Bankruptcy: Know The Rules So You Can Profit

BankruptcyBankruptcy can be a problematic element of note investing if the investor doesn’t fully understand the process, rules, and regulations of bankruptcy and the implications it may have on their particular investment. Our company recently bought two notes from the same borrower which had filed Chapter 11 Bankruptcy, which is a re-organization of an entity or company (similar to Chapter 13 which is for an individual). The borrower had over 11 properties that they she was surrendering and had declared she wanted to keep her homestead only. In my mind I thought it was the perfect scenario, the borrower was pending an approval of their Ammended plan, and contact with their bankruptcy attorney indicated they were willing to provide a deed in lieu on the properties. We decided based on the evidence from her case, we would buy the notes and have a quick and easy turn around on both notes.

Shortly after our purchases, both the borrower and attorney went AWOL, I mean NO response after multiple attempts! Although the workout is taking MUCH longer than expected, and the dreaded foreclosure had to be implemented, we are still going to make a nice profit on the two deals, and have learned a lot along the way.

We realized that although we were aware of bankruptcy and believed we understand how it effected us that there was a lot we still had to learn. I wanted to write this post to help you understand what to be aware of before buying a note with a borrower in bankruptcy.

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Timeline for Bankruptcy
Chapter 7 ( Typically 4 – 6 months)
Chapter 13 or 11 (Average of 3 – 5 years)

Contact with Borrower
When a borrower is in bankruptcy you are legally prohibited from contacting the borrower directly and must speak with their attorney or trustee until a lift of stay has been filed and approved.

Gaining Title
Even if the property has been surrendered (the owner does not want it anymore) or the debt itself is observed, you still need a Deed In Lieu or Foreclose on the property to gain title.

How that effects you…
In order to initiate contact with the borrower and potentially start the process of the “workout” you will need to file a lift of stay. After a lift of stay has been requested it typically takes 30 – 60 days to be given a court date to have the hearing to receive approval. So this could extended the workout timeline on your note.

Automatic Stay
Automatic stays are put into motion after the borrower enters Bankruptcy. It is intended to prevent creditors from further contacting, harassing, or attempting to collecting debts from the borrower. You must apply for this to be “lifted” and be granted approval within the BK court. It is typically granted to creditors that have collateral that is not properly being protected so they can take the next steps to protect their asset such as foreclosure.

How that effects you…
Although applying for a lift of stay is rather easy, being approved for it in court can be more of a challenge. For instance, the court will not lift the stay when an unsecured debt will be included in the debtor’s discharge (so for Chapter 11 or Chapter 13 plans). If you’re early on in the plan or your borrower files for Chapter 11 or 13 right before the final judgement (this actually happens a lot more than you’d like to know), it could take up to a year or longer before their plan is approved and you start to see some form of payment or workout solution. In the mean time you’re stuck waiting with a note you can’t do anything with! 

Proof of Claim and Transfer of Claim
In Chapters 7 and 13 and 11 bankruptcy cases, all unsecured creditors must file a proof of claim for their claim to be allowed.  Certain secured creditors, however, do not have to file proofs of claim to participate in a bankruptcy case. For example, lien holders and other secured creditors do not have to file a proof of claim to preserve their liens in a bankruptcy case. You have 90 days after the first meeting of the creditors to file this claim. proof-of-claim

Transfer of Claim happens when a creditor has changed, for example if the note is purchased from the current lender on file, you need to file a transfer of claim to prove you are the new creditor.

How it effects you….
I suggest checking with an attorney that is familiar with the bankruptcy process in the state the borrower is located within to find out if you a required to file a claim or not. This is especially important if your borrower is in Chapter 11 or 13 and a payment plan will be made to the creditor on file for the specific property. You want to ensure that your note/property will be properly addressed in their plan.

Bankruptcy Plans
A payment plan is created in both the Chapter 11 and Chapter 13 BK cases. This must be approved formally by the court before set into motion and can take up to two years before it is formally approved. It outlines the exact amount secured creditors will receive in the form of payments and for how long.

How it effects you…
Reviewing the plans before buying a note that has a borrower in BK is extremely important. If a payment schedule has been created within this, it will allow you to see what you are expected to be paid per month, for how long, and at what interest rate. If you are buying this note as a “re-performing loan” then this is the sole determining factor of your ROI and must be looked at carefully. There can be amendments to the original plan, so make sure to look for that as well. It’s also important to know if the plan intends for you property to become a part of their repayment plan, or if it is being surrendered. If it’s surrendered then a foreclosure or DIL is necessary before you are able to do anything with the property.

Now there are other elements to be aware of within Bankruptcy and many rules and regulations that were not discussed in detail here. If you want more information, glossary, or tips with BK, I suggest you take a look at the BK “Cheat Sheet” and Due Diligence checklist we provide to our paid members of NoteInvestingClub.com  for more help. Let me know any questions you may have about this post or bankruptcy itself below!

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Remember, I am not an attorney. This post does not provide legal advice and the Provider is not a law firm.  None of our customer service representatives are lawyers and they also do not provide legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer if you want legal advice.

The Truth about Servicing Companies

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Servicing companies are big players in the note investing world. National laws allow each individual state to determine their rules & regulations for servicing loans and surprisingly do not always require you to have you loan serviced be a professional company.  While it’s possible to service your own loan, I  do not suggest it simply because of the time value. Is saving $25 – $50 per month really worth the hassle and liability/risk you’re putting yourself into but servicing itself? Hopefully your answer is no, it’s not. If you do decide to have your loan serviced by a company, the next problem you have to solve is; well, which company do I chose? There are TONS of servicing companies to chose from and each of the vary slightly in price and services but offer essentially the same thing:

  • Ability to collect payments.
  • Workout the loans (handle talking to the borrower, negotiating, or starting/executing foreclosure).
  • Filing & Sending paperwork (TILA/RESPA letters) borrower options, correspondence.
  • Keeping payment records from borrower.
  • Correctly taking out and holding escrow for taxes and insurance.

I talk with a lot of investors that ask “have you found a good servicing company yet?” and my current answer is, “I’m with _____ right now and I am happy with their results and services, but it hasn’t always been like that.” The truth is, I’ve gone through several different servicing companies and each of them have positives and negatives to their day to day operations and I’ve had to make a switch several times to hopefully find the one that works for me. Some have quick payout times when you’re collecting payments, and I’m able to get my money quickly, but their workout specialist services are not up to par. Or maybe they have lower rates, but do not respond to anything you ask and are terrible at follow up with both the borrower or the client. I even had one servicing company that didn’t send my TILA/RESPA letter but asked for a boarding fee when I was handling the workout! They literally did nothing for me or my loans, but expected their servicing fee. Let’s just say I will NOT be working with them again.

To be honest, there is no perfect servicing company. You’re just going to have to search around and do your own digging. My suggestion is to try working with them on 1 loan initially, actually receiving their services will be the true sign if their company will meet your needs or not. Even with client reviews you’re still going to have to try it out yourself and see if their services or expertise meet your needs. When I was dissatisfied with my last servicer, I asked a fellow colleague about switching to the company I’m currently using (and happy with). They said they had a very poor experience with the company I’m happy with, and that they were making a switch themselves to a new company because of it!

Here is a list of servicing companies. By including them on this list, I am in no way endorsing their company or services. My goal is to make the searching period easier for you by housing them in one location.

When you make your initial contact with them, ask them the following questions about their services; *Also check for their pricing online, if it’s not online ask for the pricing to be sent to you*

  • What information is needed from me if I board with you?
  • Do they send the TILA/RESPA letters?
  • What do they do as a part of their “workout/collection services” do they skiptkace? Send someone to the home of the borrower, or just try to send letters and make phone calls?
  • How quickly do they typically see results with their borrowers and when do they file foreclosure if the borrower is unresponsive?
  • How fast is the money deposited into my account when I am successfully receiving borrower payments?
  • Is there an online portal for me to access my records, borrower payment history, borrower correspondence, etc.?

So start interviewing and hopefully you’ll find the right servicing company for you!

Florida’s New Foreclosure Laws: House Bill 87

Florida is known for being one of the worst foreclosure states in the nation.  Florida is a judicial state, meaning foreclosures are required to pass through state courts before title is transferred to the lender and then sold in auction. In recent years this process could take anywhere from 480 days to 860 days! This lengthily timeline was largely due to the increase in defaulted mortgages around the market crash in 2007/2008. The court system and many lending institutions were unable to handle the increase in defaulted mortgages and in result prolonged the process of foreclosure.

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House Bill 87 was passed by Governor Rick Scott earlier this year and began taking effect June 7th, 2013. There were a number of changes that could benefit and harm both the borrower as well as the lender. The most prominent change in Bill 87 is the expedited foreclosure process for any lien holder in default in uncontested cases or against homeowners who have an illegitimate defense. Coming from an investment/lender stand point, this is a tremendous victory. ALL lenders (including HOA’s) are now able to file a foreclosure complaint (Lis Pendins) and if uncontested within 45 days or failure to produce genuine defense allows the lender to enter a final judgement of foreclosure and request an order of foreclosure sale. In addition, HB87 made all foreclosure judgements final.

One major change that has negatively effected the lenders position is the requirement to produce the note or certification of ownership of the note when a deficiency judgement is filed. The lack there of can invalidate the deficiency judgement and can inevitably forces the lender to “dismiss” the borrower from the judgement “without prejudice” and begin the process over again at a later date. If the original note is lost, an affidavit with clear chain of title needs to be produced in order to initiate foreclosure.

The last major stipulation in House Bill 87 is a lessening in time allowance for deficiency judgements to be ordered. A deficiency judgement is the lenders ability to collect the difference in unpaid balance to the foreclosure sale price. Previously, the lender was able to collect for up to 5 years the difference in unpaid debt to sale price, but is now reduced to 1 year allowance to seek a deficiency judgment on residential properties with no more then 4 dwelling units. (If you’re interested in learning about 4 dwelling units or larger, please click here).

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In our business, dealing with foreclosures is always a possibility. It is important not only for us to understand how these provisions affect our business but also for our partnering investors. It is important to us that we are able to give accurate estimations in timelines, and understanding the laws allows us to do this. Florida is finally able to liquidate some of those “empty house” assets, and Seasoned Funding is here to help!