How is a Contract for Deed Handled in Bankruptcy?
As the opportunity to purchase a home using a traditional mortgage has become more difficult at times over the past several decades, various non-traditional means of obtaining financing have been created. One such non-traditional means of financing the purchase of a home is a contract for deed.
What is a contract for deed?
In a contract for deed, the buyer purchases a home by obtaining financing from the seller. Whether the seller owns the home free and clear or is himself making mortgage payments on the property does not matter generally. The important factor in a contract from deed is that the seller is effectively the one extending credit to the buyer to facilitate the home purchase. Therefore, the buyer makes payments to the seller rather than a normal mortgage lender.
What are the pros and cons of a contract for deed to the buyer?
The main benefit of a contract for deed to the buyer is that he can use this mechanism to purchase a home when traditional financing through a mortgage is not available. The seller likely is aware the buyer does not have good credit. But the seller is willing to accept a buyer with credit issues because he is otherwise convinced the buyer can make the payments as defined in the contract for deed.
The seller is willing to work with a buyer through these means because a contract for deed generally offers significantly more legal protection to the seller. Should the buyer miss a payment, the buyer will have a limited number of days—perhaps only 30 to 60 days, with the length of time varying by state—to bring the payments current. If the buyer is not able to bring the payments current, the seller can seize the property without going through a formal foreclosure as with a traditional mortgage.
When the seller seizes the property in this manner, the buyer is left with no equity or interest in the property, usually regardless of how far into the contract for deed the buyer is.
What happens with a contract for deed if I file bankruptcy?
Whether you are declaring Chapter 7 or Chapter 13 bankruptcy, a contract for deed is treated much like a property with a traditional home mortgage. If during the bankruptcy you continue to make payments to the seller per the contract for deed, you will be able to continue to live in the home.
However, the seller still owns the property in a contract for deed. Therefore, he will be able to take the home if you stop paying him.
When you have a traditional mortgage and file a Chapter 7 bankruptcy, the bankruptcy will not stop a lender from seizing your home if you stop making payments. But the bankruptcy will protect you from being personally liable for any remaining balance owed on the mortgage if the sale of the home by the lender to another buyer does not cover the mortgage amount you still owe.
In many states, if you have purchased a home using a contract for deed, once the seller seizes the home from you, he does not have any authority to sue you for any remaining money owed. Therefore, a Chapter 7 bankruptcy really does not provide a benefit to you as the buyer with a contract for deed.
When you file a Chapter 13 bankruptcy and have a traditional mortgage, the bankruptcy will allow you to reorganize your payments over a longer term. You may likewise be able to restructure your payments under a contract for deed.
However, this may not always be true, as in some states once the seller notifies the buyer he is in default, the seller does not have to allow the buyer to restructure payments even if Chapter 13 bankruptcy is subsequently filed.
Can I speak with a bankruptcy attorney about my contract for deed before I declare bankruptcy?
Yes, you can and you should speak with a bankruptcy attorney when evaluating your options related to a contract for deed. Every contract for deed is different. And the laws that may govern how a contract for deed works in a bankruptcy can vary from state to state.
Therefore, it is important that you speak with a bankruptcy attorney who is familiar with the bankruptcy laws in your state, to ensure you are making an informed decision. As the initial conversation with a bankruptcy attorney is free of charge and does not obligate you to anything further, you have every reason to call the number at the top of this web site today to get the help you need.