Another common concern surrounding bond for deed transactions is how they are treated in the event of a bankruptcy, whether filed by the seller or the buyer. The key point is this:
A properly documented bond for deed is recognized by the bankruptcy court.
If the Seller Files Bankruptcy
When a bond for deed seller files bankruptcy, the property subject to the bond for deed should not be listed as a rental property or investment property. Instead, it should be disclosed accurately as:
Property sold under a bond for deed.
This distinction is critical. The seller must clearly instruct their bankruptcy attorney to list the property accordingly when assets are disclosed. Failure to do so can create unnecessary confusion and potential issues.
In practice, bankruptcy trustees generally recognize bond for deed arrangements. Unless there is an unusually large amount of equity—which is rare and would need to be substantial enough to justify holding the property over time—the trustee typically has no practical reason to disturb the bond for deed.
As long as the buyer continues to make payments:
- The trustee may require payments to be made to the bankruptcy estate
- But the bond for deed remains in force
- Upon payoff, the buyer is entitled to receive title to the property
Prudence for the Buyer
If a bond for deed buyer learns that the seller has filed bankruptcy, it is prudent to:
- Review the bankruptcy filing
- Confirm that the property is properly disclosed as a bond for deed
- Consult with a bankruptcy attorney if necessary
This review is usually inexpensive and, in some cases, can even be done by a knowledgeable buyer by reviewing bankruptcy court records.
The key is ensuring the trustee knows the bond for deed exists and understands its nature.
If the Buyer Files Bankruptcy
If the buyer files bankruptcy, the seller’s position is similar to that of a mortgage lender.
The buyer generally has the right to:
- Reaffirm the bond for deed obligation
- Continue making payments
- Retain possession of the home
- Ultimately receive title after completing the bond for deed
If the buyer chooses not to reaffirm:
- The bond for deed obligation can be discharged
- Payments cease
- The bond for deed is effectively terminated
- Title remains with the seller (as it always has)
This mirrors what happens with a conventional mortgage when a borrower surrenders the property in bankruptcy.
The Bottom Line
Bankruptcy courts do recognize bond for deed transactions, and both buyers and sellers are protected—provided the bond for deed is properly disclosed and recorded.
The trustee must understand:
- That the property was sold under a bond for deed
- That it is not a rental or speculative investment
- That the buyer holds the right to obtain ownership as long as the Bond for Deed is paid
With proper disclosure and continued payment:
- Buyers can keep their homes and eventually take title
- Sellers’ interests are preserved
- The bond for deed survives bankruptcy just as a mortgage would
As with many aspects of a bond for deed, the protection exists—but it requires accuracy, diligence, and proper documentation.
