Buying a Property from a Bankruptcy Trustee

With consumer bankruptcy filings trending upwards, more properties will become available through trustee sales.  This is good for the consumer looking to purchase homes, as there will be more inventory on the market and the bankruptcy trustee is mandated to sell the property.  However, the process is different from that of a traditional sale, and buyers need to be aware of some of the potential pitfalls that may entail.  For purposes of this blog, we will focus on the pitfalls as to how they pertain to the New Jersey residential properties purchase and sale process.

The first pitfall that buyers must understand is that the bankruptcy trustees is obligated to accept the highest and best offers.  The reason being is the trustee has a duty to do what’s best for the debtor(s) and creditor(s) of the bankruptcy estate.  This means even if a buyer’s offer is accepted and the parties are under attorney review, should another offer come in that is either higher or better, the trustee will most likely accept that offer. 

The second potential pitfall is, after the contract for the subject property is out of attorney review, the bankruptcy trustee (via her bankruptcy counsel) must make a motion to the bankruptcy court to approve the sale.  As part of this motion, the bankruptcy court will allow other offers to take place, and (again) the bankruptcy trustee is obligated to accept the highest and best offers.  Consequently, the bankruptcy trustee will (most likely) notify any other bidders and/or people who previously showed interest in the subject property of their opportunity to (again) bid on the subject property.  If another bidder comes in and makes a better or higher offer, the contract the bankruptcy trustee is seeking approval of will become null and void.  In turn the buyer who was originally under contract will have (i) wasted time and money only to lose out on the subject property and (ii) lost out on an opportunity to bid on other properties that may have been available during the time the buyer was waiting on the approval of sale by the bankruptcy court.

Another potential pitfall is, even if the bankruptcy court approves the sale, in the event the subject property is occupied by the debtor or a non-occupant co-borrower and they refuse to leave, the bankruptcy trustee may need to get a court order allowing for the US Marshalls to come in and evict the occupants.  This can add time to an already elongated purchase and sale process, which is problematic if the buyer is getting a mortgage.  The reason being is the mortgage commitment or interest rate lock could expire – resulting in the buyer having to pay additional extension fees.  Additionally, the buyer cannot rely on the debtor to cover these costs, as the debtor will most likely have very little money.

Please note that the above is not meant to dissuade people from buying properties that are sold by a bankruptcy trustee; especially if the buyer really loves the property.  It is merely to show that the process is different from a regular purchase and sale transaction in New Jersey, and buyers should be aware of the same.

The information in this blog posting is for general information purposes only. Nothing in this blog or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information in this blog is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.

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