buying a note going through bankruptcy

10 Replies

I am looking at a non-performing note that the owner is in bankruptcy. What kind of pitfalls do I need to be mindful of? Where can I find a good resource on these types of transactions?

Thanks in advance.

Should you decide to pursue the non-performing note it is my understanding that you cannot contact the borrower directly since he is in bankruptcy.   You would need to contact the bankruptcy trustee to understand the borrower's intentions for the home.  I am working on the assumption that the note is in 1st lien position.  If it is not, you need to be wary of lien strip if it is not the borrower's primary residence.  If you are serious about pursuing the note, I would highly recommend consulting an attorney who understands bankruptcy law.

@Ray Trounday

Thanks for the response. I am to assume that I have to purchase the note before seeking out the bankruptcy trustee.

Have you looked at all of the filings in BK court? You can find a ton of information about the borrower and their intentions.

@Drew Poniewaz I wouldn't contact the trustee before you own the note because you are not a creditor or otherwise involved in the case. As others have said, you can find out a lot about the case by looking it up in PACER.

Your note seller should be able to give you an idea of what's happening from their end. Ask them to provide the servicing comments on the loan. That, in addition to what the seller tells you, should give you a big picture idea of what's happening with the loan that PACER might not necessarily be able to convey. Plus, if you're new at this, it might be difficult for you to understand what PACER is actually telling you. The seller really should be telling you this stuff and should be able to show you documentation providing evidence.

There's a lot to consider with loans in bankruptcy and your investment goals play a big role in determining what's acceptable on what's not. Do you know if it's a Ch 7 or a Ch 13 BK? Are you looking to liquidate or do you want a reperforming loan? What is the borrower's situation, can they follow through on their payment plan? How much and how will the arrearages be paid? Etc, etc...

Hi @Drew Poniewaz , as others recommend, set up an account at https://pacer.psc.uscourts.gov/pscof/regWizard.jsf then you can look up the borrower's case. I generally like chapter 13 since the borrower will be setting up a formal repayment plan which includes the mortgage debt. This does not guarantee that they will stay on the payment plan but its a good sign that they want to stay in the home and get their debts under control. Pacer will show the BK trustee/attorneys on the case as well, but until you buy the note and become the lender, you cannot contact the trustee nor the borrower. 

@Bob Malecki and @Chris Seveney Interesting how different business models result in different perspectives.

We pick the NPN's where the borrowers are far behind, underwater, and we think will probably not fight the FC. We look to liquidate as quickly as possible through DIL, Short Sale, Trustee Sale, or REO. If we find a borrower who legitimately wants to save their home, we will try to work with them to get them to reperform and then sell the loan on the market after some seasoning. The borrowers we've encountered recently seem to be interested in keeping their properties as long as possible while paying the minimum amount, if anything. It makes me scratch my head when borrowers refuse to make a P&I payment even when it's a lot lower than they would have to pay for rent.

We have three active Ch 13 BK notes and will most likely have a 4th one. One, we think is playing games but may just be having a hard time. The other two are clearly gaming the system, they waited the day before the trustee sale to file, and have made one or two payments on the plans. They are both on the verge of failing so, hopefully, we'll get Relief soon so we can continue with FC. It's aggravating that we are delayed for most likely 4-7 months. At least I'm getting first hand education and experience in BK's that I'll be able to use for future BK 13 filers.

If someone is legitimately trying to get their affairs in order through Ch 13 BK, I totally support it. However, my recent experience is the opposite. I don't know if people realize that the lawyers and trustees stand to benefit the most, while creditors take the back seat. I didn't know that the trustee collects 11% of the borrower's total payments as a fee. His fee and the lawyer's fee are Class 1 and get the highest priority over us in Class 2 (secured) and unsecured creditors.

Sorry for my rant! Maybe I need to look at your guys' business model instead :)

Yup, that's one of many challenges you get when buying distressed debt. Many borrowers try to game the system via BK which can buy them time and we as debt owners have the final say, unfortunately via foreclosure. 

Our business model is to keep the borrower in their home, not liquidate the asset, so a BK 13 is viewed as favorable from our position. 

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