Disclosure of Bankruptcy

QUESTION: I signed a listing agreement with a seller who told me that the sale price of his property might not be sufficient to pay all of the outstanding liens. I disclosed this  information in the MLS listing. Now, two months later, I have learned that my client has filed a bankruptcy petition. Is this a material fact that I should disclose, either in the  remarks section of the MLS listing, or to potential purchasers of the home?

ANSWER: Under North Carolina’s license law, and the REALTOR Code of Ethics, a listing agent is required to disclose material facts concerning the listed property and facts  that relate directly to the ability of the seller to complete a transaction. However, in addition to this duty of disclosure, the fiduciary relationship between an agent and his  principal imposes a duty on the agent NOT to disclose certain confidential information concerning the principal without the consent of the principal.

The first thing to know is that a bankruptcy filing is a public record. Under the circumstances, the fact of a bankruptcy filing is not confidential information, and disclosure does  not require your client’s consent.

The second thing to know is that not all bankruptcy filings are the same. In some circumstances, the filing causes control of the bankrupt party’s assets, including your listed  property, to be transferred to a Bankruptcy Trustee. In those circumstances, the loss of control could impact the ability of your client to complete a sale, and disclosure will be  required. Therefore, once you learn of a bankruptcy filing, you should determine whether a Trustee has been appointed. If so, you should contact the Trustee yourself and ask whether any sale is subject to his approval. If so, disclosure of the bankruptcy filing is required.

Even when a material fact must be disclosed, you should keep in mind that you are not required to advertise that fact to the entire world. This means that the fact of a  bankruptcy filing does not have to be disclosed in your MLS listing. The North Carolina Real Estate Commission takes the position that disclosure must occur at a “meaningful time”. We suggest that disclosure of a bankruptcy filing occur once a prospective purchaser has expressed interest in the listed property, but before that purchaser has  changed his position by making an offer, or by incurring due diligence costs.