What Death, Divorce, and Bankruptcy Can Mean For Real Estate Transactions

Real estate transactions can be stressful in the best of circumstances. Add in emotionally complicated factors like death, divorce, or bankruptcy and you’re looking at a process filled with potential difficulties.

A home is more than a collection of bricks, wood, concrete, and glass. It’s the center of daily activities where people gather, memories are made, dreams are discussed and communities are built.

But it’s also an important financial asset – often the largest asset a person owns – and there are circumstances where that asset must be divided and sold. If all parties with a stake in the property agree on an outcome, this can usually be managed cleanly and swiftly. But in instances of death, divorce, and bankruptcy, emotional intricacies and family dynamics can complicate matters. Grief, feelings of loss, anger, and confusion can drive people apart when they most need to collaborate.

Keith Barrett, Founder of Vesta Settlements, recently met with several of our Associates in a discussion on the thorny issues that can arise in real estate transactions and offered insight on how agents can help their clients maneuver through a maze of legalese, high emotions, and fiduciary constraints. Here are some things he encouraged sellers to keep in mind when navigating these difficult life events.

Death

The death of a loved one can be a challenging situation, sometimes causing a dramatic effect on the ability of the friends or family members to manage and sell real property owned by the deceased. To understand how the real property can be sold, we must first look back to how the decedent took title to the property at the time of purchase.

Who has the power to convey title when the owner has died? The easiest situations are when there is more than one seller and they held title (ie: were on the deed) with Right of Survivorship, meaning at the moment of death ownership rights transfer to their survivor through either Tenants by the Entirety (which is available only to married couples) and Joint Tenancy, where two or more parties have equal rights of ownership in a property. In both instances, the surviving spouse or surviving joint tenant(s) need only provide a death certificate to the title company.

A more complicated situation is Tenants in Common, where multiple owners hold title to the property together, but they each own a designated share of the property without the Right of Survivorship. Upon the passing of one owner, their ownership interest passes per their will; if they don’t have a will, then their ownership interest passes per statute in the state of the property (local examples: Section 64.2-200 of the Code of Virginia, Section 42-16 of the Code of the District of Columbia, Maryland Intestacy Law). To sell the property in these situations, the remaining owner(s) must coordinate with the administrator of the decedent’s estate. If the decedent died testate (with a will), then the executor named in the will must file the will with the probate office of the circuit court for the county in which the property lies. If the decedent died intestate (without a will), then one of the descendants must apply with the probate office of the circuit court for the county in which the property lies to be appointed as the administrator of the estate. Once an administrator or executor has been appointed by the probate office, that person may begin the process of selling the property. However, there are mitigating circumstances that may delay the timeline of a sale, depending on the jurisdiction.

The best way to ensure there are few issues arising following the death of a homeowner is to have a will that designates an heir or executor to authorize the sale of the property. Another option is to establish a Trust, which creates a private fictional entity (a document) that never “dies” and which exists to hold and own assets and gives people control over those assets and avoid probate.

Divorce

A divorcing or divorced couple can make a real estate sale stressful for everyone involved. Parties can be angry, vindictive, irrational and uncooperative. When a Realtor® is put into the middle of these relationship dynamics, it’s important that all sides feel heard, respected and empowered in their position. An agent wants both parties to stay focused on the goal of maximizing the proceeds of the sale in order for the sellers to move on to their next respective chapters.

For purposes of real estate, a couple can only be considered either married or divorced. This means that even if a couple is separated, they are still married until the court has entered the final divorce decree and property remains under the current title status (see above for Tenants by the Entirety and Joint Tenancy). However, if the divorcing couple has already agreed to a Property Settlement Agreement outlining how the property will be dispensed, it’s important to share that with an agent because the sale of a property can occur before the divorce decree is finalized.

Parties need to determine how the proceeds are to be divided prior to settlement and if the parties cannot decide on how the proceeds are to be divided, then they must decide where the proceeds should be held (typically, one the divorce attorneys can hold the funds).

Bankruptcy

Bankruptcy is a form of federal financial protection that is unfortunately often viewed through the lens of shame, embarrassment, and mistrust. There are many reasons a seller can be in dire need of financial relief and it can be one of the most anxiety-producing experiences a person will go through.

When a petition for bankruptcy is filed, it triggers an Automatic Stay by the bankruptcy court which protects the debtor from their creditors. However, once in bankruptcy, the debtor is also restricted in how they manage and sell assets, including their home. Here are three ways in which a debtor in bankruptcy can sell their home.

A seller could obtain a discharge from bankruptcy, which means that they have completed or are on the way to completing the bankruptcy process and the bankruptcy court has closed their case. At that point, they are no longer under the restrictions of the bankruptcy court, and they can sell their property without needing to ask permission. Of course, this also removes the Automatic Stay so creditors can resume trying to collect on the debt.
They could ask the bankruptcy trustee to abandon the property and move it outside of the bankruptcy. Once the property is no longer a part of the bankruptcy, the debtor can sell the property without needing to have the sale terms approved. A note of caution: When the property is abandoned by the trustee and is outside of the bankruptcy, it is once again subject to creditors, and the bank could restart the foreclosure process if the debtors fall behind on payments.
They could file a motion requesting that the bankruptcy court approve their sale of the property. Under this option, the seller would list the property and ratify a contract subject to third-party approval. The settlement date must take into account the length of time to get the motion heard by the bankruptcy court and for the appeal timeframe to have expired.

A professional Realtor® is your best advocate in these types of transactions, trained with the knowledge to guide clients through the process and ready to provide resources for areas outside their scope of expertise. Keep in mind that an agent cannot offer advice outside their realm of expertise but they can recommend legal professionals to assist in transactions where title transfer may become an issue. Let an experienced McEnearney | Middleburg Real Estate | Atoka Properties Associate be your advocate and supportive guide through any major life event you face. Because it’s not about us… it’s about you.