Handling Bankruptcy in a Short Sale Part 1

If you have a client who’s considering filing bankruptcy, typically most realtors just frown and withdrawal the short sale listing. Without a doubt such filing complicates matters, especially because communication with the lender could shut down, but knowledge of the bankruptcy process can help you avoid the pitfalls so many investors or realtors encounter.

As you may know, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which sought to limit access to bankruptcy courts. Frankly this legislation was more bark than bite, as most bankruptcy practitioners will tell you.

Before I review the Act’s provisions and limitations, let me give you a refresher course on bankruptcy.

For your purposes, with a preforeclosure client, they are typically just dealing with Chapter 7 or Chapter 13.

Chapter 7 is essentially a total liquidation, where all nonexempt property is sold and the proceeds and distributed to the creditors. It is known as a straight forward bankruptcy, and the debtor receives a discharge of all dischargeable debts within four to five months.

Most debtors would prefer to file Chapter 7, but that’s where the new Act comes into play. In order to file Chapter 7, a person’s income must be below the median income for families in Florida. For cases filed after February 1, 2008, the median income for someone single is $40,036, for a family with two it is $50,636.

More on this tomorrow.