Myth vs. Reality: Short Sale During Bankruptcy

Myth: There is a widespread misconception that since the consumer still owns the house they have the option of putting it on the market anytime they want to, including when they have filed for bankruptcy protection. Sadly, there are some attorneys who will tell the consumer that there is no problem since they are ‘just marketing’ and will get approval from the Trustee for any eventual sale. Too many real estate salespeople are afraid they will miss the opportunity for the listing unless they go ahead and sign a listing contract sooner, rather than later. Everyone is feeling pressured and so a decision is made which is directly contrary to the law and is almost certain to anger the Trustee when they are made aware that a listing is in place. Since Trustees are people, this is not likely to bode well for the debtor.

Reality: All assets are considered frozen from the time the consumer officially files for the bankruptcy. A consumer is prohibited by Federal bankruptcy law from transferring or selling ANY assets until a determination has been made by the Trustee about which assets are to be sold or relinquished to satisfy creditors and which can legally be retained by the debtor. In the meantime, ANY asset advertised as available for sale clearly constitutes an attempt to dispose of that asset in direct violation of the law.

WARNING: If you are a REALTOR, you should be careful to explain to any borrower who is in default and becomes a listing client what is covered above and further, let them know that you will need to remove the listing from the market should they decide it is in their best interest to file for bankruptcy. A licensee should never have a property on the market unless and until the Trustee of the court has given a specific release (in writing) which says that the listing has the approval of that court. Your worst nightmare as a real estate agent could be getting an offer on a property which is, in fact, not available because it has not yet been released by that Trustee. You will have placed the listing client in an impossible position: an inability to close, which would open them up to the possibility of a lawsuit for “failure to perform.” Essentially I am saying this is one of those times when you cannot take matters into your own hands—EVERYONE should wait for the official determination of the Trustee of the Court. Once this has been handed down, provided to all interested parties in writing, then move forward based on the latitude you have been given.

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(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)