Borrower filing bankruptcy...what happens?

[Erick V.]

What would happen if after you buy a NPN, the borrower decides to file for bankruptcy? What happens to you as the note holder? I assume if the borrower throws the property into the bankruptcy that it would go to the note holder but what if the judge grants the borrower to keep the property. What options do they give the borrower in regards to the note?

[Wayne Brooks]

Assuming the house is upside down, usually the owner isn't trying to keep the house/reaffirm the debt in a chapter 13. Your attorney doing the foreclosure has to get the property released from the BK and proceed normally with the foreclosure. BK doesn't "give" the property to the mortgagee, it simply removes personal liability for the note.

[Erick V.]

So the judge wouldn't force the note holder to try to do a "loan modification" so the borrower can keep the property, right?

[Wayne Brooks]

Never seen that done, but an attorney would know better. I just see it more from the short sale side, where a BK generally just buys a few months of time, at best.

[Erick V.]

Thank you Wayne. I'm just thinking ahead of bad case scenarios so I know what to expect.

[Darrell Shepherd]

You've got two types of BK for this kinda thing. A chapter 7 is straight bankruptcy, the buyer either re-affirms the debt under the original terms and keeps the property or gives up the property and bankrupts against the debt.

On a 13 its supposedly a repayment plan. They can stick any arrearages into the repayment and you'll get monthly payments on that, but moving forward they have to make the regular payments on time.

The judge does not have the power to restructure your contract other than what is allowed under BK law on dismissing unsecured debt.

[Dion DePaoli]

Just to clear up some concepts. Bankruptcy includes Chapters 7, 13 and 11 however 11 are not all that common. In the petition, the borrower either reaffirm the debt which means they agree they owe $X and will make payments moving forward or they surrender the property to the plan, which the Trustee can work to liquidate and pay creditors. This still has it's own barriers since title is encumbered and the sale will need to deliver clear and marketable title to a new buyer.

When Bankruptcy is filed an automatic stay of collection occurs for all creditors, secured and unsecured and the borrower is protected under Bankruptcy law during the BK plan. This means there is a very limited amount of contact a creditor (in mortgages that would likely be a mortgage servicer) can make.

If the borrower reaffirms the debt, they must make payments which can happen through or on top of the Trustee payment plan. Failure from the borrower (not the Trustee) to make the future scheduled payments are grounds for the creditor to seek Relief from the Stay of Bankruptcy. This essentially allows the Mortgagee to return to normal collection activity which may include foreclosure actions.

The Bankruptcy Plan can and does from time to time 'Cram Down' the mortgage debt. This takes place when the debt exceeds the value of the collateral. The cram down will retain the amount that is secured and any negative equity has to be moved into the Bankruptcy plan and must be paid through the plan. As you may imagine, this in most cases would create a type of balloon payment at the end of the BK plan or increases the payment required through the plan to a level not attainable by the borrower, so it has it's own barriers.

A properly discharged mortgage debt relieves the borrower of deficiency but does not 'cancel' or remove the mortgage from the property. So once a bankruptcy plan is complete and the debt is discharged, the borrower can still loose the property through foreclosure for default or other breach of contract. A normal foreclosure process must still take place. If the borrower fails to follow the plan, the BK plan is dismissed and the creditors can file and continue with legal collection means.

Due to some state laws in bankruptcy and mortgage foreclosure alternatives, yes a BK plan can force a Mortgagee to consider a modification. Forcing a consideration is not the same as forcing a final outcome.

[Bill Gulley]

Good post Dion, but yes, the BK can require modification, a cram down or upon the discovery of noncompliance by a lender, darn near anything they want to do. I had to appear several times as a Registered Creditor's Representative in BK, all of mine went smoothly, but not every creditor is that good or lucky. Generally, a stay will be obtained and you can the continue with a FC, it's also a good time to show that there is no equity beyond the exemption, offer a tad bit for the keys and take a deed in lieu if that is appropriate. :)

[Erick V.]

Thank you all for the replies.

So for the most part, I shouldn't worry too much about borrowers filing bankruptcy after I purchase a NPN correct. Most likely all it will do is cause delays on me obtaining title to the property.