In the Western District of Washington – encompassing Seattle, Tacoma, Vancouver, and Bellingham – it is fairly common for the chapter 7 trustee to conduct a short sale on a debtor’s real property, if a few conditions are met. The chapter 7 trustee might conduct a short sale on a debtor’s real property if:
- The debtor is in default on the mortgage;
- The debtor intends to surrender the real property; and,
- The debtor does not have any equity in the house.
This is confusing and concerning for some people, because they feel that they filed bankruptcy to protect themselves from a foreclosure. However, a chapter 7 bankruptcy can only delay a foreclosure. If you are behind on your mortgage and you want to save your house from foreclosure, you have to either file a chapter 13 bankruptcy or get a mortgage modification.
This is because a mortgage – like any other secured debt in bankruptcy – has two parts: 1) the debt, and 2) the lien. The debt is discharged in a chapter 7, meaning that you cannot be held personally liable for it. The lien – which is the creditor’s right to foreclose – cannot be discharged in a chapter 7 bankruptcy. This means that your mortgage company has the right to foreclose after they either 1) get relief from the automatic stay, or 2) the bankruptcy is completed.
Chapter 7 is very useful for delaying foreclosure, because the moment you file it the automatic stay prevents a foreclosure from going forward. However, the foreclosure process will eventually restart. A chapter 7 bankruptcy can give you anywhere from an additional 45 day to 180 days in your house, depending on where you are in the foreclosure process and how fast the bank moves. This is where the chapter 7 trustee comes in with a short sale.
If the trustee conducts a short sale, you will typically get as much, or more, time in your house as you would if you just let it go into foreclosure. In addition, you will not have a foreclosure on your credit report. In some cases, banks are very slow to foreclose and you are stuck with HOA or COA dues; and so, a trustee’s short sale can actually help you save money. The purpose of the short sale is for the bank to give the trustee a carve out – essentially a fee – for conducting the short sale. That carve out is used to provide some payment to your unsecured creditors.
There are some cases where a chapter 7 trustee’s short sale is a problem for a debtor. The court will not stop a short sale just because you want more time in the house or because you want to be control of te short sale process. This is a controversial area of bankruptcy law, where it is difficult to give a precise answer as to how the court will rule. In my opinion, chapter 7 trustees do not actually have the authority to conduct short sales without the debtor’s consent; however, for most people, the short sale is actually beneficial and it is not worth the effort to try to stop the short sale process.
Two areas where it is possible to get the court to stop a short sale: unreasonable delay or interference with the ability to modify. For example, the trustee may be taking too long to short sell the house and delaying the administration of your case. Alternatively, you may want to modify the mortgage on your house. If the trustee’s short sale is taking too long, then you can file a motion to abandon the house. If the court believes that the process is taking an unreasonably long amount of time, then the court can force the trustee to abandon the sale.
If you are in the process of modifying the mortgage, the trustee will generally hold off on listing the house once you have shown him the modification paperwork. Once the modification is completed and the court approves the modification, the trustee will abandon the house. If the trustee’s short sale efforts are interfering with your modification, then your attorney can file a motion to abandon the property and try to get the bankruptcy court to order the trustee house.
If you are considering bankruptcy and concerned about a short sale by the trustee, then discuss it with your bankruptcy attorney. Your bankruptcy attorney can explain the short sale process, the chances that the trustee will actually attempt a short sale, and whether you have grounds to object to a short sale.nn1