Short Sales And Bankruptcy Language

After homeowners fall behind on their mortgage, many of them start wondering about bankruptcy. If you’re going to help these people negotiate a short sale, you should know the basics of bankruptcy in case they need to talk about it.

Keep in mind that you’re not there to advise them on whether or not they should do it. Stick to talking about the facts related to how bankruptcy affects homeowners in foreclosure, and advise them to take that information to a bankruptcy attorney. You don’t want to let them think you can help them file, or be accused of practicing law without a license.

This is about knowing how to hold an intelligent conversation about what bankruptcy can and cannot do for a homeowner in default. I’m going to start with a vocabulary lesson. Just by learning a few key terms, you can learn the basics and perhaps help the homeowner learn the right questions to ask their attorney.

Bankruptcy Stay: A judge can order a stay to freeze the progress of the foreclosure. It doesn’t prevent the foreclosure from ever happening, but it does prevent the lender from taking further action for a while – even an hour before the sheriff’s sale. This has the effect of giving the homeowner more time to work things out.

Relief of Stay: When a stay is ordered by the judge in a bankruptcy court, the lender may file a motion for relief of stay. The lender is basically asking to be allowed to continue to go after the house or the money. The judge has the option to allow their request or deny their motion.

A lender may ask the court to allow the foreclosure to proceed for one of two reasons. One is a lack of equity. If the homeowner owes more than the house is worth, there is no way the bankruptcy court will be interested in what happens to the house. The homeowner won’t gain anything from the sale to give to other creditors. The second reason has to do with the homeowner’s compliance with the court. If the person has been ordered to begin making payments and hasn’t kept up with the program, the judge may not feel like they deserve to keep the house.

Abandonment of Assets: An abandoned asset is one with such little value (such as a house with negative equity) that no creditor, besides the secured lienholder, could possibly be interested in including it in the bankruptcy proceedings. As far as the bankruptcy court is concerned, the asset (the house) is said to be abandoned.

Discharge: In bankruptcy court, a debt is said to be discharged when the Chapter 7 or the Chapter 13 proceedings are over and the court is satisfied. The judge’s discharge order means that the person who filed bankruptcy doesn’t owe anything else on that debt.

Bankruptcy Dismissal: This bankruptcy court order is also given at the end of the proceedings, but unlike a discharge, a dismissal means that the individual does not have his debts discharged. This happens most often with Chapter 13 repayment plans. A judge will dismiss a bankruptcy when people fail to present paperwork or payment when asked by the court. The 2005 bankruptcy laws made it harder for someone to refile bankruptcy after one has been dismissed.

People who have trouble paying their mortgage are usually behind on their other bills as well. Bankruptcy can help some of them, but it might not do anything for others. Ask a colleague or call us at Strategic Real Estate Coach about how to manage a conversation with a homeowner about bankruptcy options. You’ll have to refer them to an attorney in the end, but at least you can learn enough to help them think things through before they make that appointment.

You may want to speak with a bankruptcy attorney yourself to get the details about how this works in your state. In the meantime, just remember this: When a homeowner files bankruptcy, the court won’t stop the foreclosure permanently, but it could delay the auction temporarily and buy the homeowner some time to work things out another way.

Need to know more about how bankruptcy affects homeowners in foreclosure? Get free online training from Strategic Real Estate Coach. You’ll gain access to this and much more helpful information!