Chapter 13 And Warranty Deed
Here's the situation: Mom and Dad's mortgage: $120,000.00 Back Property Taxes: $40,000.00 Back Property Taxes filed under Chapter 13, payable over five years. 2 years have elapsed, and all payments (mortgage, trustee, property taxes) are current. My wife and I want to buy house from Mom and Dad. We get a large home, they get bailed out. Two ways of doing it according to my research: Plan A) Mom and Dad get permission from Court to sell house. My wife and I take out a mortgage. Trustee shows up and we hand check to him. Once money is dispersed from Trustee to creditors, we have Title and Note of house and Mom and Dad are in the clear. This is the ideal way, but we would get 7% interest on mortgage. Broker says we can get 5% on a refi after the purchase, but My wife and I don't want to pay closing costs TWICE, so, .... Plan B) Mom and Dad write up a Warranty Deed relinquishing Title to My wife and I (Trustee does not know we're doing this). Mom and Dad are still on mortgage. My wife and I, with Title in hand, find a mortgage and refi while Mom and Dad call Trustee for a payoff amount. Once we get written letter of payoff amount from Trustee, we have bank send Trustee check and they can payoff Mom and Dad's mortgage. This plan would get us the prime rate interest, saving us $$ in attorney fees, interest on mortgage, and would only have to pay one closing cost. Can anyone help me see a problem with either Plan?? I'm trying to find the least expensive way of doing this without sacrificing the home. Lawyer thinks Plan B can work as long as the Trustee doesn't know about it, i.e. Lawyer won't have to file a Permission to Sell home because Plan B isn't really a sale, but a total relinquishment of asset using Warranty (or Quitclaim) Deed. My Wife and I would assume total responsibility of Title, etc. etc. If anyone can find anything wrong with this PLEASE give me direction as to what I should do. I DO NOT WANT TO LOSE THE HOUSE. I also understand Gift Tax on the part of the Grantor under Plan B; that can easily be erased using Mom and Dad's Unified Credit.
I am not a lawyer, but I think you'll find that "Plan B" (the secret transaction plan) would constitute bankruptcy fraud and is illegal. Your parents cannot secretly transfer a beneficial interest in the property while in a Chapter 13 bankruptcy. Also, what mortgage company would grant a mortgage on a property without doing a title search and finding out that the previous owners (your parents) were in bankruptcy which will remain as a cloud on the title despite the quitclaim deed. And I certainly doubt that any lawyer would tell you that such a transaction would be anything other than illegal. So, my guess is that this is just one more of a few recent posts here that are designed to invite controversy. Why not have your folks dismiss the Chapter 13 at the settlement table? This way it's a "normal" settlement and you don't have to deal with the implications of the bankruptcy at all. Have your folks speak with their bankruptcy attorney for more details
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