How Bankruptcy Affects Short Sales – Part 2
Bankruptcy is often misunderstood as it pertains to Short
Sales. Bankruptcy (hereinafter BK) is a complex, subjective process, but its
role in a Short Sale is in fact quite simple. Agents don’t need to know what a
“relief from stay” is, they only need to know how the BK will affect the Short
Sale. There are only a few key things to know that are of significant impact,
and this series will simplify them as follows:
Key factor #2 – Overestimating Bankruptcy
Far too often, Short Sellers neglect to mention they have a 2nd or 3rd mortgage lien on their home. “Oh, I BK’d that” is a common response, when liens come to light after the Preliminary Title Report is received. Sellers’ attorneys often fail to drive home the fact that BK only relieves the Seller of the personal obligation but does not remove the lien from title.
BK Attorneys may request the removal of the lien when the BK is Active, but many do not either because of the extra paperwork involved or because at the time the Seller didn’t want to pay the additional fee entailed. Further, such requests may be denied if and when they are made.
That said, as long as the 2nd lien is identified and addressed timely, it can often be negotiated more easily that non-BK’d liens as the debt will be uncollectable after a foreclosure. They’ll generally “take what they can get” within reason, however they may require a complete submission package just like any other lien holder.
Perspective:
BK’d 2nd liens are one of many reasons Agents need a Preliminary Title Report ASAP when listing a Short Sale. Learning of a junior lien halfway through the Short Sale process may be too late, especially if there’s foreclosure activity on the home.
Recommendation:
Not only should the Prelim be requested ASAP when listing a Short Sale, but the junior lien holder should be contacted right away so the required documentation can be identified and provided ASAP. Further, as some Lenders will reflect the BK as “Active” years after discharge, Agents will need to work on the communication channel early in the event the Lender takes time to make the correction.
Key factor #2 – Overestimating Bankruptcy
Far too often, Short Sellers neglect to mention they have a 2nd or 3rd mortgage lien on their home. “Oh, I BK’d that” is a common response, when liens come to light after the Preliminary Title Report is received. Sellers’ attorneys often fail to drive home the fact that BK only relieves the Seller of the personal obligation but does not remove the lien from title.
BK Attorneys may request the removal of the lien when the BK is Active, but many do not either because of the extra paperwork involved or because at the time the Seller didn’t want to pay the additional fee entailed. Further, such requests may be denied if and when they are made.
That said, as long as the 2nd lien is identified and addressed timely, it can often be negotiated more easily that non-BK’d liens as the debt will be uncollectable after a foreclosure. They’ll generally “take what they can get” within reason, however they may require a complete submission package just like any other lien holder.
Perspective:
BK’d 2nd liens are one of many reasons Agents need a Preliminary Title Report ASAP when listing a Short Sale. Learning of a junior lien halfway through the Short Sale process may be too late, especially if there’s foreclosure activity on the home.
Recommendation:
Not only should the Prelim be requested ASAP when listing a Short Sale, but the junior lien holder should be contacted right away so the required documentation can be identified and provided ASAP. Further, as some Lenders will reflect the BK as “Active” years after discharge, Agents will need to work on the communication channel early in the event the Lender takes time to make the correction.
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