Bankruptcy – 5 Myths Debunked
The Key Ins and Outs of Bankruptcy
1

Agenda
• Bankruptcy – an Overview of the 5 Myths
p y y
• Q&A – It’s Your Time to Get Answers
• Hot Seats X 2
H S
2

Bankruptcy
1. Myth #1 – it can happen anytime
2. Myth #2 – it can “kill” a deal
3. Myth #3 – it takes “forever”
4. Myth #4 – a judge can restructure any loan anytime
5. Myth #5 – there’s nothing you can do about a
bankruptcy
3

Bankruptcy Basics
Chapter 7: the bankruptcy trustee sells all nonexempt
and unencumbered assets and distributes the proceeds
to creditors, and the debtor receives a fresh start.
Chapter 13: the debtor devotes all of his or her
di
disposable i to
bl income t payment of creditors over a 3 or 5
t f dit 3- 5-
year plan, and any unpaid portions of the debts are
discharged.
discharged
Chapter 13: more effective at protecting current assets
assets,
like a home
Chapter 7: more effective at protecting future income
4

Bankruptcy Basics
33.4% of all consumer bankruptcy filings are Chap 13
66.6% are Chap 7
5

Bankruptcy Basics
Increasing steadily since 2005 BK Law
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Myth #1 – BK can happen “anytime”
• 95% of bankruptcies take p
p place in final 48 hours of
foreclosure
• What’s the lesson here?
• Pain stimulates action … use “pain” (e g foreclosure)
pain (e.g.
wisely. Key intervention is at point of greatest pain
• If BK is a disease, then Communication is the
antidote
• And … so what? Does it help to file BK?
7

Myth #1 – BK can happen “anytime”
• … five to six years after their bankruptcy filing 72 1%
filing, 72.1%
of families still owned their homes. The remaining
27.9% lost their houses.”
houses.
Sarah Carroll & Wenli Li, “The Homeownership
E
Experience of Households i B k t ” ( small DE
i fH h ld in Bankruptcy” (a ll
study based on 2002 BK filers)
• No really good temporal studies to track BK filing and
its impact on homeownership
8

Myth #2 – it can “kill” a deal
• First of all, great information – almost always better
all
than you can get from your seller
• PACER - let’s take a test drive
• For Case Law – references, use Westlaw
• Second – what’s the “context” (job credit overall
what s context (job, credit,
situation)
• Third – can serve as a proxy for loan underwriting
(why I’m a proponent of BK cram down legislation).
Implication being – the judge “qualifies” the borrower
qualifies
9

Myth #3: BK takes “forever”
p
It depends.
Pro Se vs Represented by Attorney
Chapter 7 (
C (with mortgage debt) vs C
) Chapter 13
1. Filing – all forms and requirements (e.g. credit
counseling, SSN verification, etc.)
2. 45 days later = 341 (Creditors’) Meeting
(Creditors )
3. Plan submission and review
4. Amended Plan(s)
5.
5 Trustee then recommends dismissal / approval
6. Judge Orders the Plan or the Dismissal 10

Myth #4: A judge can restructure any loan anytime
Not true. In simple terms, BK distinguishes between:
p , g
Oversecured Creditor:
$100,000 mortgage, $200,000 house
Undersecured Creditor:
$100,000 mortgage, $50,000
$100 000 mortgage $50 000 house
What BK distinguishes between here:
Secured claim is $50,000
Unsecured claim is $50 000
$50,000
www.creditslips.org – Bob Lawless, Mortgages in Bankruptcy 101 11

Myth #4: A judge can restructure any loan anytime
An “undersecured” creditor has two claims in a
undersecured
bankruptcy case:
• a secured claim up to the value of the collateral
• an unsecured claim for the excess of the debt over the
value of the collateral.
l f th ll t l
US bankruptcy law protects the full value of the
secured claim ...
The d l i l
… Th unsecured claim only receives a proportional
i ti l
share of the debtor's remaining assets
www.creditslips.org – Bob Lawless, Mortgages in Bankruptcy 101
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So what’s a “Stripdown or Cramdown”?
• Distinction between secured vs. unsecured …
“stripping off” from the secured and making it
unsecured
• How does this happen?
• Re-defining the collateral (house) value
• pp g y
Stripping away the secured p portion by negotiating, or
y g g,
agreeing to, a lower value for the collateral – and
having the unsecured portion receive nothing
• Exception: a Chapter 13 debtor cannot \"strip down\"
the mortgage to equal the value of the residence –
for debtor’s principal residence
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M th #5: Th
Myth #5 There’s nothing you can do about a
’ thi d b t
Bankruptcy
• Make sure the debtor follows every step they need to
(don’t assume Trustee will ensure they follow all
steps – e.g. credit counseling)
t dit li )
• Track all documentation via PACER – see what’s
happening
• Can put 3rd party in communication with borrower
p p y
(e.g. mortgage broker)
• Talk to th b
T lk t the borrower’s attorney – would a refi h l ?!
’ tt ld fi help?!
• Track payments carefully – file Relief from Stay as
soon as you can – “stay on it”
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H tS t X2
Hot Seats
Your opportunity for One-on-One coaching
Y t it f O O hi
• Landmark Education: when you voice your desires to
others then you truly “commit” to them
commit
• Learn from others
• Work things out with a professional “sounding board”
sounding board
• Apply for a Hot Seat: See download link on the PAC home
page => NoteBuyingProfits.com/privateaccessclub.html

N tW k
Next Week
Th “Dreaded” B
The “D d d” Borrower
• Ins and Outs of Dealing with the Most
Important Person in Your Deal … EVER