Any one bought a note going into Chapt 7?

[Sean M.]

I'm looking at a note w/equity that's going into the Chapter 7, with equity.  Anyone have any experience? I'm comfortable waiting the process out, but want to make sure I'm not going to get jammed somewhere with an ongoing court process.  Anyone have any advice/suggestions? 

Thanks  

[Bob E.]

Is this in Canada or US?

[Roy N.]

Originally posted by @Bob E.:

Is this in Canada or US?

 Bob,

It would have to be in the U.S.A. - chapter 7 and chapter 8 are parts of the United States Code.   Bankruptcy legislation in Canada is different.

[Mike Hartzog]

Most of the CH7 cases I have looked at are discharged in the 3-6 month timeframe.  One thing to check is if the borrower reaffirms the mortgage debt in the CH7 process.  If they don't, they will no longer have a personal obligation to pay the debt and can walk away without consequence, and you could foreclose uncontested.  If you were looking for a workout, CH7 can be helpful since the borrowers debts have been wiped out, this putting them in better position to make mortgage payments. 

[Sean M.]

Thanks Mike, 

I sort of like the Chapter 7 guys, seems nice and clean.  They just sell cheap - makes me wonder what I'm missing? 

[Mike Hartzog]

I think there is a lot of uncertainty around the implications of bankruptcy for note investments, so people avoid them and prices reflect this.  If you as an investor can become knowledgeable, you will have an edge.  Personally, I like BK for this reason.

[Sean M.]

Seems like my sort of area - notes (and BK in particular) seem like the one place where being a lawyer might actually benefit me a bit!  

[Mark Scarola]

Hi @Sean M.- 

The equity thing is important when you have a CH7 note because so long as you have some equity, even if it's just $1 you should be able to maintain your lien. That said if you're buying a 2nd position note make sure you have updated information on the status of the 1st as interest/late fees could add up fast and quickly erase your equity as a junior lienholder. 

But otherwise bankruptcy can help clear out some debts for the borrower and put them in a better position to work things out with you. Plus you then have a contact point you know how to reach. An attorney with a phone number is much easier to work with than a homeowner who's avoiding you.

[Sean M.]

@Mark S. Thanks for the heads up re: chapt 7's  getting scraped - I hadn't appreciated that about threm.  I thought that was only applicable to chapt 13s and that the risk for 7s was the senior foreclosing without the 2nd having equity. 

[Bob Malecki]

I bought a defaulted HELOC on a house in So. Cal. for 15 cents/dollar, borrowers had a BK7 in 2009. The UPB is $110K and it looked like there was about $100K equity in the property after the first balance of $535,000. We filed FC and the borrower sent in his loan mod papers on his first with Chase last week. Apparently there is a "deferred principal" of $131,000 with Chase that did not show up on any collateral, O& E or credit report. This was a major blind side.....

[Mike Hartzog]

@Bob Malecki 

Thanks for sharing that.  I don't work with 2nds much so have not run into this issue.  Seems like there would be no way find this in DD unless you were to somehow get your hands on the servicing records for the 1st lien.

[Mark Scarola]

No problem @Sean M. My point was that equity becomes more important if you're dealing with a 2nd and there's a bankruptcy because of those things that you can't plan for. Just like @Bob Malecki was describing a situation where he did his due diligence and was later hit with something that wiped out his assumed equity, I recently found myself in a similar situation. I knew I didn't have full equity coverage on a particular 2nd I held, but I was sure I had enough to maintain the lien. Then in pursuing foreclosure it came out that the equity I thought I had wasn't really there. So while you might be able to get a better deal, there is that added potential risk.