on time? I know we can keep the payments current, I wish we could just leave them out of the bankruptcy but I’m told we have to list them. What are the chances the trustee will just leave them alone? Do you think there is any chance the lenders won’t be notified?

Does anyone have any knowledge or experience with this? They were all bought back in 2005, and the sellers now have good credit and I have good tenant buyers. I don’t want to ruin the seller’s credit and I don’t want to lose the house that I have agreed to sell to my tenants.

Of course the bankruptcy attorney understands very little about Sub 2 deals and I haven’t found one yet that does. The attorney just keeps telling me who cares you wont be liable for anything etc etc, however I feel I have a moral responsibility to these people.


In chapter 7 bankruptcy you will lose the properties to the creditors as the judge will order them sold by trustee and the money from the sales paid to your creditors.

You can only retain one home as a primary residence in bankruptcy with no more than (xxxx) dollars of equity.


Has anyone out there been through Chapter 7 with a Subject 2 deal or knows someone who has?

What would happen if the Trustee determined there was not enough equity in the house to sell it and pay all the closing costs, realtor commissions etc.?

I’m assuming the trustee would not sell the houses if there was little to no equity …however would the lenders still be notified and if so would that clue them in on the fact that the property had been sold to a land trust and cause them to call the note due?

If they did decide ther was enough equity what would happen to all the tenant buyers who have paid an option fee and are currently living in the houses? I

I’m hoping someone out there has been through this or knows someone who has and can tell me how it worked out for the Subject to Buyer

Any insight into all this would be greatly appreciated.

Hi Dorthy,

           I understand your in a tough spot. 

First I am getting the feeling your the current owner and qualifier for the mortgage, I thought before that you got 3 properties on a sub 2 from another seller and put 3 tenants in your units.

Now since you are the owner with these mortgages in your name you will have to name the creditor in your bankruptcy as you can not exclude a single creditor and risk a reversal on failing to make disclosure.

In Chapter 7 bankruptcy you can not retain no matter what more than one property on the other side and that property has to be owner occupied.

So if the property has no equity and the properties are deemed a wash they will go back to your lender in bankruptcy. Any rental property non-owner occupied or second home or vacation home will go to lender.

Yes, this lender will know as you have to name every party on your credit report and disclose the terms and conditions of your bankruptcy.

If they thought there was enough equity they may offer them to your tenant buyers but would require an immediate refinance to purchase and settle the property and the trustee would submit the profit to the court.

Federal Bankruptcy law say’s “You may retain 1 owner occupied home” with no more than $xx,xxx.00 dollars of equity.

Either don’t go bankrupt or figure out a way to get the properties and mortgages out of your name. If you make a sale or transfer you have to wait for 6 plus months before you reconsider a bankruptcy as the court and judge have a 6 month “Claw Back” period to unwind a sale or transfer previous to a bankruptcy filing.

Good luck,



Hi GR,

I guess I haven’t presented the information very well. The properties were purchased sub 2, by transferring title to a land trust with me being the beneficiary and I do have tenant buyers in the properties with options to purchase. The Notes are still in the original sellers names not mine.

Since the note is not in my name and I’m only the beneficiary of the land trust, if there is no equity in the house will they still require a sale?


The property in the land trust is yours and must be included as part of the bankruptcy when you declare assets. Since you will be required to go through financial planning and chapter 13 before you can file for chapter 7, there is a chance you can retain them. If you go into chapter 7, then all your non-exempt assets will be sold to pay your debts. Rest assured the bank will find out about the change in ownership and call the loans.

If you don’t include the properties in the trust and can get caught, your bankruptcy will get dismissed and you will leave bankruptcy with only your exempt assets (i.e. your personal residence and limited personal property). None of your debt will get discharged.

Here is my take on it. Not only are you morally responsible, but i believe legally and contractually responsible to your T/B. I am also told by my CPA and Realestate Attorney that they are included in the trust sale. I recommend you approach your T/B’s and ask them to buy earlier or approach a Investor and see if they won’t buy your position or even just take it sub 2 from you.