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Brent Blanchard
Brent Blanchard, Bankruptcy Attorney
Category: Bankruptcy Law
Satisfied Customers: 1975
Experience:  Twelve years experience in all aspects of debtor & creditor BK.
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My parents owned a piece of farm land for years. They sold

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My parents owned a piece of farm land for years. They sold the land to someone I know to basically hold temporarily. I agreed to make the mortgage payments and was planning on purchasing the property from my friend.....however, I was unable to get a loan. That was 2.5 years ago. He put my parents back on the deed in May of 2009. Although I have been making the mortgage payments, he just told me he is planning on filing a chapter 7. The auditors website has the land appraised at $450K. The mortgage on the property is $309K. There was a 2nd mortgage on paper that was never filed. He says he plans to reaffirm the land along with his house. Please let me know what the risk is in my parents losing their land.
If the person who "temporarily" held the property is not an "insider" (relative or business partner), the transactions would probably not come under scrutiny. The 12-month rule on real estate transactions being scrutinized applies more to sales, as the BK code and the Trustee who looks into the filings are interested in whether assets were sold for substantially less than market value, or under circumstances likely to "hinder, delay or defraud" creditors.

Re-affirming on a debt secured by land in a BK case really rarely carries more risk of losing the land than one has without a BK case being in play--stay non time with all the payments and there is no risk of foreclosure, for example.

The complication is whether the land is "necessary" for re-organization in a Chapter 13 case or Chapter 12 family farm case (as in provides part of the income needed to make the Plan payments), or if it's just an excessive-value non-exempt asset in a Chapter 7 liquidation. If there is an excess of non-exempt value, then the Debtor is often required to "buy out" the asset in the BK by borrowing against it and making the dollar value of the asset available to the creditors. That outcome is far more common than the Trustee forcing a sale of the property at auction, paying off the loan, and making the net proceeds available so the creditors don't lose more than they would have.

BK law is a balancing act between the legal rights of the creditors to be paid as agreed by the Debtor, and the Debtor's equitable right to get relief from his or her debts.

BTW, land is almost always worth more than the auditor or other taxing authority puts it--everyone wants to own a dump at tax time, but have a Tau Mahala when it's time to sell.

Make sure your parents get their money's worth out of their BK attorney.
Customer: replied 7 years ago.

1. Are you saying that him putting my parents back on the deed 9 months ago will not be scrutinized?

2. You said: the Debtor is often required to "buy out" the asset in the BK by borrowing against it and making the dollar value of the asset available to the creditors.

a. What financial institution would allow the partial land owner to borrow against the property to pay creditors if he is in the process of bankruptcy? b. Also, since my parents are on the deed(as of 9 months ago) wouldn't they have to agree to him borrowing against the property? Should my parents get an attorney knowing he is going to file ch. 7? I was told by his atty. it is too late for my parents to file the 2nd mortgage my friend owes them (on paper). Is this true? Should they file it? Prior to him filing the Ch.7?

More new questions!

1. Probably not, if the person is NOT an "insider". Less likely anyway because it was a purchase rather than sale, BUT more likely again if the payment obligations made him insolvent.

a. That's their business decision. Unwillingness to loan is sometimes overcome by getting paid a higher interest rate. No one can predict how this will play out without complete information and even then we're sometimes wrong because other players are involved.
What's this about a "partial land owner"? If "put my parents back on the deed" means adding them and staying on himself (instead of just giving it 100% away), then the situation gets even more complicated than I thought.
1) Your parents agreeing to "him" borrowing against jointly-owned property??? Depends on how title is held. Tenancy in common *can* be encumbered/borrowed against only as to each person's share...again, if a lender is willing at an interest rate you can live with.
2) Yes, yes, YES!!! What you describe sounds like a situation that even an attorney could screw up. Be careful who you choose.
3) A loan encumbering land can be recorded any time. It's just a question of who gets to stand at the front of the line (priority position). If the document(s) are properly written, the act of recording will create a consensual lien on the property, known to the world.

Thank you.

Please do not forget to click the green "Accept" button so I can be paid for my work. Bonuses are greatly appreciated if you are happy with the quality of the answer(s).

Customer: replied 7 years ago.
I want to summarize: My parents owned the land for many years it has been in the family. They sold it to the Non-insider. The non-insider had to take out a mortgage in his name only in order to purchase the property. That was 2.5 years ago. I have been making the mortgage payments for 2.5 years on time every month. He put my parents on the deed with him and his wife 9 months ago. It was recorded 9 months ago. I just found out he is filing chapter 7 today. They will not wait or delay. They are filing today. He plans to reaffirm the property. If the trustee forces a sale. 1.What rights do my parents have. 2.Is the non-insider responsible for buying them out? 3.How does the equity get divided? Is there anything they can do at this time to make sure they don't lose the land in his bankruptcy? I do plan on giving you a bonus for your time. I appreciate your patience with me.
Had some unexpected travel the past three days.

Will post more either tonight or tomorrow night.

Wanted to make sure you knew you are not forgotten.

Back to the questions at hand...

First of all, I just want to make sure that I understand the situation correctly--it's the BUYER who is filing Chapter 7, not your parents. The parents are on a deed which is implicated in the BK.

1.What rights do my parents have.
Because it sounds like the buyer's mortgage paid off your parents in full (regardless of the fact that YOU were making the payments for him...), their rights are going to be limited to the dollar value of their share of the land. If the land is worth less than the outstanding loan plus all foreclosure costs ($$ouch!), then they really have no rights that come down to money.

2.Is the non-insider responsible for buying them out?
Only if the court orders the land sold, and they have some equity in the property. If he wants to re-affirm on the debt and keep the land AND the buyer's equity in the land is below the Ohio exemption limit, then he *could* keep the land and nothing really changes. The "buy-out" if needed and allowed would almost certainly be from the sale proceeds.

3.How does the equity get divided?
Generally-accepted accounting practices will trace purchase price exchanged at each transaction. The exact language of the deed will also help control the answer. If the parents really paid nothing for getting back on the deed (and the land was paid for in full TO THEM by the mortgage), and there was no equity in the land when their names showed up on the later deed, then they really own nothing from a financial standpoint. An X% share of land which has zero equity is still zero, because the lender gets to take its value out FIRST, before anyone else gets paid.

On the other hand, even if they paid nothing, there could be a legal gift of whatever share of the property was stated in the deed of conveyance. There *might* be a presumption of half and half with the buyer, but that depends on the language of the deed and Ohio law. That requires an personal consultation with full review of the documents.

Is there anything they can do at this time to make sure they don't lose the land in his bankruptcy?
The most reliable way to save their ownership interest as shown on the deed would be to buy out the buyer, which results in the dollars of that sale going into the BK estate. DO IT AFTER MOTION AND GETTING PERMISSION OF THE COURT and pay the money through escrow to the BK Trustee. If the buyer takes the money and runs, the feds will be all over everyone with accusations of trying to defraud the buyer's creditors.

I do plan on giving you a bonus for your time.

Thank you. I often work way too hard on some of these questions.

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