If you’re going to do short sales, you’ll need to know a little about bankruptcy – or at least about how it relates to foreclosures. Chances are, you’re going to run into a homeowner who has heard a thing or two and wants to talk about it.

The first thing you need to tell them is that you can’t help them with the bankruptcy itself. That’s not why you’re there. You could be accused of practicing law without a license; if you’re not an attorney, don’t give legal advice.

This is about learning the difference between what a bankruptcy can and can’t do for a homeowner in foreclosure. You don’t have to become a bankruptcy expert, but you should learn just enough about a few key terms that you can be a part of the conversation if it comes up. When you can relate those terms to the foreclosure process, you will be better equipped to help homeowners explore their options and decide if they want to speak with a bankruptcy attorney.

Bankruptcy Stay: A judge can order a stay to freeze the progress of the foreclosure. It doesn’t prevent the foreclosure from ever happening, but it does prevent the lender from taking further action for a while – even an hour before the sheriff’s sale. This has the effect of giving the homeowner more time to work things out.

Relief of Stay: A lender may respond to a bankruptcy stay on the foreclosure process by filing a motion for relief of stay, or to reverse the original stay order from the judge. If the lender can convince the judge that there is a good reason to proceed, the motion may be granted.

A lender may ask the court to allow the foreclosure to proceed for one of two reasons. One is a lack of equity. If the homeowner owes more than the house is worth, there is no way the bankruptcy court will be interested in what happens to the house. The homeowner won’t gain anything from the sale to give to other creditors. The second reason has to do with the homeowner’s compliance with the court. If the person has been ordered to begin making payments and hasn’t kept up with the program, the judge may not feel like they deserve to keep the house.

Abandoned Asset: An asset is said to be abandoned after it loses its market value. In bankruptcy court, this includes a house with negative equity because no other creditor besides its lienholder could gain from its sale.

Bankruptcy Discharge: The court discharges all debts in a Chapter 7 or a Chapter 13 bankruptcy after all procedures have been followed. A discharge tells future creditors that the borrower is no longer legally responsible for those debts.

Bankruptcy Dismissal: Most frequently used in a Chapter 13 bankruptcy, the term “dismissal” means that the individual has lost the ability to file bankruptcy papers and have his debts discharged. The court dismisses a bankruptcy when the individual fails to comply with either the court’s request for paperwork or the trustee’s payment plan. The legislative reforms that became effective in October 2005 limited an individual’s ability to refile bankruptcy in the event of a dismissal.

When you work with homeowners who are in default on their mortgage, there’s a good chance you will talk to someone who is considering bankruptcy to end their financial problems. Be prepared. Talk to one of the real estate professionals at Strategic Real Estate Coach about handling that conversation. The more you know about bankruptcy, the more you will be able to help a homeowner think through each of his options.

Educate yourself as much as possible about the concerns a homeowner might have regarding bankruptcy and foreclosure. Make sure the homeowner is aware of one thing, though. A judge’s stay on the foreclosure proceedings is only temporary. The only way to completely avoid foreclosure is to work something out with the bank before the auction.

Need to know more about helping homeowners in default on their mortgage? Visit the Strategic Real Estate Coach website, and check out our free report about the new Real Estate Rebel. Challenge yourself to follow our ethical, proven strategies for growing your real estate business beyond your wildest dreams!