Bankruptcy How to Buy Notes Defaulted Mortgages Non Performing Notes Real Estate Notes Note Buying Profits.com

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Bankruptcy How to Buy Notes Defaulted Mortgages Non Performing Notes Real Estate Notes Note Buying Profits.com

  1. 1. Bankruptcy 101 De-Mystifying Bankruptcy for Note Buyers 1
  2. 2. Objectives for this Session • Introduction to Bankruptcy • Chapter 13s and Chapter 7s, a Primer • Strategies and Tactics • Case Study of a Chapter 13 Bankruptcy • Schedules • The Plan • Motions and Orders • Relief from Stay 2
  3. 3. Introduction to Irv Berg, Chapter 7 BK Attorney • Bankruptcy attorney with over 30 years of experience • Practices in the San Francisco Bay Area • Represents Debtors (borrowers), primarily in Chapter 7 cases • Focuses on Fair Debt Collection Practices Act (California and Federal) 3
  4. 4. On Bankruptcy “[Bankruptcy] gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Supreme Court, Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) 4
  5. 5. Chapter 7: the Basics Chapter 7 “Liquidation” An orderly, court-supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor's assets. These cases are called quot;no-asset cases.quot; http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 5
  6. 6. Chapter 13: the Basics Chapter 13 “Adjustments of Debts” Officially called “Adjustment of Debts of an Individual With Regular Income” Designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a quot;planquot; to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 6
  7. 7. Chapter 13: the Basics Debtor must compile the following information: 1. A list of all creditors and the amounts and nature of their claims; 2. The source, amount, and frequency of the debtor's income; 3. A list of all of the debtor's property; and 4. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc. http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 7
  8. 8. Chapter 13: the Trustee What does a Trustee do? 1. When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. 2. The chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc. http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 8
  9. 9. Chapter 13: the Automatic Stay What happens once the Debtor files? 1. Filing the petition under chapter 13 quot;automatically staysquot; (stops) most collection actions against the debtor or the debtor's property 2. The stay arises by operation of law and requires no judicial action 3. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 9
  10. 10. Chapter 13: the Automatic Stay How does a BK affect a foreclosure proceeding? 1. Individuals may use a chapter 13 proceeding to save their home from foreclosure. 2. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. 3. The individual may then bring the past-due payments current over a reasonable period of time. 4. The debtor may lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing. http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 10
  11. 11. Chapter 13: the Process FC Sale NOD NOT / NTS BK 95% + of all Bankruptcies to prevent a foreclosure are filed within 48 hours of the Sale 11
  12. 12. Chapter 13: the Process 3-5 Yrs 20-50 days BK TBD days filing 15 days $274 fee Plan 341 Plan Meeting Approval / Dismissal Schedules Proposal to Debtor Ordered by pay 3 types must the Judge Statement of attend of financial creditors: affairs •Priority Certificate •Secured of credit counseling •Unsecured 12
  13. 13. Chapter 13: Plan Components The Key Components Include: 1. Confirmation of Priority Creditors (taxes, bankruptcy fees) 2. Confirmation of Secured Creditors and amount of arrearage (e.g. pay history reviews). 3. Unsecured Creditors – who shows up? 4. Unsecured Creditors – how much gets paid out? 5. Time Period of Plan (usually 36-50 months) http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html 13
  14. 14. Chapter 13: an Example Plan
  15. 15. Chapter 13: an Example Plan
  16. 16. Chapter 13: an Example Plan
  17. 17. Bankruptcy Strategies • Collect payments • Refinance • Foreclose in case of non-payment • Sell your Note and Mortgage 17
  18. 18. Bankruptcy Strategies • Collecting payments – a note on FDCPA • Be careful of your “wording” used in any communication with the borrower, inside OR outside of bankruptcy • Remember that you can not communicate with your borrower IN bankruptcy 18
  19. 19. Bankruptcy Strategies • Refinance • You need to pay out Unsecured per Plan, and can approach Debtor’s attorney with this option • $100,000 mortgage • $75,000 home • $40,000 purchase price of mortgage • Borrower has $10,000 of unsecured debt • 5% payout on Unsecured, per Plan 19
  20. 20. Bankruptcy Strategies • Refinance: The Numbers • $40,000 mortgage cost • $500 unsecured creditors (payout of $10,000 @ 5%) • $40,500 – total debt • $75,000 house value • 65% LTV loan (e.g. hard money) $48,750 – new 1st mortgage 82% • annualized • - 5% in fees – or $2,440 yield • $46,000 net out of Refi • $5,500 profit, or 13.8% (in 60 days?) 20
  21. 21. Bankruptcy Strategies • Hold – “performing” bankruptcy • What is your “effective” yield? • $100,000 mortgage • $580 payment (~7% interest) • $6,000 in arrears, Plan is 60 months, so $100/month to Trustee • $680 / month payments or $8,160/yr • $40,000 purchase price • 20.40% yield 21
  22. 22. Chapter 13: A Case Study • Part of a pool we recently evaluated • Looking for “color” – what’s happening? • What’s our “risk”? Will this last? • Looking for closure – drawing conclusions 22
  23. 23. Chapter 13 Case Study • Linda and Arturo Fierro • Track the timeline here • Take notes on each step in the process • See what you can learn from the Schedules • Watch what happens in terms of the Plan • Notice how it “ends” 23
  24. 24. Q&A with Dean and Irv Ask away … this is YOUR time 24
  25. 25. Next Session: May 13 5pm PT / 8pm ET Licensing reviewed – what does it take to buy notes? Overview of the current market Due diligence basics 25

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