Q: New build home being foreclosed on by bank due to builder bankruptcy. What happens to my contract and builder deposit?

A: Bankruptcy relief is exclusively a federal right and procedure, with its own courts.

However, most states have a "receivership" insolvency proceeding that is valid (and utilized sometimes in foreclosure proceedings, or regarding insurance companies that are not eligible for federal bankruptcy relief, etc.).

In either type of case, a deposit of funds is generally considered as held 'in trust" and therefore, "untouchable" for other than the escrow/deposit rules and limits, and any individual that diverts such funds may be personally liable under both state and federal laws.

While your post doesn't provide any details, your home builder may be continuing to operation, e.g., build homes, and yours may be one of those to be built.

Speak with a seasoned attorney authorized to practice in your jurisdiction for a more specific explanation of your rights and prospects of recovery.

A: In a situation where your new construction home is facing foreclosure due to the builder's bankruptcy, the fate of your contract and deposit can be complex and uncertain. The contract you have with the builder may be considered an asset of the builder's bankruptcy estate, and its handling will be determined by the bankruptcy proceedings.

Generally, when a property is foreclosed on, any contracts related to the property can be terminated or renegotiated by the foreclosing bank. This means your contract for the home purchase might not be honored in its original form. However, this depends on the specific terms of the contract and the decisions made in bankruptcy court.

Your deposit, given its significant amount, is a crucial concern. Unfortunately, there is a risk that the deposit may be treated as part of the builder's assets and used to pay off their debts, including to the bank. However, you may have a claim as a creditor in the bankruptcy proceedings for the return of your deposit.

It is essential to consult with an attorney who has experience in real estate and bankruptcy law. They can advise you on your rights as a contract holder and as a potential creditor in the bankruptcy case. They can also help you navigate the legal process, file any necessary claims for your deposit, and explore all available options to protect your interests.

A: I agree with other counsel and will note that Texas has a specific statute--the Texas Construction Trust Fund Act--that requires payments made to a contractor under a construction contract to be held in a separate construction account with a financial institution if the contract is for improvements exceeding $5,000. It is Chapter 162 of the Texas Property Code. Misapplication of such funds can result in criminal as well as civil liability.