Note Buying – “What if the Borrower files BANKRUPTCY?”

I received the following question:

“Hello Dean, thanks for your videos, they are very helpful, I only have some questions: what happens if once you buy and own the note, the homeowner files bk? How does it affect the note? And what is the best way to protect yourself from this?”

My reply:

Bankruptcy is a good question to ask about, and yes, it can be one of the scariest things for the uninitiated. You know, it’s a simple fact of life that we fear that which we know the least about. And “BK” as we affectionately call it isn’t something that people know a lot about.

You know, the best education anyone can get on Bankruptcy (and this is the way I taught it to myself, by the way), is to READ THE FREE INFORMATION AVAILABLE ON BK.

If you want to learn about bankruptcy, go to this site right now https://pacer.psc.uscourts.gov/psco/cgi-bin/register.pl.

Register (it’ll cost you 8cents/page that you download – the CHEAPEST and BEST education on bankruptcy you’ll ever get).

Next, select your state, and then type in Smith in the Party Name box.

Select the first Chapter 13 filing you see.

Click on the Case number, then click on the Docket Report, and Run Report (sorted for oldest first).

Read through EVERY entry (you’ll pay 8 cents/page, so consider this roughly a $25 investment in your own education). READ any of the documents starting with “Motion” and any document referring to a Relief from Stay.

Any underlined blue number in the 2nd column is a link to a document.

Then review in detail the Voluntary Petition and the Schedules (should be at the very beginning of the case, and is usually more than 20 pages long), as well as the Chapter 13 Plan if there is one.

Now that you’ve done that, let me give you a brief summary of BK and its effect on a Note Buyer.

First – I consider a BK to be a MISTAKE ON MY PART. If I “lose” a borrower to bankruptcy it means that I haven’t worked with them hard enough or – more accurately – well enough. That doesn’t mean that I personally have to talk to every borrower I have that files BK, but it means that the person I have assigned to that Note hasn’t done their job properly.

Some facts:

-95+% of borrowers file a BK within 48 hours of a foreclosure sale

-A large majority of Pro Se bankruptcy filings (Pro Se is latin for “for myself” meaning the borrower doesn’t file with an attorney) are dismissed (another word for rejected)

-The average bankruptcy that is dismissed will cost you roughly 90-120 days of extra time to foreclose upon

-Bankruptcy DOES NOT affect your lien security in any way, you will still have a secured Deed of Trust or Mortgage on the property (there is one exception – extremely rare, called a “cramdown” in which the borrower is able to get a Note balance altered via the BK court – I wouldn’t worry about this too much – but google it for more info)

-If you see someone with mortgages who is filing a Chapter 7, they are looking to “walk away” with no debt – and are protecting themselves against a deficiency judgment

-If you see someone with a Chapter 13 Plan and an Order Approving that Plan, then you need to look at the Plan proposed (ALL is publicly available for your review), and you’ll see your cash flows laid out for you clearly

-In order to remain in Bankruptcy with an approved Plan, the borrower typically makes 2 payments – 1 to you directly for your regular mortgage payment, and another one to the Trustee that will then be forwarded to you – it’s a simple calculation of the total arrearage you (or the prior investor) is owed, divided by the number of months proposed in the Bankruptcy Plan

An Example: The way your typical Chapter 13 works is that the borrower, say, has 100K on your loan, plus 6K in arrearages, and the home is worth 100K. They propose a 60month plan (max allowable). Each month they’ll make their regular $1,000 payment to you (assume this is a 12% Interest Only mortgage for simplicity), and they’ll make an additional $100 payment to the Trustee (6,000 arrearages divided by 60 months) who will then forward this payment to you.

Can you file another Bankruptcy if your case has been dismissed? Yes if it’s a Chapter 13, no if it’s a Chapter 7 (you can’t immediately refile another Chapter 7).

Can a borrower file, the case gets dismissed, then the co-borrower files? Yes, until and unless the judge dismisses the bankruptcy case “with prejudice” – in which the judge will then say essentially “buddy, no more refiling of any Chapter 13 within the next 180 days” for example. That’s to give you enough time to hold your foreclosure sale and collect on your collateral (the home).

If you want more, I’ve included a Bankruptcy Checklist in the Roadmap that I’ve made available for purchasers of my “A-Z Buying Discounted Bank Notes & Mortgages Business-in-a-Box” course.

Really your best resource is YOU – reading through the information that’s all available on PACER. It’s an AMAZING and CHEAP resource that will teach you more than you’ll ever learn from any course – I promise you.

Dean