As a southern California bankruptcy attorney, I receive a lot of questions. Most are from people who want to file bankruptcy, just filed bankruptcy or filed years ago and are now wondering how it could affect their current situation. What we don’t usually get are questions from creditors regarding how to respond to a bankruptcy filing. That makes today’s question particularly interesting because it’s from a creditor and it involves some very specific circumstances.
Hypothetical Situation: 8 years before her death, Susan sold a piece of real property and took back a recorded mortgage and promissory note as collateral. Joe, who was the buyer, made payments for 2 years, but then fell behind. 4 years after the transaction, Joe filed Chapter 7 bankruptcy with Susan listed as a secured creditor on the filing with Joe indicating that he’d like to reaffirm the debt. The filing called for reaffirmation, but there is no document on record actually reaffirming the debt. Joe has not made any payments toward the debt since he filed his bankruptcy petition. Is there any recourse for Susan’s beneficiaries?
In response to this situation, I recommend starting by attempting to prove that Susan was the legal owner of the property (the best case scenario is that she recorded the mortgage loan). Assuming that Susan was the legal owner and that the property was officially passed down to her beneficiaries, you can depend upon the fact that a failure to reaffirm the loan during bankruptcy does not immediately result in loss of the property. The reaffirmation agreement is intended to reestablish the terms of the promissory note. It allows the holder of the note to sue the debtor for failure to pay post-bankruptcy.
If the note was not reaffirmed during the bankruptcy, suing for failure to pay is not an option, but you can still foreclose. Foreclosure is the obvious method of obtaining your property as you are just like any mortgage lender. In fact, most mortgage lenders won’t make their borrowers reaffirm the mortgage loan during bankruptcy because they know that they can always just foreclose on the property if the borrower failed to make payments. Filing for bankruptcy provides protection from lawsuits for non-payment, but it doesn’t clear the debt and allow the borrower to keep the property without payment.
If you would rather receive payment for the property rather then foreclose, your best option is to discuss the situation with the purchaser and work out a plan to resume payments and get caught up on the past due amounts.
If you need an attorney to draft a letter to the purchaser advising them of the situation and requesting information regarding their intent towards the property and payment towards the debt, please get in touch with the southern California bankruptcy attorneys at Westgate Law.