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One of the most frustrating things to deal with as a note investor is working with bankruptcies. Sometimes people get way in over their head and even a minor change in fortunes can send their financial world into a complete tailspin. Sometimes the only way out of it is through bankruptcy protection. You, as an investor, need to be able to deal with that situation to find an amenable solution for all parties.
Other times, bankruptcy is a tool used by a consumer, often a wealthy consumer, as a means to further their own interests at the expense of other interests. You, as an investor, need to be able to deal with that situation, be firm, and find a practical solution (and an ironclad legal solution at that) for all parties.
Each of these situations requires a steely certainty from you as well as a willingness to work with you from the other party. In the meantime, though, what can you learn to do to defend your interest to this debt as well as find creative solutions so everybody can “get along”?
I had a customer recently—yes, customer. They give me money and are my livelihood which is one of the reasons I treat borrowers with so much respect and compassion. They are the ones who give me a roof, food and something to do every day!—this customer was behind on payments, of course, but had also filed a bankruptcy under chapter 13 of the US bankruptcy code.
This code allows the debtor to keep their home from foreclosure, most of their assets and allows for the debtor to create a repayment plan with their creditors during which time the creditors cannot start or continue collection proceedings.
Although regular creditors are barred from these efforts, a mortgage gets special attention. During protection, the mortgage payments must be made on-time and previously delinquent payments can be cured over time, with a judge’s approval. In other words, while they are under protection, as long as they are making payments, even if they have some that are behind, the debtor cannot be foreclosed upon.
My customer was protected by this law and had called us seeking for a resolution. The very first thing I did? I verified his identity. The last four digits of a SSN and address is sufficient. We then discussed his situation and determined that a conversation with his lawyer was needed. We also needed to contact the trustee to see what was going on with the courts.
After speaking with the trustee, and reviewing the court filings, we started to come up with a plan to get the customer paying on-time again. Since he was willing to work with us, we just needed to get the OK from all concerned to discuss the plans with the borrower directly. So I got on the phone with the bankruptcy attorney and discussed with him who we are, how we got the loan, and made sure the attorney saw our Transfer of Claims filing. The TOC allows us to collect the debt.
Since we needed to be able to communicate with the borrower directly, I made sure to get a letter stating approval to do so from the attorney. After everything regarding communication was in the clear, we discussed our plan with the borrower and are receiving appropriate repayment of the loan.
Although we hope that all goes well in the repayment of this loan, I am not naive when it comes to borrowers in trouble. If he ever does become delinquent, even during the bankruptcy protection, we can use our own attorney to file a motion of dismissal due to non-payments. Usually the court will allow it and then we can proceed with more stringent measures, if necessary.
More likely (and what we hope happens) is that the note will continue to perform and we can either collect in time or sell the note as a reperforming note for a higher value than we purchased it and see a nice, tidy return. If you have been reading closely, I have set out 5 points to remember when dealing with a borrower being protected by a chapter 13 bankruptcy:
Never forget the borrower still has protection under the courts until the ‘13 is dismissed. Until dismissal, you can not call the borrower for the past due payments. Even after dismissal, you must follow the judgement set out for repayment of any past-due amounts.
If you are not as lucky as us and the borrower will not tell you his problems on the phone, you can and should call the borrower’s bankruptcy attorney to see why the borrower has not made payments.
Good luck and happy investing everyone!