Bankruptcies and Notes

[Martin Sterling]

How do Chapter 13 or Chapter 7 effect a note you have purchased or about to purchase? What are the opportunities and procedures necessary to take advantage?

Thanks in Advance

[Mike Hartzog]

Hi Martin,

This is a great topic which deserves an entire blog post to properly address, but I can give you the highlights.  I am sure others will chime in if I miss anything important here. 

For both CH7 and CH13, secured lienholders cannot foreclose while the case is active unless a lift of stay is granted.

CH7

• The debtor's assets are liquidated and unsecured debts are extinguished. 
• The timeframe is usually a matter of a few months.
• Lienholders cannot foreclose while the case is active without a lift-of-stay.  (Not worth the trouble for CH7 IMO.)
• After CH7 completes, the borrower is no longer personally obligated to repay a mortgage loan, but the loan still encumbers the property.
• CH7 can help us as secured lienholders because the borrower emerges in better financial condition and more able to make mortgage payments.

CH13

• CH13 is a reorganization, so assets are not liquidated as in CH7.
• The debtor files a plan for repayment, which must address payments for secured debt.
• The timeframe for the plan is variable but can be up to 5 years.
• Personal liability for the debt remains intact.
• Once the plan is confirmed, the debtor makes plan payments to the trustee, who distributes them to creditors on a pro-rata basis.
• Frequently plans call for mortgage loan arrearage payments to be paid through the trustee while the P&I payment is made directly to the creditor (or servicer).
• Because the plans are longer term, lien holders must file for lift-of-stay if the debtor does not live up to the plan and they wish to pursue foreclosure.

Key Procedures

• For new BK filings, secured lienholders must file a Proof of Claim (POC) with the trustee. This defines the amounts owed, including a break out of principal and arrearage. This filing must include copies of recorded DOT/Mortgage and Note.
• If you are purchasing a note where the borrower is already in BK13, you will need to file a Transfer of Claim.  This informs the trustee of the change in ownership of the lien.  The POC can also direct payments from the trustee to your servicer.
• Generally it is a good idea to find a good BK attorney who can help with these filings.  Bankruptcy is a federal code, so a single attorney can usually deal with all of your BK filings regardless of state.  The attorney can file an Appearance on the BK case to get a feed of any changes that happen on the case and make you aware of the important ones.
• If you have liens with BKs you will want to register for an pager.gov account.  You can search and find BK cases and drill down and see all of the details.  The Case Summary provides some good basic information.  If you go to the History listing of a CH13 case, you can find the plan the borrower is committed to, which details how the mortgage loan should be treated in terms of payments from the debtor.

Sorry for the info dump.  Hope it helps.