This bankruptcy case (Burke, Dylan; In re) is a perfect example of the type of misunderstanding that can occur when there isn't a written contract for a verbal agreement and no attorney involved to make sure all parties are on the same page. A bankruptcy court denied a plaintiff's adversarial proceeding claiming that her claim was excepted from a discharge in bankruptcy.
The details of the Chapter 7 Bankruptcy case:
In 2002, the debtor thought he was helping out his future mother-in-law when he agreed to buy her home to save it from foreclosure.
Problem number one, it is probably not a wise idea to take up offers from others to buy your home and "save" it from foreclosure. We've talked about this type of scam in previous blogs. I'm not saying that this debtor was a scammer; but usually these types of arrangements are foreclosure scams. Bankruptcy is one of the few ways that a homeowner can save their home from foreclosure.
She thought she was helping out her future son-in-law when she agreed to sell the house to him for $100,000 when it was worth $190,000. She also thought that she received the right to remain in the house rent-free for the rest of her life as part of the deal.
How would she enforce this? No contract, no power to enforce or even prove that there was such an agreement.
For two years, the debtor, his girlfriend, and her mother lived in the house with the debtor paying the mortgage and household expenses. Then, the debtor's girlfriend became romantically involved with another man. The debtor moved out, but kept making the mortgage payments for a few months. Then, the girlfriend's mother paid "rent" to the debtor equal to the amount of the mortgage payments. The debtor suggested that the house be sold to pay off the debt against it. He also suggested selling the property to the daughter for the amount of the debt. Eventually, the mother obtained a default judg¬ment against the debtor for $55,600 - the amount of the rent payments. After the debtor filed for bankruptcy, she filed an adversary action against him claiming that the judgment was nondischargeable pursuant to Section 523(a)(4) or (a)(6).
Well, the bankruptcy court did discharge this $55,600 judgment against the debtor and ruled that the debtor did not act maliciously or fraudulently. I'm not sure what happened to the actual property in this bankruptcy case; but there is the potential for a lot of things to go wrong for both parties.
If you are facing foreclosure , do not sell your home at "basement bargain prices" and expect free rent for life. Even if this is the intention of the person buying the house ( it is highly unlikely) it is not the most probable outcome of that type of arrangement. When you are facing a foreclosure, speak with a bankruptcy attorney first to find out what your options are, or you could end up like the "former" homeowner in this bankruptcy case.