The prevailing wisdom in the bankruptcy community is that we are going to see an avalanche of new bankruptcy filings in a few months. We can also expect that homeowners are going to want to try to sell their homes as part of their digging out of financial distress. But this combination can spell real trouble for the unwary. Here is an introduction to those problems and how to head them off.
While a property owner is in bankruptcy, they cannot sell their home unless and until (1) the court approves the sale by motion or (2) the home has been formally “abandoned” by the bankruptcy trustee in a court filing. This is because the home is an asset under control of the bankruptcy court until sold or taken out of the “bankruptcy estate”. How this occurs depends on the type of bankruptcy and other circumstances. For example, in Chapter 7, the trustee files a notice of abandonment which is approved either by court order or the clerk issuing a “Certificate of No Objections” typically about 28 days after the notice is filed. Otherwise, the trustee will seek to sell the property for the benefit of creditors.
So the first thing to do is to find out if the seller is in bankruptcy. I would recommend that buyers and brokers attend to this as early as possible. In New Jersey this will show up on a judgment search but that is usually ordered too late in the game. The good news is that a bankruptcy search can be done through the PACER (Public Access to Court Electronic Records) portal, http://www.pacer.org. Members of the public can sign up there and establish an account. This allows them to use the Case Locator to search by name and to look up specific cases when found or confirm that the seller has currently in bankruptcy. While there is a cost of $0.10 per page, those fees are waived if your usage does not exceed $15 per quarter. With a PACER login you can also access information at the Bankruptcy Court-District of New Jersey. http://www.njb.uscourts.gov/case-info
If the trustee or in Chapter 13 the debtor wants to sell the home, then brokers and buyers need to be aware of some critical steps. First, the listing realtor needs to have the debtor or trustee submit to the court an application for approval of the broker’s listing. Again this should be done as soon as possible. Without such approval, the broker may not be entitled to any commission.
If this was not done earlier, do not delay. In the past, courts liberally granted retroactive “nunc pro tunc” approval. However, the US Supreme Court has recently ruled that bankruptcy courts do not have that power except in limited circumstances. In other words, be sure to submit this approval or ask for it in writing before closing and before court approval. Document the request and make your situation known not just to the seller but the trustee and the court as well.
If it not already clear, these are situations where consultation with an experienced bankruptcy attorney is wise if not essential. We have decades of experience in selling and assisting brokers, buyers and sellers in bankruptcy real estate sales. If we can help, feel free to contact us.