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Chrisman's Corner: Be Careful When Buying a Property Involved in a Bankruptcy

If you want to start an argument, announce to a crowd that the economy is recovering: half will agree with you, half won’t. Certainly the recent downturn has impacted many, leading to short sales, foreclosures, and bankruptcies. And plenty of people are asking JMAC’s brokers about buying a property that was involved in a bankruptcy. To answer that, our experienced brokers know that the key issue is what type of bankruptcy was filed, and how long will it take to close?

Since most such sales come with no representations, warranties or indemnifications, attorneys and brokers representing buyers should make due diligence their number one priority. Section 363 of the U.S. Bankruptcy Code allows parties involved in a Chapter 11 or Chapter 7 (most common for consumers) proceeding to dispose of real property in order to help pay off their debts through a highly structured process aimed at getting the most out of each asset while retaining the least liability.

As such, properties are sold “free and clear” from all liens and encumbrances, but it’s not uncommon or our brokers or JMAC underwriters to later discover hidden issues, and the buying process itself can present various other hurdles. The buyer should conduct exhaustive due diligence. The trustee or debtor-in-possession rarely has access to all of the materials a buyer would typically need to see before making a decision to purchase property; sometimes a debtor has destroyed the documentation prior to the bankruptcy, or not kept it in good enough shape.

A buyer should take advantage of the property being “Free and Clear”. Although the transfer of the property comes with no representations or warranties, it also comes with no liens or encumbrances. A buyer should enlist a knowledgeable lender and real estate professional, and be prepared to move quickly in what could be a competitive bidding environment.

The main goal under any filing in bankruptcy is to give one, who is burdened with debt, a fresh start. A debtor files a petition with the court, along with a schedule of assets and creditors; a trustee is appointed to administer the sale of nonexempt property. The primary role of the trustee is to pay the secured and sometimes unsecured creditors, from the proceeds of the sale of property, and this may take up to 45-60 days to wind its way through courts – but as JMAC’s brokers know it could very well be worth it to the buyer!