Buying Defaulted Mortgages - Bankruptcy

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  • 1. Bankruptcy – 5 Myths Debunked The Key Ins and Outs of Bankruptcy 1
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. Bankruptcy Basics 33.4% of all consumer bankruptcy filings are Chap 13 66.6% are Chap 7 5
  • 6. Bankruptcy Basics Increasing steadily since 2005 BK Law 6
  • 7. 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
  • 8. 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
  • 9. 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
  • 10. 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
  • 11. 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 – Bob Lawless, Mortgages in Bankruptcy 101 11
  • 12. 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 – Bob Lawless, Mortgages in Bankruptcy 101 12
  • 13. 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 quot;strip downquot; the mortgage to equal the value of the residence – for debtor’s principal residence 13
  • 14. 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” 14
  • 15. 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 =>
  • 16. 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