Bankrupt builder starts dominoes falling

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Dear Steve,
Our new home is near completion, but we just found out the builder went bankrupt! Now, they want us to close ASAP. What are the things we need to add to our contract to protect ourselves?
— Soumya

Dear Soumya,
This is happening all over the country. I hate to sound the alarm bell, but you need to find a real estate attorney and quickly, before you even consider closing. There are several worries here, including the very real possibility that your down payment may be in jeopardy or at least be tied up in a protracted bankruptcy case where you’d become just another on a long list of creditors. Know there’s also a chance you could end up wrangling with the lender that holds the builder’s note.

Another concern is whether the builder paid the subcontractors in full. If not, that could put you on the hook for added expenses. In this recession, it hasn’t been uncommon for struggling builders to use a new customers’ money to cover bills on other properties, often at the expense of those “subs.” The uncompensated subcontractors would then put a lien on that unsuspecting new customer’s home.

Moreover, since the builder has gone bankrupt, your home may no longer be insured! Normally, the builder has insurance to cover incomplete homes, but insolvent builders may let it lapse. Hence, your nearly complete home may be bereft of any coverage whatsoever. Better get to the bottom of that quickly.

Also in jeopardy is any home warranty that may be negotiated with the builder and inserted into the contract before closing. In a worst-case scenario in a builder bankruptcy, warranties are typically honored only if they’ve been purchased through a third-party warranty company.

As you can see, it may be difficult or at least unwise for you to move ahead until these issues get settled. While it’s true that most builder contracts at least lightly cover such bankruptcy contingencies, albeit with a scale that tips in the builder’s favor, all bets are off in many bankruptcy cases.

Your lawyer will need to scour the contract for terms such as “breach,” “remedies” and “arbitration clause” to see what your legal rights are. There are also some minimal protections by law for customer-deposited, down-payment funds.

But either way, you’re going to need prompt legal representation. Good luck.