Whether you are a first-time home buyer or searching for your dream home, home buying can be an exciting, but also nerve-racking experience. Now add the complexity of a bankruptcy to the equation and it can be even harder to navigate a real estate transaction. Understanding how a bankruptcy may affect your ability to buy or sell your home and understanding your rights, as either the buyer or seller, is important.
What is a Real Estate Transaction?
First, it’s essential to understand what is involved in a real estate transaction. Real Estate transactions typically involve a seller, buyer, and lender. The entire process contains many moving parts, but each step can be broken down and explained so that buyers and sellers better understand their roles in the transaction. The different phases of the real estate transaction include:
- Pre-contract – In this phase, as a buyer, you determine what it is that you are looking for in a home. You create your list of needs and wants including location, type of home, size of lot, etc. You will also want to figure out the type of financing you will need, if applicable, and obtain a pre-qualification letter to determine the minimum and maximum purchase price you are able to afford. From the seller’s perspective, this is the phase where your home is being shown and you are collecting offers from potential buyers. This is the negotiation phase.
- Due diligence – This is the phase where inspections take place. This is an important period for both a buyer and seller to help “seal the deal” on both sides.
- Financing – During this phase, the buyer secures their financial means to purchase the home from the seller. This can be done through a cash deal or financing through a lender depending on the financial situation of the buyer.
- Closing Preparation – At this stage of the real estate transaction, all the documentation for all parties involved is prepared.
- Closing – As the buyer or seller, this is the point where you will sign all the required documents involved in the real estate transaction and finalize the deal.
- Post-closing – In this phase, all legal documents and aspects of the closing are reviewed to ensure they are completed appropriately and any follow-up that is required is done.
How Bankruptcy Alters the Real Estate Process
If you feel that you need to sell your home due to financial hardship, it is important to understand that if you file for bankruptcy, the sale of your home may be impacted. In a Chapter 7 bankruptcy, a sale generally cannot move forward until after the bankruptcy, unless it is the Trustee selling your home. In a Chapter 7, the Trustee is the one entrusted with the power to sell non-exempt assets to pay your creditors. Thus, in a Chapter 7, if your house is worth more than you are allowed to maintain, you may lose decision making power on a sale. If you already have your home for sale or have accepted an offer on your home, this will freeze the real estate process and you could lose the deal if the potential buyers aren’t willing or able to wait. A Chapter 7 bankruptcy takes between 3 to 4 months to complete, and thus it may be in your best interest to file and wait to list your home for sale until after discharge, or conversely, sell your home and then wait to file. These are important decisions that you can make in consultation with an experienced bankruptcy attorney.
In Chapter 13 bankruptcy, you do not lose decision-making power to your Trustee, therefore it is possible to sell your home during the case. However, the Bankruptcy Code requires that any sale be approved by the Bankruptcy Court, and such approval brings its own considerations. First, it generally takes about a month to file a motion and obtain an order approving the sale. Further, the sale normally is open to higher and better offers. Again, you can benefit from the counsel of an experienced bankruptcy attorney during this process.
As to the important question of what a debtor may keep while in bankruptcy and selling their home, in Pennsylvania that is defined by federal law. The exemption amount for a single person is just over $27,000 and increases to just over $54,000 for a married couple when the property has been held jointly.
As a buyer, if you have previously filed bankruptcy it will affect your credit score and will remain on your credit report for up to ten years. However, it is still possible to purchase a home and obtain financing through a lender. You may have a higher interest rate or be required to put down a larger down payment, but it should not keep you from your dream of owning your own home. If you expect to benefit from programs like the VA or FHA, you should understand they have certain limitations if there was a previous bankruptcy or foreclosure.
Contact an Experienced Bankruptcy Attorney
Whether you have already experienced a bankruptcy or you’re contemplating whether bankruptcy is the best decision for your financial situation but are looking for a home to purchase or worried about selling your current home, the experienced bankruptcy team at Mette, Evans & Woodside can explain your rights and what options are best for your situation.