Bankruptcy. Designed to help people who are over burdened with debt find relief. Relief by absolving some or most of their debt, or assisting them with a payment plan to get them back on their feet. When used for the purpose it was intended for, it can be a very beneficial process and help people, families, or businesses start fresh. Unfortunately, like many other programs created to assist in a time of need, there are some people who abuse it. Often times in the note business, Bankruptcy is used as a “stalling tactic” to stop, prolong, or avoid foreclosure and is typically done RIGHT before a foreclosure sale. There are even really savvy borrowers who will file several times, first the husband, then the wife, then a joint filing being able to prolong the process several years before eventually losing their home.
Today we wanted to share with you 3 case studies of REAL stories about borrowers using BK as a stall tactic to hopefully help you understand the various ways as a note buyer, you may unexpectedly encounter Bankruptcy. Before we move forward, you’ll need to know some of the basics of Bankruptcy as you read the Case Studies. If you want to go further in detail take a look at one of our old posts regarding BK and Notes.
Ch. 13 – The classification of bankruptcy filing that enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.
Ch. 7 – Unlike a Ch 13 filing, in Ch. 7 the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. The remaining debt is discharged.
Automatic Stay – An automatic protective injunction that halts actions by creditors the moment the bankruptcy petition is filed.
Lift of Stay – A request made by a creditor to the court which allows the creditor to take action against the debtor or the debtor’s property that would otherwise be prohibited by the automatic stay.
Case Study 1:
This past month we had a note in Tallahassee that was set to go to foreclosure sale on the first Monday of the month. We wake up Monday morning excited to check the docket and see the results from our Foreclosure sale only to find “Canceled per Bankruptcy”.
Lo and behold, the borrower filed Ch. 13 Bankruptcy the Friday before, cancelling the foreclosure sale and automatically gaining protection from us (the lender) and other creditors, seeking collection. While the borrower may be using Bankruptcy as it was intended, to keep her home because of her ability to repay, in all likelihood is simply trying to do whatever the can from not losing their home, even if it’s just stalling it for a few months. This borrower did not show up in court at any point in time during the foreclosure, or respond to any of the demand letters or notifications. They did not reach out to my attorney or servicing company to see what options they had (which we sent letters telling them there were other options).
The borrower filed BK themselves without an attorney to assist. Several of the documents were filed incorrectly, which tells me they are likely to be dismissed (kicked out). For the time being, we’re stuck waiting to find out….
1. What her financials look like and her ability to repay.
2. The proposed “Plan” which would outline her payments to us as creditor.
3. If she even files the necessary documents in time in order to be approved for a plan or not.
Until one of those steps are completed, we just wait.
Case Study 2:
This note is owned by a friend and colleague of ours that also invests in 1st lien notes. The property is in Pinellas Park, FL. The borrower was delinquent for several years prior to our friends buying the note. The homeowner was very adamant about keeping her home, although she had no income and her financials did not support her ability to afford the home. While they initially tried several loss mitigation options, but ultimately foreclosure was the only option. After filing foreclosure, and a strong fight in court, a few days before the foreclosure sale, the borrower filed Ch 13 BK. Thus again, stopping the foreclosure sale and putting the borrower in automatic stay.
This borrower ended up using an attorney and was approved with a BK plan that requires a high monthly payment on the note, (way more than her original payment she already couldn’t make before) which of course just two months in, failed to pay. She was however, making very small payments to the Trustee which was no where near the required payments in the BK plan. The note holder requested a lift of stay based on the lack of ability to pay to the plan, but luckily for her, had a borrower friendly Judge who denied the Lenders request, and approved the borrowers ability to continue the BK plan.
A few months later, the Trustee requested the borrower be dismissed from a lack of payments according to the BK plan, and AGAIN the Judge denied the request and was in favor of the borrower continuing with the plan. I will say, this is a pretty crazy case that unfortunately for my friend does not happen often, but can happen. When you’re in BK you’re at the mercy of the Judge, and this Judge happened to favor the borrower. So my friend is stuck waiting, and waiting, until eventually they are kicked out (which we know will be the outcome based on their past payment history). On a positive note, they have collected some money from the Trustee which helps recoup attorneys fees, but is still prolonging the completion of the deal by 1 year +.
Case Study 3:
This note was purchased by another colleague of ours that we are assisting through the
process of working the note to completion. The borrowers had previously filed BK but were dismissed without prejudice (kicked out) from a failure to pay. Again, just 1 day before the foreclosure sale, the borrower filed BK for a 2nd time, resulting in another automatic stay. When a borrower files Bankruptcy back to back like this (after 60 days), normally it’s up to the court to lift the stay or allow it to remain in place. This judge favored the borrower and are giving them a 2nd chance to attempt to repay in the Ch 13 plan.
Again, the note holder has collected a decent amount of money from the Trustee from the borrower’s payments, but their ultimate goal was to gain title to the property, not have a potentially risky re-performing note. They’re continuing to wait to see if the borrower will be successful in the plan, and sell it as a re-performing note, or if they will be kicked out, where the note holder can proceed with the foreclosure sale. Either way, it’s a waiting game!
So there you have it, three real BK stories that unfortunately show how easily this system can be manipulated. As annoying as it may be at times, it’s a part of the business so we suggest getting familiar with it so you can hedge yourself as much as possible, or simply be less “shocked” when it happens to you.