Short Sale and foreclosure- watch out for the small lenders! Can bankruptcy help?

I believe that short sales are preferrable to foreclosures because of the credit score hit that you take in a foreclosure.  Most large banks should readily do a short sale for you but watch out for small lenders who may lure you in with the promise of a short sale only to cancel the short sale at the last-minute and sell the house at auction.  Watch out for the game they play where they lure you in thinking you have a short sale approved only to find out that you don’t and the house is sold at auction to a third-party buyer.

Don’t worry the big banks are involved in 95% of loans these days so chances are you don’t have a small lender at all.  The big banks like Chase, Wells Fargo, and B of A are usually all very amenable to short sales.  They have too much foreclosed housing inventory currently and they prefer to execute short sales of homes whenever possible.  My realtor told me of a case where they told the owner to go get a realtor and do a short sale.  They apparently had no interest in a foreclosure if it could be avoided with a short sale.

This is good for you because short sales are better for your credit score.  A foreclosure can last longer on you credit report than even a bankruptcy which prevents you from getting a FHA loan for 2 years.  A foreclosure prevents FHA loans for 3 years traditionally and there are stories of them precluding FHA loans for 5 years.  A short sale appears on your credit report as a “settled” debt which is also two years so even with a bankruptcy you would only have to wait two years for a loan.

The problem I just faced in a case was with a small bank that falls in the 5% of loans category.  My client had his loan sold from a big bank to one of these small ones years ago.  We attempted to do a short sale on the property but the bank stalled our efforts from the beginning.  In the end we had a great buyer and all the docs in and the bank came up with an excuse at the last-minute and went ahead with the sale on the courthouse steps.  It was clear after that they never really wanted a short sale at all and that they were determined to do a foreclosure from the beginning.  I just wish they told us that before we jumped through all the hoops and wasted everyone’s time.

We looked up this company and discovered that they approve less than 10% of short sales brought to them.  We speculated that they are getting some government bonus for the foreclosure because the government appears to want to see more foreclosures.  It seems silly as this is hurting people’s credit but the government disincentive programs are often hurtful and wrong.

A chapter 7 bankruptcy would have stalled the foreclosure sale it is true (This client had insufficient income to fund a chapter 13).  But then the bank could have filed an immediate motion for relief from stay and it would have been granted by the bankruptcy court quickly.  Once the relief was granted, the stay lifts and the bank can proceed with the sale.  So a bankruptcy filing can only stall a foreclosure and it will not force a determined bank t accept a short sale.

I just looked up a case for a client who had a stay lifted in 3 weeks and a new sale date scheduled three days after that.  So it’s possible that a chapter 7 bankruptcy will only stall a foreclosure sale for 20 to 30 days.  But it is all dependent on how quickly they file the motion.  I have seen them take 6 weeks to file but two weeks is more common and they could file the motion for relief within just days of the bankruptcy filing.

If you have one of these small banks then the most you can do is stall them with a chapter 7 bankruptcy unless you can afford to fund a chapter 13 for years to come.  Most people cannot afford this so they opt to do a chapter seven or hope that they can get a sale through as we did.  But then you run the risk of the bank pretending to want a short sale and then cancelling it at the last moment when it is too late to file a bankruptcy.

A bankruptcy can still get rid of most of your other debts though if you have them so don’t be afraid to use bankruptcy where necessary.  A chapter 7 can’t stop a foreclosure sale but only delay it though and it can’t get your house back once it’s sold to a third-party buyer.

Beware of the tricks these small banks play on you!

I am a San Diego bankruptcy attorney.  For more information please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call for a free consulation on any debt or bankruptcy matter at (619) 702-5015.  Call now for a free credit report and analysis!

If you or someone you know needs to file a bankruptcy then get my FREE E-BOOK “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” by emailing me at farquharesq@yahoo.com.

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Local San Diego restaurant goes bankrupt! Say Goodbye To Pat and Oscar’s.

Apparently another victim of the economic crisis that seems to still be gripping America, Pat and Oscars filed for Chapter 7 bankruptcy in September with the last three corporate stores closing on 9/27/11.  A chapter 7 means that they will be liquidating the company and not reorganizing it as they would in a chapter 11.  This could mean the end of Pat and Oscars but possibly it will survive in some form as it was alluded to in an article the “Restaurant News”.

According to that article there are numerous franchised stores out there that are not operated by the corporation but are in fact operated by individuals.  Many of these people undoubtably want to continue with the operation of their restaurants as they have families to feed and bills to pay.  But the question becomes how do they do this when the corporation goes bankrupt?

The company did everything it could in the past to keep the brand alive including cutting costs and creating a new proto-type store.  None of this worked though to save the company as sagging sales and a bad economy has claimed another restaurant victim.  People do tend to eat at home more in a down economy as they have far less disposable income.  I usually tell my clients to eat at home more to cut their expenses after filing a personal bankruptcy.

So nobody blames Pat an Oscars for filing but the individual franchise owners could be left in the lurch.  But according to the article there is possibly a way out for them.  The company itself has been around since 1991 when it was founded by Pay and Oscar Sarkisian.  Sizzler bought it in 2000 for $16 million and Sizzler became Worldwide Restaurant Concepts which was then acquired by Pacific Equity Partners in 2005.  In the bankruptcy the parent company was listed as “FFPE LLC”.

They got a new chief executive in 2008 and they tried to grow the restaurant and that didn’t work.  When they filed bankruptcy there were 14 locations of which 9 were owned by franchisees.  These franchisees could get liquidated too if they are not careful but there is an alternative.  In the article they say they will have to “go to court”.  That is true if they want to save the brand and operate it themselves.

The problem is that they are now part of a bankrupt corporation.  That bankrupt corporation will have debts.  It is the job of the Trustee in any chapter 7 bankruptcy to liquidate any assets the corporation may have to pay creditors.  It is possible though that in the franchise agreement for Pat and Oscars the franchisees are owners of all of the property in their restaurants and they just have some contractual agreement to purchase supplies from the mother corp.  Then their individual store assets would fall outside of the bankrupt estate.

That still leaves the name of Pat and Oscar’s.  That is surely owned by the corp. and the trustee would probably be duty bound to sell the name as that is an asset of the estate.  But according to an article in “Sign on San Diego” the parent company is listing assets of $331,459 and liabilities of $4.1 million so we know that there are considerable debts owed to creditors who will want to get paid from any asset that the Trustee can discover.

But also the article quotes a “consultant” who says that the franchisees will have to first form an association and then petition the court to use the name.  This is possible I believe as they will have to form a new business as the old one is defunct.  It is also possible that the trustee will allow the use of the name if he determines that it has no value to the estate.  It is unlikely that anyone would buy it so the franchisees would at most have to pay a nominal fee for its use and they could possibly use it for free is the trustee abandons the name.

Then they would take this new business and operate their restaurants and they could even change the name to something similar if they can’t get the name or if they don’t want to pay for the name.  This is not unprecedented according to the “Restaurant News” article as “Ground Round” franchisees in Boston operated their 24 restaurants after their parent company went bankrupt.  80 units of “Bennigans Steak and Ale” were similarly operated under a new franchisee owned business after their parent company went bankrupt.

Therefore it is possible that we will see more of Pat and Oscars as it is certainly okay from a bankruptcy perspective to operate a new franchisee owned restaurant chain after a parent company bankrupts.  The question though is if the restaurants can operate profitably in this down economy.  We shall see.

So you still may be able to take the family to Pat and Oscars in the future.

I am a bankruptcy attorney practicing bankruptcy law in San Diego, CA.  Please visit my websites for further information at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for a free credit report and analysis!

If you or someone you know needs to file a bankruptcy please get my FREE E-BOOK: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” by e-mailing me at farquharesq@yahoo.com.