(When your earnest money is in escrow and you already paid for inspection + appraisal)

You were this close.

The inspection is done. The appraisal came back. You’ve already mentally arranged furniture that you don’t even own yet. Then you get the message that turns your homebuying dream into a courtroom subplot: the seller filed for bankruptcy.

This is the moment where a lot of middle-class buyers get hurt—not because they did something reckless, but because they assume real estate is still running on normal rules.

It’s not.

The good news: you have rights. The bad news: you have to act fast and protect your money—because bankruptcy doesn’t care how “close” you were to closing.

Let’s break it down in plain English.

The first rule: bankruptcy triggers a legal freeze

When the seller files bankruptcy, an automatic stay usually kicks in. Think of it as a federal “pause button” that stops most actions that affect the debtor’s property or contracts until the bankruptcy court allows the next step.

That’s why your closing can’t just slide forward like it’s a normal delay. Even if the seller still wants to sell and you still want to buy, the process is now supervised.

So your first move is not arguing with the agent or “waiting for an update.” Your first move is protecting your money and forcing clarity.

Your contract becomes a bankruptcy decision: assume or reject

Most home sale contracts are treated in bankruptcy like an executory contract—meaning both sides still owe important performance (the seller must deliver clean title; you must bring funds and close).

Bankruptcy allows the trustee (or the debtor, depending on the chapter) to decide whether to:

• Assume the contract (move forward with the sale), or
• Reject the contract (walk away; legally treated like a breach)

This is the hard truth: you’re no longer waiting on a seller who’s “being slow.” You’re waiting on a bankruptcy-controlled decision. That’s why timelines get foggy and why you need a plan that doesn’t depend on optimism.

The real spine of this situation: where your money is sitting

Buyers fixate on one question: “Will I get my earnest money back?”

The more useful question is: Where is your money right now, and who controls it? Because bankruptcy is largely a fight over control and priority.

Side-by-side: where the money is and what it usually means

Earnest money: “protected” doesn’t mean “released quickly”

If your earnest money is truly sitting in escrow with a neutral holder, that’s usually better than money you handed directly to the seller.

But don’t confuse “better” with “easy.”

Most escrow/title companies do not want to guess who gets the money when bankruptcy appears. They typically hold the deposit until one of two things happens:

1. Everyone with authority signs written release instructions, or
2. The bankruptcy court issues an order that clearly authorizes what happens next.

So yes, escrow can be your shield—but it can still turn into a holding pattern if the seller’s side can’t (or won’t) sign, or if authority has shifted to a trustee.

Chapter 7 vs 11 vs 13: why the bankruptcy type changes your timeline

Not all bankruptcies move the same. The chapter tells you who’s driving and what the court’s priorities are.

Side-by-side: what the chapter usually means for a buyer

The important part isn’t memorizing bankruptcy chapters. It’s understanding that the seller may no longer be the final decision-maker—even if they want the sale to happen.

Two paths: fight to close vs protect your cash and exit cleanly

Once bankruptcy is filed, you need to choose a strategy. Not emotionally—strategically.

Path A: You still want the house (and you can tolerate the delay)

If you stay in the deal, your goal becomes: get the sale approved the right way so you don’t end up with title problems later.

In many cases, the sale requires bankruptcy court approval—especially if the court needs to bless the transfer and deal with liens/claims.

That approval process is the difference between a clean closing and a future headache. Title insurance companies typically want to see the proper bankruptcy order before they’ll insure the transaction.

Path B: You want out (and you want your deposit protected)

If you want out, your goal is to terminate cleanly under your contract and push for escrow release through the safest channel available. If there’s disagreement or uncertainty about authority, a court order may be the only clean way to get the escrow holder comfortable releasing funds.

And if you end up having to pursue certain amounts as a creditor, that becomes a bankruptcy claim process, not a normal real estate dispute.

Side-by-side: stay-and-close vs exit-and-recover

Inspection + appraisal: the sunk-cost reality, handled the smart way

This is the part no one likes to talk about because it feels like money thrown into a fire.

Inspection: If the inspection has already happened, the fee is usually earned. You typically won’t get it back. But don’t dismiss the report as “wasted.” That report is leverage. If you end up buying later—whether through the same deal revived or through a court-approved sale—you’ll be negotiating with more information than the next buyer.

Appraisal: Same story. If the appraisal is completed, the fee is usually earned. But you should still request the appraisal copy and keep it. It can help you evaluate whether the price was inflated, whether the lender’s underwriting was reasonable, and what your negotiating posture should be if the deal comes back to life.

The action plan: first 24 hours, first 72 hours, first week

You don’t need a 40-step checklist. You need a sequence that protects you.

First 24 hours: stop the bleeding and get the facts

Do three things immediately, in writing where possible:

• Get the bankruptcy case number, chapter, and the name/contact for the seller’s bankruptcy attorney (and trustee, if one exists).
• Tell the escrow/title company: you need written guidance on escrow handling and what authority they require for release.
• Tell your lender: bankruptcy has been filed, and you need your rate lock options and potential extension costs documented.

First 72 hours: choose a path and force a decision point

If you want the house, you’re trying to answer one question: Is the estate going to honor this sale? Your attorney (or the title company, depending on your setup) should request a clear position from the trustee/debtor’s counsel.

If you want out, you’re trying to lock in two things: your contractual right to terminate and a clean process for escrow return.

First week: prepare for court process (or clean exit)

If the sale is going forward, assume it will require formal court steps and paperwork. Ask your title company what exact bankruptcy order language they need to insure and close.

If the sale is not going forward, ask your attorney whether you need to preserve claims for any money that isn’t in escrow, and what deadlines apply.

Florida note: escrow disputes don’t move on vibes

If your deal is in Florida and the escrow is held by a broker or a regulated escrow holder, there are procedures for handling disputes and conflicting demands. The practical effect is simple: if both sides don’t agree, the escrow holder often won’t release funds without following required steps or getting a legal resolution.

That’s not them being difficult. That’s them protecting their license and avoiding liability.

The Financial Middle Class truth

This situation feels unfair because it is unfair. You did what responsible buyers do—saved money, lined up financing, paid for inspections—and now somebody else’s financial collapse is threatening your deposit and your timeline.

But you’re not powerless.

Your advantage is speed and structure: stop spending, get the chapter and case details, choose your path, and make every step something you can defend on paper.

Because in bankruptcy, the paperwork is the power.