You have worked hard all your life. You have made many sacrifices to save money to purchase your new home. Your real estate broker calls you with news that your offer for the perfect dream home has been accepted by the real estate developer. You enter into contract for the sale of that house or condominium and you submit your down payment to be held in escrow. You obtain your mortgage commitment and your attorney schedules a closing date.

The perfect dream home is about to be yours… except the real estate developer files a Chapter 11 Bankruptcy Petition before your closing date. You are now thrown into the complex world of bankruptcy law and the purchase of your dream home is now on hold and may be on hold for a very long time.

Like individual purchasers of homes and condominiums, many real estate developers often apply to banks for construction loans and mortgages to build these homes and condominiums. Real estate developers would then have to give these banks a priority or first mortgage. Oftentimes, when purchasing real property from a developer, they would require you to enter into contract and require a down payment even though the homes or condominiums are unfinished. Real estate developers enter into contracts with contractors and other vendors to ensure that the project is completed on a timely basis.

When the real estate developer has trouble paying all of the vendors and the bank, the developer files for Chapter 11 in Bankruptcy Court. Essentially, the petition is a request by the real estate developer to have a trustee review the developer’s assets and debts and propose a plan to repay all outstanding debts.

Under Bankruptcy laws, there is an automatic stay1 of activity in connection with the real estate developer, aka, the debtor’s bankruptcy estate when a petition is filed. Any “asset” or “debt” of the debtor becomes subject to Bankruptcy laws2. This means that your down payment and contract of sale are now part of the real estate developer’s bankruptcy estate.

At the very minimum, you would have to file a proof of claim3 with the Bankruptcy Court as a creditor before you can attempt to secure the return of your down payment. There are deadlines for filing the proof of claim, so it is important that you file in a timely manner or you may be precluded from getting your down payment back. If your ultimate goal is to still purchase your dream home, you may have to navigate the Bankruptcy Court’s procedure, which can be lengthy and costly with no guarantee that you will be allowed to purchase your dream home. Under Bankruptcy laws, there are different categories of creditors, and depending on your classification, you may not be entitled to the same rights as if the real estate developer had not filed for Bankruptcy.

I am always asked, how do you prevent this from happening? There really is no simple answer to this question. A real estate developer may file Bankruptcy for a myriad of reasons. There is no way of really knowing whether or not a real estate developer would file Bankruptcy. Purchasers can protect themselves by either requesting the financials of the developer before entering into contract, waiting until the home or condominium is completed before entering into contract, or inquiring into the reputation of the real estate developer in the construction community.

1 11 U.S. Code § 362; There are certain debts owed by the debtor that are exceptions to the Bankruptcy Stay; Federal Rules of Bankruptcy Procedure Rule 3002.


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