If you took the property subject2 at least a year ago, you should be fine. Just make sure that the owner does not want to list the mortgage in the BK, because you are already paying for it.
If you took the house sub2 less than 1 year ago, the BK trustee could find that this was a fraudulent transfer of deed and undo the sale.
Unfortunately I do not know the magic number on how long it takes to hold the property before you are safe, I would take caution in this thought!
I don't want to be the one riding the high horse here, but I really don't understand the problem. IF you, as the investor/buyer, have done everything in a legal and ethical manner then there would be no "fraudulent transfer of deed ," whether it was one day ago or ten years ago.
There might be an issue with the loan, since it is still in the name of the original seller, however, there would be no legal way for them to include it in a BK because they do not own the property anymore. Of course, it will be highly likely that the lender at this point would exercise their option of calling the loan due. Again, however, this shouldn't pose a problem to the prepared investor. If you bought the property correctly (ie with equity), a simple refi into your own name would be a piece of cake. At that point, you go on with your gameplan as normal.
Yes, the best laid plans of Mice and Men do oft times go astray. I think Lonnie said that in Mice and Men.
What you do is carry on as the die has been cast. You await an approach from the Referee or Trustee in Bankruptcy. and when you get the call or letter. Your response is to imediatly if not sooner run out and have an appraisal done by a real live licensed appraiser. The appraisal comes in for a sum just about equal to the outstanding obligations.
The fun of Bankruptcys is that nobody has any money so usualy no big expensive investigations The poor Trustee is standing there with masses of cases and no visable assets. Thats why people take the Big B. no visable assets. Just where these assets are is anybodys guess, but they are not visable.
Having proved your point that there is no chance of a recovery from this newly painted slum, they leave you alone and go elsewhere. Perhaps an Ex wife who married a highly successful gambler. Yeah Right. On.
It has happened and once on purpose, what a lowlife. His matress was so stuffed with $100 bills, he took to sleeping on the couch. The first time in my life I saw a mattress being escorted by an armed guard.
Raj, they would have to include the loans for the house in the Bankruptcy. They cannot include the house as an asset.
If there is a lot of perceived equity then the bankruptcy trustee can and probably will reverse that sale. That is if they filed bankruptcy within a year of the sale.
Your homestead exemptions will come into play. If you have a large amount of exemptions than the perceived equity in the house will be lower.
You'll have to give me a legal, valid way that the trustee could reverse the sale in this situation. As long as the sell was performed legally, it's not a fraudulent sale, or transfer of deed, so how could anyone reverse the sale?
You're correct that the loan would be included in the BK and the house couldnt be an asset because the seller doesn't own it anymore. As I stated, at this point, the bank would probably chose to call the note due. Of course, they might not, too, because IF they current payment has been being paid on time and in full, the trustee, with the lender's approval, might choose not to include the loan. Why? because then the lender wouldn't be forced to accept a smaller payment.
Also, the home owner has no choice but to include all debt when filing for bankruptcy. They are breaking the law if they don't disclose everything. They cannot decide what debt they want to include and what debt they do not want to include.
They could reaffirm the debt but why would they?
Tom
[ Edited by tbelknap on Date 01/19/2004 ][ Edited by tbelknap on Date 01/19/2004 ]
Actual fraud is should not be an issue with anyone operatiing a legal, ethical investing business. By the article's definition, you, the investor, would have to have active knowledge of the intent of the seller to defraud his creditors. An intent, I might add, that the writer admits is hard to prove.
So constructive fraud is the only possilibity here. What would shoot this down, IMO, is the "reasonably equivalent value" that the seller must receive. You're correct. If there is alot of equity, there exists the possibility of the seller's not getting this. Two things here, though. First, it has to be a proven value. The trustee can't just say, "the seller sold it too cheap, and we want it back." Second, most experienced investors would know better than, for example, take a FMV home of $100K for $50K, from a distressed seller. Most would offer either more $$$ to the seller or some form of equity payments. This alone would negate the inadequate value question.
It's all a mute point as well, since this article is specificly about California law, and would only apply to RE deals in that state.
Why not contact the note holder and tell them that you have been making the payments on the note for the last .......
ANd that the note holder is filing bankruptcy, wouldn't they prefer to pass the note to you and let you assume what you have already been doing?
[addsig]
After reading the article and comments, I think it would be difficult to prove a "Subject-To" purchase as being fraudulent. The intent of the purchaser is to pay the debt, which also satisfies the "reasonable" compensation clause. Assuming the purchaser uses a standard contract with appropriate consideration, the worst case scenario is facing the DOS clause. However, the purchaser may be able to contest this point if the the lender "knowingly" accepted payment. However, I would not rely entirely on this point. I have a hard money lender that will bail me out if the lender initiates the DOS clause in situations such as this.
[addsig]
Tim, I don't agree entirely. I think you would have to look at it per deal. If you took over payments on a house with 100k of equity, then I don't see the trustee having a hard time say that 100k for taking over payments is not reasonable compensation.
Yes bankruptcy is federal law, but real estate law is state specific. So anything referring to "fraudulent deed/title transfers" would be state specific and may be for other states.
As a practical matter, trustees rarely undo those transactions, even if there is equity, so long is it was an arms-length transaction, and the buyer did not actually no, nor should have known, that the seller was planning on filing bankruptcy.
I think your right Martin. Especially if it is an arms-length transactions and there has been a few months that has past before the bankruptcy was filed.
You mentioned that you have to place all debts in the bk. I filed BK sometime ago (and unless the rules have changed) I got to pick and choose which debt I wanted to keep. If I file a BK and mI have a few credit cards that I've been paying on, and they are in current standings, I can choose to keep them if I want. If I have an auto payment that I no longer want even if I can afford the payment, I can list it in the BK.
But who knows, maybe the rules have changed since then. (I just thought you can pick and choose what you want to write off)
After you have the deed, it makes no difference to you as the investor because you own the property, not the sellers.
Roger
Isn't the bk attorney going to want to get the house to pay off creditors!!
Hi Bginvestor,
If you took the property subject2 at least a year ago, you should be fine. Just make sure that the owner does not want to list the mortgage in the BK, because you are already paying for it.
If you took the house sub2 less than 1 year ago, the BK trustee could find that this was a fraudulent transfer of deed and undo the sale.
Unfortunately I do not know the magic number on how long it takes to hold the property before you are safe, I would take caution in this thought!
Best of Success!
BAMZ
Thanks!
You can also put a clause in your contract where the seller affirms that they have not and do not plan to declare BK.
This provides a paper trail that may help protect you should the issuse of fraudulent conveyance arise.
I don't want to be the one riding the high horse here, but I really don't understand the problem. IF you, as the investor/buyer, have done everything in a legal and ethical manner then there would be no "fraudulent transfer of deed ," whether it was one day ago or ten years ago.
There might be an issue with the loan, since it is still in the name of the original seller, however, there would be no legal way for them to include it in a BK because they do not own the property anymore. Of course, it will be highly likely that the lender at this point would exercise their option of calling the loan due. Again, however, this shouldn't pose a problem to the prepared investor. If you bought the property correctly (ie with equity), a simple refi into your own name would be a piece of cake. At that point, you go on with your gameplan as normal.
Roger
Yes, the best laid plans of Mice and Men do oft times go astray. I think Lonnie said that in Mice and Men.
What you do is carry on as the die has been cast. You await an approach from the Referee or Trustee in Bankruptcy. and when you get the call or letter. Your response is to imediatly if not sooner run out and have an appraisal done by a real live licensed appraiser. The appraisal comes in for a sum just about equal to the outstanding obligations.
The fun of Bankruptcys is that nobody has any money so usualy no big expensive investigations The poor Trustee is standing there with masses of cases and no visable assets. Thats why people take the Big B. no visable assets. Just where these assets are is anybodys guess, but they are not visable.
Having proved your point that there is no chance of a recovery from this newly painted slum, they leave you alone and go elsewhere. Perhaps an Ex wife who married a highly successful gambler. Yeah Right. On.
It has happened and once on purpose, what a lowlife. His matress was so stuffed with $100 bills, he took to sleeping on the couch. The first time in my life I saw a mattress being escorted by an armed guard.
Hope this helps. Lucius
Raj, they would have to include the loans for the house in the Bankruptcy. They cannot include the house as an asset.
If there is a lot of perceived equity then the bankruptcy trustee can and probably will reverse that sale. That is if they filed bankruptcy within a year of the sale.
Your homestead exemptions will come into play. If you have a large amount of exemptions than the perceived equity in the house will be lower.
They better refi before the bankruptcy filing.
Tom[ Edited by tbelknap on Date 01/17/2004 ]
Tom,
You'll have to give me a legal, valid way that the trustee could reverse the sale in this situation. As long as the sell was performed legally, it's not a fraudulent sale, or transfer of deed, so how could anyone reverse the sale?
You're correct that the loan would be included in the BK and the house couldnt be an asset because the seller doesn't own it anymore. As I stated, at this point, the bank would probably chose to call the note due. Of course, they might not, too, because IF they current payment has been being paid on time and in full, the trustee, with the lender's approval, might choose not to include the loan. Why? because then the lender wouldn't be forced to accept a smaller payment.
Roger
Raj, here is an article explaining how the trustee will see a transfer as fraud and can revoke the sale.
Like I said if there is a lot of equity than the sale may be considered fraudulent.
http://www.caddenfuller.com/CM/Articles/Articles38.asp
Also, the home owner has no choice but to include all debt when filing for bankruptcy. They are breaking the law if they don't disclose everything. They cannot decide what debt they want to include and what debt they do not want to include.
They could reaffirm the debt but why would they?
Tom
[ Edited by tbelknap on Date 01/19/2004 ][ Edited by tbelknap on Date 01/19/2004 ]
Interesting article, Tom
Here's my take on it:
Actual fraud is should not be an issue with anyone operatiing a legal, ethical investing business. By the article's definition, you, the investor, would have to have active knowledge of the intent of the seller to defraud his creditors. An intent, I might add, that the writer admits is hard to prove.
So constructive fraud is the only possilibity here. What would shoot this down, IMO, is the "reasonably equivalent value" that the seller must receive. You're correct. If there is alot of equity, there exists the possibility of the seller's not getting this. Two things here, though. First, it has to be a proven value. The trustee can't just say, "the seller sold it too cheap, and we want it back." Second, most experienced investors would know better than, for example, take a FMV home of $100K for $50K, from a distressed seller. Most would offer either more $$$ to the seller or some form of equity payments. This alone would negate the inadequate value question.
It's all a mute point as well, since this article is specificly about California law, and would only apply to RE deals in that state.
Roger
Raj, your right that the Trustee must prove a fraudulent transfer which may be hard to do.
Not sure what you mean in regards to California law. As far as I know Banruptcy law is a federal law.
Exemptions are state specific.
Tom
Thanks for all comments, really appreciate it!!
Why not contact the note holder and tell them that you have been making the payments on the note for the last .......
ANd that the note holder is filing bankruptcy, wouldn't they prefer to pass the note to you and let you assume what you have already been doing?
[addsig]
After reading the article and comments, I think it would be difficult to prove a "Subject-To" purchase as being fraudulent. The intent of the purchaser is to pay the debt, which also satisfies the "reasonable" compensation clause. Assuming the purchaser uses a standard contract with appropriate consideration, the worst case scenario is facing the DOS clause. However, the purchaser may be able to contest this point if the the lender "knowingly" accepted payment. However, I would not rely entirely on this point. I have a hard money lender that will bail me out if the lender initiates the DOS clause in situations such as this.
[addsig]
Tim, I don't agree entirely. I think you would have to look at it per deal. If you took over payments on a house with 100k of equity, then I don't see the trustee having a hard time say that 100k for taking over payments is not reasonable compensation.
Just my opinion,
Tom
Just to clarify my last post, Tom.
Yes bankruptcy is federal law, but real estate law is state specific. So anything referring to "fraudulent deed/title transfers" would be state specific and may be for other states.
Roger
Roger, I believe that fraudulent transfers are mandated federally.
Here is a link to the Banruptcy law which as you stated is federal.
http://www4.law.cornell.edu/uscode/11/548.html
Here is another good article.
http://www.firstam.com/faf/html/cust/jm-bfp.html
Tom
As a practical matter, trustees rarely undo those transactions, even if there is equity, so long is it was an arms-length transaction, and the buyer did not actually no, nor should have known, that the seller was planning on filing bankruptcy.
Martin
I think your right Martin. Especially if it is an arms-length transactions and there has been a few months that has past before the bankruptcy was filed.
Tom
tb..
You mentioned that you have to place all debts in the bk. I filed BK sometime ago (and unless the rules have changed) I got to pick and choose which debt I wanted to keep. If I file a BK and mI have a few credit cards that I've been paying on, and they are in current standings, I can choose to keep them if I want. If I have an auto payment that I no longer want even if I can afford the payment, I can list it in the BK.
But who knows, maybe the rules have changed since then. (I just thought you can pick and choose what you want to write off)
Sorry I jsut read my other post and it is misleading.
I meant they must disclose all debt. If not then they may be liable for purgery. The person can reaffirm the debt but still needs to disclose it.
Sounds like you reaffirmed certain debt and discharge the rest.
Tom
[ Edited by tbelknap on Date 01/23/2004 ]