Borrower BK 7 Discharged but not closed?

19 Replies

I just purchased a 1st position NPL on a home in Oklahoma and found out from FCI's bankruptcy specialist that the borrower had a Chapter 7 bankruptcy in 2009 which was discharged in 2012 but not yet closed. This was not listed on the O&E report or any collateral files from the note seller. 

So, what if any, are the implications for me as the new lienholder on her house? I've not yet gone over to PACER but thought I'd post this for initial thoughts.

Thanks

Bob

Medium rcm circleBob Malecki, Resolution Capital Management | 360.850.1252 | http://www.rcm.company | Podcast Guest on Show #211

I think you are good to go Bob.  I am not a bankruptcy attorney, so take this at face value, but my understanding is that the discharge refers to discharge of debts.  So now your borrower is no longer personally liable for the debt, but the debt still encumbers the collateral.  You are free to work with the borrower and/or move forward with FCL. 

There are cases where the debtor is required to perform certain actions after discharge and before case closure.  The trustee still has power over the case until the case is closed.

Medium sure dark blue   dark grayMike Hartzog, SureMark Capital Group

I'm an ok bankruptcy attorney. I assume you want to move forward with a foreclosure. This sounds like a very unusual situation which probably involves assets or a contested matter. To be safe you may need to file a motion for relief from the stay as the trustee may be claiming an interest in the subject property. You might contact the trustee to see if they have any issues or if they have abandoned this asset. Most of them are very helpful when they can be. I only represent debtors but I can refer you to some creditor attorneys if you need one. 

Paul Choate JD | 405‑426‑9677

Don't contact the debtor directly. Contact their old attorney first for permission if you are willing to work with them. 

Paul Choate JD | 405‑426‑9677

@Paul Choate  

Thanks for chiming in here Paul.  I am curious on how/why a trustee could claim an interest in a secured debt under CH7.  I am guessing that one scenario might be that the debt Bob has purchased may not be the debtors primary residence, or if it is, there may be substantial equity above the secured debt which could be fair game?

Medium sure dark blue   dark grayMike Hartzog, SureMark Capital Group

Absent a Relief of Stay or Trustee's Petition for Order to Dismiss (under 109g?) I'd think the stay would still be in effect. 

Counselor?

BK isn't my area of expertise however I've come to treat them as the real deal, lest I piss off some BK judge and s/he remember me with prejudice for eternity.

The following is a general discussion of the operations of bankruptcy. Please seek legal counsel for your specific situation. I am not providing any individual legal advice.

When a case is filed, an estate is created. This estate consists of all of the property of the debtor. Property leaves this estate in three ways: 1. The debtor claims it as exempt and it is automatically removed 60 days after the first meeting of creditors (341 hearing) if no one objects. It is still subject to any voluntary liens (i.e. mortgages). 2. Creditors can file a motion to abandon and lift the stay. If no one objects or upon a ruling by the Court, it is abandoned from the bankruptcy estate. 3. The trustee can abandon the property or liquidate the property (abandonment- usually done in a report filed before the discharge of the case; liquidation- private or public sale). Each of these has rules and exceptions. An undisclosed property is never abandoned.

The fact that the case has been open for over 5 years is a big red flag. Something is going on. The trustee may be looking at the equity issue. @Mike Hartzog  this would only apply to non-exempt property (not their home- Oklahoma provides an unlimited homestead exemption if the property meets certain rules). 

The other option is there may be an issue with the perfection of the lien on the asset. This mortgage predates the mortgage crisis and the changes in the rules so there could potentially be issues in that area. I am not saying that is the case, just that trustees can do things no one else can. If a case is open this long, something is up.

@Bob Malecki  if you would like to give me the case number and district (or county), I can let you know what I see. If you just have a name you should probably send it pm.

Paul Choate JD | 405‑426‑9677

@Rick H.  the stay applies to the collection of the original debt against the debtor personally and never expires absent the debt falling into a nondischargeable category (taxes, child support fraud etc.). 109g are limits for repeat filers so they cant use bankruptcy to play games with mortgage holders. As with most laws, there are always exceptions!

I should clarify, generally a motion to lift stay is filed in conjunction with a motion to abandon and the purpose is to proceed under state law for the enforcement of the lien which still exists after a discharge. It does not generally lift the stay against the debtor since that is the point of filing bankruptcy. That is why you should never talk to a debtor without legal advice and even then you should check with their attorney if they have one. 

Paul Choate JD | 405‑426‑9677

@Paul Choate  

Great stuff!  That's the best legal non-advice/explanation I have seen yet BP.  Thanks for sharing.  BK is a grey area for many of us.

@Rick H.  

You crack me up man!  Love it when you post.  Always a perfect mix of wisdom and humor...

Medium sure dark blue   dark grayMike Hartzog, SureMark Capital Group

Thanks guys, I'll review her case on PACER and contact my attorney in OK to look into anything further, then will let you all know if anything of interest. I appreciate all of your input, this is an outstanding forum!

Bob

Medium rcm circleBob Malecki, Resolution Capital Management | 360.850.1252 | http://www.rcm.company | Podcast Guest on Show #211

The optimal idea here is what is meant by "Closed" and how it was discovered.  If you do not have the BK documents it is unclear how you have ascertained the BK Case is still open.  An Owner & Encumbrance report for title is not the best report to find a BK flag.  For that you really need to use Pacer.  


Ok, I looked up the file in PACER and found that on May 8 2012 a motion for relief from automatic stay and order of abandonment was granted, so I'll assume that my ability  to FC is allowed. Let me know if I should do any further verification.

In the case history it was reopened on 10/13 and below are the activities listed in the INDIVIDUAL ESTATE PROPERTY RECORD AND REPORT. To @Paul Choate, can you advise as to what TFR and NDR in the language below pertains?

-------------------------------------------------------------------------------------

04/19/12 Motion for Relief from Stay and to Abandon

4/23/12 MMS US Bank NA 5613 NW 61st St., OKC, OK B9620 P316-332

06/21/12 Chapter 7 Trustee's Report of No Distribution (filed by error)

07/12/12 Chapter 13 Trustee's Final Report and Motion for Discharge of Trustee

08/29/12 Final Decree. Case is Closed. Trustee is Discharged

11/30/12 - Need to reopen case and WD NDR. - Filed Motion to Reopen case. Need to WD NDR and file Claims Notice.

11/30/12 Trustee's Interim Report for period ending 9/30/12

2/20/13 File reviewed

6/13/13 In line for TFR workup

7/17/13 Trustee change of address filed

11/5/13 Interim Report for 9/30/13 FILED

12/16/13 Notice appointing Trustee John Mashburn

1/16/14 POC Bar date 1/13/14 has passed can be worked up as TFR

4/28/14 TFR ready for approval

7/14/14 TFR to be reviewed and sent to US Trustee for approval

Initial Projected Date of Final Report (TFR): 04/24/13 Current Projected Date of Final Report (TFR): 12/31/14

Filed: 11/17/2010
County: OKLAHOMA-OK Terminated:
Fee: Paid Debtor discharged: 06/27/2012
Origin: 1 Reopened: 10/15/2013
Previous term: 08/29/2012 Converted: 03/15/2012
Debtor dismissed:  

Medium rcm circleBob Malecki, Resolution Capital Management | 360.850.1252 | http://www.rcm.company | Podcast Guest on Show #211

I already sent this to Bob privately but I just wanted to let everyone know for your edification-

This case was originally filed as a chapter 13 (probably to save the home in question). It was converted to a chapter 7. The mortgage company filed a motion to lift and abandon in the 7. That takes the property out of the bankruptcy and allows the mortgage holder to proceed IN REM (against the property only). The case was reopened when the trustee found a tax refund to administer. It does not reopen or change the issues for the mortgage company- it is all about the non-exempt assets. All of this explains the length of the case.

The terms TFR and NRD are just acronyms. TFR- is trustee's final report and NRD is something related to a notice requirement. They are not important on their own. 

Paul Choate JD | 405‑426‑9677

Hi All, one more question on this one-- since the borrower has a discharged BK7, am I allowed to contact her via letter? I know that there are some rules about contacting borrowers with BK, any insight is appreciated. 

Bob

Medium rcm circleBob Malecki, Resolution Capital Management | 360.850.1252 | http://www.rcm.company | Podcast Guest on Show #211

Originally posted by @Bob Malecki :

Hi All, one more question on this one-- since the borrower has a discharged BK7, am I allowed to contact her via letter? I know that there are some rules about contacting borrowers with BK, any insight is appreciated. 

Bob

What is the point of contact?  

Collection ideas should not be broached.  There is a little argument out there of Mortgagees attempting get previously discharged Borrowers into a modification and thereby creating a new promise to pay.  The counter argument there is once discharged it is always discharged and creating a new promise on a discharged debt should not be allowed. 

The key here is a Borrower can voluntarily continue to pay the debt.  The Mortgagee can accept those voluntary payments as normal.  However, the Mortgage should not/may not imply a requirement to pay.  Such implications could be used by the Borrower as a violation of the injunction created through the BK.  

There are some situations where a Borrower's re-newed promise to pay is found unenforceable.  It is very important to note that attempting to re-establish a new promise to pay where a new security instrument and note are created can extinguish any capacity for a Mortgagee to foreclose.  That is, if a new note is found unenforceable any security instrument which secures it is also unenforceable.  Foreclosure may not be possible if that happens since the old and proper security instrument no longer exists.

The moral of the story, post discharge contact should be approached with caution.   What is said and how it is said matters.  Most servicers will limit correspondence to mere account statements so as not to cross the line of the injunction.  Correspondence which 'may' be construed as harassing or misleading even if unintended can result in legal action against the Mortgagee.  

Hi Dion, our intention is to see if the borrower will sign off on DIL or QCD. I understand that offering a mod after BK is a longshot and a minefield as well.

Thanks

Bob

Originally posted by @Dion DePaoli :
What is the point of contact?  

Medium rcm circleBob Malecki, Resolution Capital Management | 360.850.1252 | http://www.rcm.company | Podcast Guest on Show #211

@Bob Malecki   I have run into the same issue.  Am curious to see how this turns out for you.  

Rather then trying to collect the debt you would be offering to purchase their interest in the property, not sure of the implications of that.

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

I just did 2 DIL's on a couple who went BK in 2009 & are now divorcing. Having them appear at my attorney's office at different times to avoid any conflict was a treat.

The searches provided clean title to proceed with the DIL & it saved me a lot of time & $$$ avoiding a drawn-out foreclosure. 

The investment properties were immediately sold so everyone wins.

Thanks Pat, good to know. Ok, one more question-- the O&E file shows property taxes due which I know have to be paid weather I foreclose or get DIL. There is also:

State tax lien filed by the OK Tax Commission for $1,300

A judgement from Wells Fargo for what appears to be a credit card debt for $12K

So, if I foreclose these should get wiped since they were filed after my first position lien, but if I get DIL, will I have to deal with the WF credit card judgement? IOW, is that judgement a lien that I as new title holder from DIL will have to resolve? 

Thanks

Medium rcm circleBob Malecki, Resolution Capital Management | 360.850.1252 | http://www.rcm.company | Podcast Guest on Show #211