What happens when buying a note in bankruptcy?

11 Replies

What generally happens when buying a note in bankruptcy? Do you, as the new note owner, still have rights to collect on the debt? Does the property usually get foreclosed on?

With with a Chapter 7 bankruptcy you still have the right to collect on the debt through foreclosure as you are not allowed to contact the borrower directly. You can work with the borrowers attorney or trustee to determine if they want to keep their house and start performing on their debt. 

With with a Chapter 13 bankruptcy you or your servicer will be working with the debtors trustee to determine a repayment plan on both pre-petition and post-petition amount due to you as the lender. A Chapter 13 Bankruptcy will provide a plan for repayment of debt by the debtors and the lender will usually file a relief of stay to have the right to foreclose on the property should the debtor not perform. 

Got it. Thanks for the explanation.  So, it sounds like you as a note purchaser can either collect or foreclose.  What what you say is an acceptable discount on a note in foreclosure?

You need to file a Proof of Claim (POC) with the court so they know you are the new lien holder.

As far as how much to pay a note in foreclosure, there are too many variables to give a specific answer.  Some people will pay more for those, since some of the FC costs may have already been paid, and the process is closer to conclusion. 

@Tim S. Is it actually a Transfer of Claim that needs to be filed? If it's already in BK, the lender/seller should have already filed their POC. The buyer would then need to file the TOC. If the lender/seller is trying to sell their loan before filing a POC, I think there would be a problem since they were the creditor as of the date of the borrower filing BK.

Originally posted by @Jonathan Spaeth :

Got it. Thanks for the explanation.  So, it sounds like you as a note purchaser can either collect or foreclose.  What what you say is an acceptable discount on a note in foreclosure?

 No that's not exactly correct.  You cannot foreclose while the borrower is in BK and until it is discharged as there is what  is called a "Stay".  Also during this time, any creditors cannot collect from the borrower if it is a BK7, or until there is a "Confirmation of Plan" for a BK13.  

Originally posted by @Chad U. :
Originally posted by @Jonathan Spaeth:

Got it. Thanks for the explanation.  So, it sounds like you as a note purchaser can either collect or foreclose.  What what you say is an acceptable discount on a note in foreclosure?

 No that's not exactly correct.  You cannot foreclose while the borrower is in BK and until it is discharged as there is what  is called a "Stay".  Also during this time, any creditors cannot collect from the borrower if it is a BK7, or until there is a "Confirmation of Plan" for a BK13.  

How long does that normally take?

Originally posted by @Jonathan Spaeth :
Originally posted by @Chad Urbshott:
Originally posted by @Jonathan Spaeth:

Got it. Thanks for the explanation.  So, it sounds like you as a note purchaser can either collect or foreclose.  What what you say is an acceptable discount on a note in foreclosure?

 No that's not exactly correct.  You cannot foreclose while the borrower is in BK and until it is discharged as there is what  is called a "Stay".  Also during this time, any creditors cannot collect from the borrower if it is a BK7, or until there is a "Confirmation of Plan" for a BK13.  

How long does that normally take?

  A run of the mill BK7 averages 4-6 months from filing to discharge.  A BK13 runs approx 6 months to plan confirmation, then is either a 3 or 5 year plan depending on their income to expense and debt ratios.  I should add that you can collect on regular mortgage payments in the case of BK13 before the plan is confirmed, by filing a Pre-confirmation motion with the trustee

@Chad U. I've had some BK13 plans actually get confirmed right away at about the three month mark. I also have had payments sent to me before the plan was confirmed without me having to do anything. It's been confusing to me because it doesn't seem like there's as much consistency as there should be. I suppose a lot of that has to do with the BK judges as some are very borrower friendly and others less so. Trustees are mysterious to me. As a creditor, you're treated as a 2nd (or 3rd) class citizen and it's difficult to even get them to communicate with my attorney.

@Jonathan Spaeth Be sure to thoroughly read through the BK plan and BK schedules during Due Diligence. Generally, the borrower is required to make the ongoing P&I payments directly to you or your servicer or to the trustee, who will pass them on to you or your servicer. The borrower will have monthly payment to the trustee. Once the plan is confirmed, the trustee will make pro rata payments to all the creditors, which include the arrrears on your loan.

Also, look up the case in PACER. You'll need the BK number. Search for the "Docket" and that will show you what's going on with the case. Look up the "Claims Register" to make sure that the lender/seller filed their POC.

As Chad mentioned, you cannot FC when the borrower is in BK. They are protected by law and the penalties for violating the "stay" are stiff, from what I've heard. You need the court to grant you a "Motion for Relief" or the BK case needs to be dismissed in order for you to proceed with FC.