Bankruptcy

The real estate profession has become increasingly based in legalities. While a handshake can signify an agreement, the contract is the foundation of the real estate transaction today.

With the increased focus on legal issues, NVAR provides members services in the legal arena. Various articles on current and hot legal topics are provided through the weekly NVAR Online News. In addition, the Legal Information Line is available to members.

There are many real estate related questions that arise often. These FAQs (Frequently Asked Questions) by topic are provided to assist you in finding quick answers.

Bankruptcy

QUESTION:  How does a seller filing  bankruptcy effect a sale of his/her property?

A:  If a seller files bankruptcy, it can affect real property sales in a variety of ways.  How it affects a sale depends upon at what stage in the process a bankruptcy filing occurs, and what type of bankruptcy protection the seller seeks.  There are a variety of Bankruptcy actions:  (a) Chapter 7 is liquidation; (b)  Chapter 11 is a reorganization, generally used for a corporation; (c) a Chapter 12 is family farmer or fisherman’s bankruptcy for persons with regular income; and (d) Chapter 13 is a reorganization for other individuals with regular income.  Most sellers file a Chapter 7, 11 or 13 bankruptcy action.  A bankruptcy action is started by the debtor filing a “Petition for Bankruptcy”.

All the property that a debtor owns in a Chapter 7 or Chapter 13 is known as the “bankruptcy estate” or “property of the estate”.  The bankruptcy court appoints a trustee to represent the bankruptcy estate in all matters, including the sale of real property.   Under Chapters 11, 12 or 13, the debtor must submit a repayment plan (the “Plan”) for the court’s approval.   Payments are made by the debtor according to the approved Plan during the reorganization period.

The bankruptcy trustee can assume or reject any contract entered into by the debtor prior to filing for bankruptcy protection if it has not been carried out (i.e., an executory contract).  In a Chapter 7 bankruptcy action, the trustee may assume or reject the contract, but if it is not specifically assumed by the trustee within 60 days of the filing of the petition it is presumed to be rejected.  In Chapter 9, 11, and 13 cases, the trustee may assume or reject an executory contract at any time before the confirmation of the Plan.

If a REALTOR® obtains a listing agreement and during the listing period is informed that a bankruptcy petition has been filed on behalf of the seller, that agreement becomes what is known as an “executory” contract which can be rejected by the bankruptcy court.    The REALTOR®’s attorney could file a motion with the bankruptcy court requesting an order that the trustee decide within a specified time whether to assume or reject the listing agreement. If not,  the broker will have to wait 60 days or longer to find out if the listing agreement will be honored.  This is not a path to be taken without an attorney’s assistance.

If your clients or you have questions about what are your rights and/or obligations when a seller petitions for bankruptcy, you will want to call the client’s bankruptcy attorney immediately.  If the client’s attorney will not return your calls, get a bankruptcy attorney of your own.