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Bankruptcy dismissed, gift of equity
I have a client who has been residing in her mother’s home. She was living there when her mother passed away in 2019, the property is still in her mother’s name. my client filed for bankruptcy, but it was dismissed due to non-payment.
Now, the property is facing foreclosure. Since it was not included in the bankruptcy and the case has been dismissed, we believe that court approval should not be necessary for the transfer, of her Mom’s home. We are currently waiting on the title commitment, but the general consensus is that she should be able to retain any funds unless any judgments arise.
To facilitate the process, we will be executing an heirship affidavit to transfer the deed. Given that the property was inherited, we anticipate that the chain of title transfer will not present any issues.
Additionally, we are considering a gift of equity since the property is valued significantly higher than the outstanding mortgage. There is enough equity to gift 20% and cover all closing costs. However, we are also weighing the option of selling for a lower price without the gift, which would only involve a 3.50% down payment. What would be the most effective approach to keep monthly payments more affordable in this scenario?
There are many moving parts in this situation, and I want to ensure we are making the best decisions without overthinking the process.
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5 Replies
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To find the best ways to keep monthly mortgage payments manageable for your client, consider these factors: the property is in her deceased mother’s name, is being placed into foreclosure, and your client inherited it while going through a bankruptcy that was dismissed. The strategy involves conveying title through an heirship affidavit, and you’re considering two alternatives—a gift of equity or a sale at reduced price with a 3.5% down payment. The objective is to have your client’s name on the property, halt foreclosure, and make reduced payments, all while preventing unnecessary complications. In the following paragraphs, I analyze the case and my recommendations.
The property, still registered in your client’s mother’s name (who died in 2019), is at risk of foreclosure because of an outstanding mortgage. Your client, who has lived there since before her mother’s death, declared bankruptcy, which was dismissed due to non-payment and didn’t include the property in the bankruptcy estate. This dismissal likely indicates that no court approval is needed for the transfer, assuming the title commitment does not contradict. An heirship affidavit will be executed to transfer the deed to your client, presuming she is the sole heir without title complications such as liens or other potential heirs. The property’s value greatly exceeds the mortgage balance, which provides sufficient equity to make a gift of 20% and cover closing costs. You’re contemplating whether to reduce the loan amount using the equity or list the property to sell it for a lower price with a minimal 3.5% down payment, which suggests an FHA loan.
This option offers a unique 20% equity gift approach when selling or transferring a property to your client. Take, for example, the property worth $300,000. There is an existing mortgage of $150,000 on the property. A 20% equity gift amounts to $60,000, which reduces the selling price of the property to $240,000. Your client will obtain a new mortgage to pay off the existing loan and the closing costs (for instance, $6,000), which puts the loan at approximately $186,000. At a 6.5% interest rate over 30 years, your client would owe $1,175 monthly on the mortgage for principal and interest; adding $375 for taxes and insurance comes to around $1,550. Since the loan-to-value ratio is below the 80% threshold, no private mortgage insurance would be needed, lowering expenses. Out-of-pocket cash expenses required upfront are minimal (around $500-$1,000 for legal or appraisal work), because the equity gift takes care of the closing costs and all the later expenses. This method is effective for reducing payments and helping preserve cash reserves; however, it does depend on lender approval for the Gift and affidavit of the heirship, and your client’s credit (after bankruptcy) has to qualify for a conventional loan.
Alternatively, consider selling the property to your client for a lower price of $240,000. A 3.5% downpayment ($8,400) applies here, and an FHA would likely be used. Paying off the $150,000 mortgage + closing costs would mean the loan amount is roughly $237,600. The monthly payment at 6.0% interest for 30 years would be $1,425 with an additional $168 for PMI (also required for FHA loans) and $375 in taxes and insurance, meaning a total of $1,968 monthly. The out-of-pocket cash required upfront is rather high ($8,400–$10,400, including closing costs), which strains your client’s finances. Although FHA loans tend to have lower credit score requirements, the increased loan amount, coupled with PMI, raises the monthly payment significantly. PMI also does not fall off for quite some time, meaning more long-term debt.
The Gift of equity adds to affordability by eliminating cash need and reducing monthly payments by $418 ($1,550 vs $1,968). Given the client’s post-bankruptcy financial situation, these factors are critical. The Gift of equity also avoids PMI, adding a savings of $50–168 a month, and builds a greater equity stake for future stability. However, several factors must align: confirmation by title commitment of no liens or additional heirs, your client qualifying for a loan (preferably conventional, or FHA with weak credit), and the foreclosure timeline must allow time to close. If your client is the sole heir, the heirship affidavit should not be complex; however, the lender might examine the title of the inherited property closely. Legally, the dismissed bankruptcy should not impose barriers. Still, your client’s credit score (which has been negatively impacted since 2019) could restrict loan conditions, posing a requirement of 580 for FHA loans or 620-640 for conventional.
The urgency of the foreclosure process (e.g., 120–200 days for judicial foreclosure) also varies by state. The mortgage servicer should be contacted to confirm the payoff amount and discuss any delays, such as forbearance, that would buy time. Issues with the title, such as creditor liens or undisclosed heirs, could delay the transfer. Expedite the title commitment review and bring an attorney to address these issues. A gift of equity might warrant filing a gift tax return if it exceeds $18,000 (2025 exclusion), but clients typically incur no taxes. Reassessment of property taxes reassessment is a risk in some states upon deed transfer, in some states, so local rules (e.g., parent-child exemptions) should be checked to avoid payment increases. Property taxes may spike unexpectedly. Another option is refinancing the existing post-transfer mortgage. Still, lenders may be reluctant to approve this, given the foreclosure and inherited status.
To capture the Gift of equity, first examine the title commitment to check for a properly ordered chain of title. Afterwards, about the partition covering, file the heirship affidavit, with caption “In the Matter of the Estate of John Doe”, to transfer the deed, making certain the lender will accept. Apply for a conventional loan of about one hundred eighty-six thousand dollars with a gift of equity letter, an FHA loan if credit is an issue, including the affidavit, death certificate, and appraisal. Work with the current lender to stop foreclosure by paying the current mortgage balance. Lastly, consult with a tax lawyer to estimate reporting on gift tax and property tax obligations. As for the hurdles of equipping Gift of equity spell out (if rejected by the lender, or having bad credit), switch to an FHA loan version pegged at the lower sale price while ensuring your client can afford the $8,400 down payment coupled with an estimated higher payment of $1,968. Either way, act first to delay foreclosure, hire a real estate attorney and a mortgage broker to expedite matters.
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Title company provided title. All on heirship easy. But said have to have court approval on bankruptcy. As it was done in 2024. I Said it was dismissed they asked for social. So waiting ,could be that is a huge problem,
I would not think they would allow a gift of equity?
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This reply was modified 3 weeks ago by Rhonda.
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You are trying to complete a real estate deal that includes a title company, heirship, a prior bankruptcy, and perhaps a gift of equity. I want to break this down further to give you clarity and reasoning from your information.
Title Company and Heirship:
- Per your statement, the title company gave the title and said, “All on heirship is easy.”
- The title is likely clear concerning heirs, probably using an affidavit of heirship, where legal documents simplify granting property ownership after someone’s death.
- If heirship is straightforward, it indicates that the title company has all necessary documents proving ownership, which is a step towards a positive resolution.
Bankruptcy and Court Approval:
- The title company said they need court approval because of a bankruptcy filed in 2024.
- You also noted that the bankruptcy was dismissed.
- But, for some reason, they still asked for a Social Security number to confirm the bankruptcy status or check for any remaining liens or restrictions.
- In most cases, a dismissed bankruptcy indicates the case was shut down without granting a discharge or finishing a repayment plan.
In any case, title companies are wary because:
- Filing for bankruptcy may invoke an “automatic stay,” which temporarily halts creditors from liquidating certain assets.
- The title company must ensure that this stay is not in place.
- Even a dismissed bankruptcy may leave unresolved claims or encumbrances against a piece of real property that the title company has to settle to issue a clean title.
Action Steps:
- Can you provide the title company with evidence supporting the claim that the bankruptcy was indeed dismissed (for example, a court order or notice of dismissal issued by the bankruptcy court)?
- Such documents can be accessed through the specified court or provided by your lawyer.
- Make them clarify the reasons for court approval.
- Have the title company explain whether they are worried about a particular lien, an involved creditor claim, or some other restriction related to the bankruptcy.
- Do not give out sensitive information like your Social Security number unless you trust that the title company has a credible system.
- Inquire how they intend to use this information (again, whether to pull a bankruptcy report or check for liens) and request that their purposes be limited.
Waiting as a Problem:
- As part of your workflow, you noted that waiting has an opportunity cost, possibly because of an overdue transaction, sale, refinance, or closing deadline.
- Title clearance delays can pose risks to many deals, particularly where financing or buyers are involved.
Action Steps:
- Can you illustrate the urgency by asking the title company when their bankruptcy verification timeline is expected to be completed?
- If the delay is due to court approval, call the bankruptcy court (or have your attorney do so) to dismiss pending matters so they can forward the approval of the dismissal without any pending matters to expedite confirmation.
- If a borrower or lender is involved in the transaction, apprise them of the delay and provide periodic updates so they can trust you.
Gift of Equity:
- You indicated concern about the title company permitting a gift of equity where a seller (usually a relative) sells a property for less than its market value, with the difference counted as a gift.
- This practice is used to ease financing or down payment considerations in family purchases.
Possible Reasons for the Title Company’s Hesitation:
Bankruptcy Issues:
- If the property was included in the bankruptcy estate, then gifting equity may be seen as a suspiciously purposive attempt to transfer assets improperly.
- Even if a bankruptcy has been dismissed, the title company might still need some proof that the gift does not violate bankruptcy court rules.
Restrictions from the Lender:
- If the buyer obtains financing, the lender could have very strict guidelines regarding gift of equity transactions that may require appraisals, gift letters, or proof that the transaction is legitimate.
Insurance of Title:
- The title company may be worried about insuring a title that uses a below-market sale as a base, which could invite future disputes (creditor disputes, heir disputes, etc.).
Recommended Actions:
- Please verify with the title company why they are hesitant about a gift of equity and whether it relates to the bankruptcy, lender requirements, or anything else.
If gifting equity is pursued, include evidence such as:
- A gift letter where the seller states that the equity is a gift and not a loan.
- An appraisal supporting the property’s market and gift values.
- Seek confirmation from a bankruptcy attorney regarding the proof of bankruptcy dismissal and its relation to the transaction.
- If the gift of equity cannot be utilized, consider other options, such as modifying the sale price or structuring it as a cash gift from the seller to the buyer post-closing (subject to lender rules).
General Recommendations:
Work with Professionals:
- Assign a real estate lawyer to address the title concerns about the bankruptcy Gift of Equity.
- A title company representative or escrow officer can assist if no attorney is available.
- However, these professionals do not have strong legal decision-making powers.
Verify Bankruptcy Status:
- Track the bankruptcy case using the PACER system (Public Access to Court Electronic Records) or through the court clerk. This can verify dismissal and any ongoing conditions.
Stay Proactive:
- Take note of the set timelines and follow through with the title company to avoid undue holdups.
- If a lender is involved in the transaction, ensure alignment with the title company’s stipulations to avoid issues that require last-minute solutions.
Potential Challenges:
- The title company may insist on a court order or lien release if the bankruptcy dismissal is not properly documented or if creditors have placed claims on the property.
- You may have to restructure the transaction if the equity gift is disallowed.
- For example, you could sell the property at market value or assist the buyer differently.
- If the bankruptcy issue is unresolved, resolve it first, since it might incur financial penalties, lost buyers, or missed opportunities.
- I can provide more detailed guidance if you provide more details, such as the type of bankruptcy (Chapter 7 or 13), where the court is, what the transaction is (sale, refinance, etc.), or what exactly the title company is concerned with.
- Also, if you want me to look up current information, like title company practices or procedures in bankruptcy courts, or if you have documents needing analysis, ask!
For now, concentrate on obtaining the bankruptcy dismissal documents and fulfilling the title company’s requirements while clarifying them. If waiting too long becomes an issue, consider proposing discussions for temporary solutions to all parties, like extending deadlines or providing temporary financing.
You are working on a multifaceted real estate deal that includes a title company, a 2024 dismissed bankruptcy, and possible issues concerning a gift of equity. Within what has been given, it seems probable that the title company requires the court to verify that the dismissed bankruptcy does not impose any claims on the property that could halt or stall the transaction. Some research papers indicate that a gift of equity is possible after a bankruptcy discharge. Still, the title company might need more documents because of your credit history. In this case, it is best to submit the bankruptcy dismissal order alongside the gift of equity documents and try to hire a real estate lawyer to speed things up.
The title company has verified that the title is clear, and the heirship process is simple, meaning there are no problems concerning inherited ownership. Regardless of the case being dismissed, they still need court permission for the 2024 bankruptcy and ask for your Social Security number, which will likely confirm the bankruptcy or look for unresolved liens. A dismissed bankruptcy frequently suggests the case was closed without a discharge, but title companies are still very cautious. They want to ensure no creditors have claims on the property or that the case was closed properly. To fix this, get the bankruptcy dismissal order from the court, which can be obtained through the U.S. Bankruptcy Court’s PACER system or by calling the clerk, and bring it to the title company. Also, answer everything to their specific questions, including, but not limited to, liens or how the case was dismissed, so they can answer as many questions as possible. Be careful when giving out your Social Security number and granting the title company an explanation for their inquiries, like running bankruptcy reports or something else.
You mentioned that waiting could be a major problem. Perhaps it was due to a sale or refinance. Title clearance delays can be problematic when buyers or lenders are involved. To help with this, please convey the importance of the matter to the title company and ask them to give the approval verification schedule. If court consent is needed, please collaborate with an attorney who facilitates communication with the bankruptcy court, so there is no delay. Frequent communication with all the stakeholders, buyers, or lenders, fosters trust, prevents loss of goodwill, and minimizes regulatory penalties.
Concerning the gift of equity, where a property sale happens at a discounted price and the difference is classified as a gift, you have some reservations about its approval. Given the history of bankruptcy, this skepticism is understandable because title companies might be concerned with possible improper transfers of assets or unresolved claims against the property. Still, research proves that gifts of equity are rather frequent, especially within families, and are accepted as down payment or closing costs on loans as long as some criteria are satisfied. You will have to prove that the gift is unconditional by providing a notarized letter stating the transaction involved a transfer devoid of obligations, an appraisal to confirm the property’s market value, and evidence that the dismissal of bankruptcy allows for this type of transaction. While it is true that the title company may be more conservative because of the bankruptcy, it is still achievable as long as there is adequate evidence. If the gift of equity is prohibited, other options like offering to sell the property at the full price or offering limited funds after closing, but only incurring expenses deemed appropriate by the lender and title company, can be explored.
Be proactive to resolve this issue. Step one is to issue the bankruptcy dismissal order so the title company’s “need for court approval” is satisfied. Step two is to ask the title company to clear up their issues so you can prepare the gift of equity documentation and the necessary gift letter and appraisal. Step three is to consider hiring a real estate lawyer so the rest of the work will be done on the requirements and communication with the bankruptcy court, because it is quite detailed. This would be better done by a lawyer to make things compliant, and in doing so, will make things faster than needed. Suppose there are unresolved bankruptcy claims or restrictions on the gift of equity. In that case, the transaction will need to be changed, and other financial arrangements will need to be made. Suppose you do not delay matters and get professional help. In that case, you can address the title company’s concerns and get closer to a successful closing.
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This reply was modified 3 weeks ago by
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Thank you , Client 1 is daughter’s childhood friend. Helped her save home in past, doing modification. This time cousin that resides with her, because she is on time sensitive matter. My suggestion is sell to him, payment now is 1,100 on a 70,000 payoff. Without any other fees involved, to keep payment lower than current. As property has double taxes due to non homestead and lender place insurance. Which insurance will be higher .
Client 2 cousin which is buyer, 650 credit score on job 10 plus years. Pricing will not be good , so that is why my thinking keep sales price higher , gifting and paying cost.
In past when I done this type of sell, I set up to go fha. Just so I can use appraisal and transfer to conventional. It is easier to pay a coc and not pay double for appraisal. Just pay to have it updated .
I’m doing a TBD with UWM , waiting on title to come back. Just needed to make sure my thinking was right. Which you clarified. I just need to talk my way thru sometimes. Which is why i decided, I would just do it here. I just hate that computer crap stuff
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Let us review your worries while we are on the insurance issue and justify your reasoning for Client 1 and Client 2’s cousin.
Client 1: Insurance Cost Comparison
- You highlighted that the property suffers from double taxation as a non-homestead.
- Also, the lender is placing insurance, which means force-placed insurance (lender-placed insurance) is currently in effect.
- You’re relating this to what the cousin (the buyer) would obtain once they purchase the property.
Force-Placed Insurance:
- This tends to be overpriced, as lenders require the borrower to have sufficient coverage to ensure their interest in the property.
- It can cost between $2,000 and $5,000 annually (or higher), depending on the property’s value, location, and coverage needed.
- It is commonly billed every month and integrated with the loan payment, increasing the overall expense.
- A $70,000 charge-off will likely incur high force-placed insurance due to the non-homestead status and higher perceived risk.
Buyer’s Insurance (Homeowners Insurance):
- Should the cousin buy the property, their homeowner’s insurance premium will almost certainly be lower than if they did not purchase the house.
- For a $70,000 property, an average homeowner’s insurance policy will cost anywhere between $800 and $1500 per year.
- This will depend on the geographical area, the condition of the property, and the buyer’s credit history.
- With a 650 credit score, the cousin will lean towards higher premiums but still be under for insurance costs compared to other policies.
Answer:
- The force-placed insurance (current lender-placed) will be higher than the homeowner’s insurance the cousin would obtain after purchasing.
Client 2’s Cousin: Strategy Sales Approach and Funding
- Selling to the cousin with a 650 credit score, higher than his, and gifting equity while paying the costs is a reasonable approach.
- Let us quickly validate your approach.
Credit Score and Pricing:
- A credit score of 650 is low on the FHA range and does not qualify for good pricing on mortgage products.
- You’ve used FHA loans, which are more forgiving (580 minimum with 3.5% down).
- Your plan of starting with FHA, leveraging an appraisal, and converting to conventional later is intelligent.
- This way, he does not incur the full appraisal cost of a second full appraisal, which is only an update appraisal of 150 to 300 dollars instead of the 500 to 800 for a new one.
Higher Sales Price and Gifting:
- One way to help buyers qualify is to set a higher sale price, gift equities, or pay closing costs.
- This approach streamlines the method for buyers who want to reduce their out-of-pocket payments.
- Say the property’s market value is $80,000. If you sell it for $90,000 but gift $10,000 back, the buyer’s loan amount is easily manageable, and their costs are covered.
- Just be certain the appraisal meets the sales price. FHA and conventional loans will not allow the LTV ratio to diverge from the appraised value.
TBD with UWM:
- Doing a TBD approval with United Wholesale Mortgage helps the buyer get pre-approved.
- At the same time, the title report is being ordered.
- You may lock in terms and proceed once the title comes back clean.
- Your intuition to check here is correct, particularly while the title is pending.
Additional Notes
Double Taxes (Non-Homestead):
- The non-homestead tax issue is a primary cost driver for Client 1.
- Assuming the cousin purchases the property and claims it as their primary residence, they could apply for a homestead exemption.
- If your state allows it, this could significantly reduce property taxes by 20–50%.
- This addresses your suggestion to sell now.
Payment Structure:
You mentioned a $1,100 payment.
System:
- You cut off mid-sentence with “You mentioned a $1,100 payment on a $.”
- I assume you would discuss the payment structure for Client 1’s sale to the cousin.
- I will complete the answer presuming you’re talking about the $1,100 payment as the cousin’s proposed mortgage payment on a $70,000 payoff and trying to keep it below the current payment.
- If that is not how you were thinking, please clarify.
Completing The Payment Structure Point
- You stated that the cousin’s payment would be $1,100 on a $70,000 payoff with no additional fees and that it should be kept below the current payment. Let’s validate this.
Current Payment:
- The payment most likely covers the principal and interest of the $70,000 loan (P&I), doubled escrow for non-homestead taxes, and force-placed insurance.
- A fully amortized 30-year fixed loan at 6% interest would have P&I of approximately $420/month.
- Non-homestead taxes could add anywhere from $200 to $400/month (depending on the tax rate, property value, and market insurance rates).
- Force-placed insurance could add $200 to $400/month.
- This puts the total payment around or can exceed $820 to $1,220/month.
Proposed Payment ($1,100):
- For the cousin, if we take a $70,000 loan with full payoff financed and a 7% interest rate (realistic for a 650 credit score on FHA), a 30-year term gives P&I of ~$465/month.
- Standard homeowner’s insurance of $100 to $125/month and taxes, assuming homestead, would (say $150 to $250/month) add $250 to $375/month in escrow.
- Total payment then comes to $715 to $840/month.
- Even without the homestead exemption, taxes would keep the total under $1,100.
- Your aim of maintaining the cousin’s payment at $1,100 or less than the current payment can be attained, particularly if the homestead exemption applies or if the loan is tailored so that escrow costs are minimal.
- Staying within $1,100 without additional fees (e.g., closing costs, which you cover) further strengthens this goal.
Summary
Insurance:
- The force-placed insurance is considerably more expensive than a homeowner would pay for homeowners’ insurance.
- The anticipated costs are $2,000–$5,000/year for force-placed, compared to $800–$1,500/year for homeowner’s insurance.
Sale Strategy:
- Your cousin-seller strategy works well, whereby the cousin pays him back through a higher sales price with gifting while he absorbs costs.
- Starting with FHA and switching to conventional later to save on appraisal costs is a good way to streamline things.
Financing:
- The TBD with UWM while waiting on the title is a good idea.
- Meeting the $1,100 payment objective is achievable. It may be lower than current payments, especially with post-sale tax and insurance reductions.
Taxes:
- Suggest the cousin apply for a homestead exemption to encourage lower taxes, which would, in turn, increase the deal’s affordability.
- You have an idea about what to do.
- It appears as though your thought process has had a little ‘shared ideas’ moment and self-created epiphany, and you are maneuvering through the intricacies pretty well, even if you brood over the “computer crap stuff.”
- If you need more precise details, such as tax estimation, loan terms, or what happens after title returns, reach out!