Exit Strategies for Borrower in Bankrupcy

[Peter Halliday]

I’m wondering what the exit strategy is for a borrower on bankruptcy. I was reaching up to follow up with a seller I’d bought a note from. He asked me if I’d be open to a note in bankruptcy.

I realized that I don’t know much about the risks vs rewards. My loose understanding is that bankruptcy doesn’t erase your debt. Stretches out the time horizon.

[Jason Duhn]

THIS IS NOT LEGAL ADVICE

Hello,

I hope I'm reading your question correctly, but I believe you are essentially asking what happens to the note at end of the bankruptcy.  If I'm not reading your question directly, please let me know, and I can try to answer again.  ; )

The risks vs rewards will depend on a number of factors.  Just to name a few:  what chapter of bankruptcy, how the borrower is treating the mortgage/property in the bankruptcy, the location of the property, if the loan was delinquent at the time of bankruptcy filing, if there is equity in the property, the jurisdiction the bankruptcy was filed in, if the property is the borrower's primary residence.  There is a lot to consider.  

Please also keep in mind, the borrower would be under bankruptcy protection, so you must be careful in how you communicate with the borrower and/or their attorney, so as to not violate the automatic bankruptcy protection.

Your post didn't indicate what jurisdiction the bankruptcy was filed in, you should probably talk to a creditor rights bankruptcy attorney in that jurisdiction.

I practice in Indiana, so my answers below are based off Indiana law/practices.  The below are just the VERY LIMITED BASICS of how a hypothetical situation might play out in Indiana, with regards to a borrower's exit strategy from bankruptcy.  

There are lots of different hiccups/curve balls that could come up (i.e. borrower tries to cram down the mortgage, or strip liens from the property, or bankruptcy Trustee tries to liquidate the property, etc).  For the hypothetical, I'm assuming it is a Chapter 7 or 13 bankruptcy (not 11 (business) or 12 (farmer)  ), and that it is the borrower's primary residence.

Chapter 7:  if no equity in the property (i.e. no reason for the bankruptcy Trustee to liquidate the property), then borrower can potentially reaffirm the debt or choose not to reaffirm the debt.  If they reaffirm, they remain personally liable on the loan.  Either way, the mortgage remains secured on the subject real estate.  Once the discharge is then entered by the Court and the bankruptcy case concludes, not much changes from the note holders point of view, unless the borrower did not reaffirm the debt.

Chapter 13:  3-5 year payment plan (with covid rules the plan can get extended for longer).  If loan was delinquent at the time of bankruptcy filing, the borrower can bring the mortgage current during the payment plan. Borrower can choose to surrender the property in the chapter 13 plan, or they can treat it to bring/keep mortgage current (they could also try to do a cram down, or strip liens from the property, there are a number of factors that play into whether they can do these things).  If they surrender, and you get relief from stay, you can still pursue the property, but you probably cannot pursue the borrower personally.  If they treat the mortgage and bring it current, then the goal is for the mortgage to be completely current by the end of the chapter 13 plan, by either paying the mortgage payment directly or via plan payments to a bankruptcy Trustee who then pays the mortgage payment along with any pre-petition arrearages.  There will likely be required notices/documents you must file during the pendency of the case (i.e. proof of claim, notices of payment change, notices of fees/expenses, response to Trustee's notice of final cure). 

Thanks,

Jason Duhn