Since mortgage rates seem to be on their way up, we may run into more folks buying their home on a contract for deed. In case you don’t know, a contract for deed is a device under which you agree to pay the purchase price to the owner of the house over time instead of getting a mortgage and paying the seller with that loan. (Some states refer to this as an installment land contract.) Contracts for deed often have relatively small down payments, monthly payments that are largely interest only, and must be paid off in (balloon) in three to five years.
So, let’s say you bought your home that way. And today you got a “Notice of Official Proceeding in Bankruptcy Court” in the mail. You open the letter, wondering what’s up, and find out that the person who sold you the house filed their own bankruptcy.
In the words of Douglas Adams: “DON’T PANIC”.
If you live in the property, and if you stay current on the contract for deed (payments, insurance, taxes, etc.) then your contract for deed cannot be terminated by the seller just because he or she filed bankruptcy. (Bankruptcy Code Section 365(i) ) Now, the person to whom you owe the money may change because your seller may “lose” the contract to their bankruptcy trustee. That means that the trustee will collect the payments instead of your seller, and if so the trustee merely has to deliver title when the contract for deed is paid off. This may open up a chance for you to get a discount on your contract for deed. If it runs several more years, and if you can get a mortgage, you can negotiate with the trustee to pay off the $100,000 balance for, say, $90,000 or less. Since a trustee has to liquidate things fairly quickly, the trustee might take a reduced payoff to be able to close the case.
So, the important thing for you as a contract for deed buyer is to stay current. Then, as a bankruptcy attorney, I suggest you consult an attorney (!) to figure out what the heck is happening.
NOTE: This is a situation where the seller files bankruptcy. This is not discussing what happens when the buyer is in default and the seller has served a notice of termination.
As with most things legal, there are nuances here. That’s why I am happy to talk to you about your particular situation. Give me a call at (320) 252-4473
