- August 30, 2019
- Posted by: august19
- Category: Podcast
Bankruptcy is too often a word that gets thrown around easily. Unfortunately, when you become a main player in this case, then getting your way out of and around it can be challenging. Tony Sottile of Sottile & Barile graces this episode to guide us through the intricacies of note investing bankruptcy. Highlighting the bankruptcies investors will most likely be a part of, he defines and helps us understand some common terminologies you need when talking to an attorney or other bankruptcy counsel. He also covers the players in bankruptcy and the roles they play. Join us today and learn more about bankruptcies – from the rights and remedies and some common pleadings to the costs and more.
Listen to the podcast here:
Tony Sottile: The Note Investors’ Guide To Understanding Bankruptcy
We are privileged and honored to have the lovely and talented, Tony Sottile, from one of our favorite attorney offices covering Kentucky, Indiana, Michigan, Ohio and Illinois. Tony and Franco Barile are two go-to people for any kinds of collateral reviews all the way through sometimes obtaining the house itself. Tony is here to specifically talk about the intricacies of bankruptcy. I have been looking forward to this because I have to admit, Tony, I have been faking it on what I know about bankruptcy, so I‘m hoping I’ll know what I’m talking about.
I love bankruptcies.
I’m a walking wounded because I have famously talked on the podcast about buying the only note I ever bought in Pennsylvania where I lived. It was a serial bankruptcy declarer who declared bankruptcy seven times in six years and was never stopped by any judge or anything else. I understand what Chris was talking about, but I also see the dark side of it. You’ll be here to help us decide whether we’re fans of bankruptcy or maybe not so much.
I’m more than happy to try to sway to the dark side, Gail.
If you would like to explain a little more for everyone what your law firm does.
Gail, thank you for the introduction. Thank you as well to Chris for having me on your podcast, both of you. We appreciate that. When I was approached to do this, the idea was to do an introduction to bankruptcy. A little bit of one-on-one, question and the answer, and questions that I received from note buyers and from other clients. Gail gave a great recap of our firm. Franco and I joined forces after meeting at a previous law firm where we worked together and started Sottile & Barile. We started pretty small with handling bankruptcy work and collection work. We had long since done a foreclosure work, forfeiture work and real property, but we wanted to focus on our core competencies, make sure the firm was going to stick around and it did stick around. We’re blessed for that. We work hard. We tried to do good work and we appreciate everybody using our services.
We have spread around a little bit into some additional states. We do all default-related matters. That’s foreclosure, forfeiture, collection and bankruptcy in Ohio, Kentucky, Indiana, Michigan and Illinois. We also handled bankruptcy matters only in Wisconsin, Colorado and Washington DC. Across the whole country, all 94 bankruptcy jurisdictions, we do what is called limited filer pleadings. Those are planning reviews, proofs of claim and transfers of the claim. We’ll talk about what some of those buzzwords mean.
We’re going to cover who are the players in bankruptcy. Oftentimes, this is the trickiest part when we’re training a new person in our firm. It’s the terminologies and who are the players. We’re going to talk about Chapter 7 versus Chapter 13. Those are the most likely bankruptcies that you all will be a part of. You may see some Chapter 11 work, but probably not too much. The same thing with Chapter 12. It’s for a family, farmers and fishermen out here in the Midwest. We see our share of those a couple of Chapter 12s a month on a weekday. Chapter 9s is municipality bankruptcies in Detroit, Orange County and California, you guys won’t handle those. Chapter 15 is cross border bankruptcies. We won’t even talk about that.
We’re going to talk about some common terminologies. When you talk with either myself or other bankruptcy counsel, we’re going to do a behind the scenes bankruptcy timeline. I‘m going to walk you through Chapter 7 and 13 cases, what to expect and when. All along, we’ll be talking about rights and remedies for note polars. What everybody also wants to know is, “How much is this going to cost me?” For now, it’s free but after this, it will cost. We’ll talk about some common pleadings, what you have to do, what you don’t have to do. Our firm will reject work. We will tell you, “We don’t need to do that for you. Save your money.” We’re not the type of firm that is after every dollar. We’re more interested in working with you all in ten and twenty years than trying to get every dollar we can on a particular file. It makes us a little unique from some of the bigger firms out there. We believe this is a team. We’ve got our firm team and we’ve got our client team. Your goals are our goals. Chris, your goals might be different than somebody else. Gail might be different than somebody else. We try to listen and do what our clients want, what their goals are.Most things in bankruptcy court are not done in front of a judge. If you have to see the judge, you might've done something wrong. Click To Tweet
Who are the players in a bankruptcy case and what are their roles? We’ve got quite a few people here. We’ve got the debtors. We’ve got the judge, the local trustee and the US trustee, debtors counsel and creditor’s counsel. Those are all the people you’ll see in a bankruptcy case. The debtors, these are the people who file bankruptcy. They can be individuals or they can be a business. They could be single, married, incorporated, unincorporated and you’ve got all kinds of entities that can be debtors. A bankruptcy judge, that’s pretty obvious what the judge does. Most things in bankruptcy court are not done in front of a judge. I like to say if I’m going to court, if we have to see the judge, we might have done something wrong. I don’t mean wrong like we shouldn’t have done something, but what I’m trying to say is if we’ve got a motion out there, we try to get those resolved, so we don’t go before a judge. Judges are wild cards. Even if we know we’ve got all the facts on our side, sometimes judges can be real wildcards. The judge is part of all of this.
Let’s talk about the two kinds of trustees briefly. You’ve got the US trustee. The US trustee governs everything. They are looking big picture. The country is divided up into several different jurisdictions that different US trustees cover. You will never see them. The US trustees are looking at big-picture things. They’re looking at proofs of claim in general. They’re looking at actions filed by certain creditors, big creditors not the smaller note buyers. They’re looking to see how Aquan is doing their pleadings. They’re looking to see how Bank of America is filing their claims. They’re looking for patterns of behaviors. They keep statistics. Occasionally, they’ll get involved in the case when they don’t like something, whether that’s a creditor or a debtor thing. If a debtor’s trying to pull a fast one, sometimes the US trustee will get involved. If the debtor is trying to file a Chapter 7 case and they make too much money, the US trustee may get involved and want some proof that they should be in Chapter 7 and not a 13.
You’ve got the local trustee. In a 7 and a 13, both of those chapters of bankruptcy have local trustees. There are a lot more Chapter 7 trustees than there are Chapter 13 trustees. Chapter 7 trustees also have a law practice, almost like a side hustle. It’s a debtor bankruptcy practice. A lot of Chapter 7 trustees are also debtor attorneys. Several that I know that I associate with are creditor attorneys. They’re in the area, in the business, in the industry. Trustees can be your friends. Trustees can help. You want to try to keep your trustees happy. You want to ask your trustees questions, not necessarily you all but your attorneys, have good relationships and want to have good relationships with the trustees. Creditors council, that’s me. I represent the creditors. That’s the last main party in a bankruptcy case.
Tony, is the local trustee like the manager of the bankruptcy case?
The local trustee is going to oversee the bankruptcy estate. Yes, they shepherd the whole process. They’re wanting to make sure that the debtor’s doing what the debtor’s supposed to do. The creditors are doing what the creditors are supposed to do. Whenever a bankruptcy is filed, there’s always a meeting of creditors. It’s what’s called the 341 meeting of creditors. 341 meeting the bankruptcy code section that has debtors come to a central place and be put under oath. They testify to the pleadings that they filed. At that meeting, creditors can come. Creditors don’t come. It’s more of the unsophisticated creditor. It’s the mom and pop landlord that are renting out a room. Ex-spouses come all the time, that’s always a hoot, business partners and businesses that went south. Those were the folks that go to 341 meetings. The local trustee shepherds everything through and makes sure all parties are going where they are supposed to do.
We’ll move on to the differences between 7s and 13s. Chapter 7, liquidation bankruptcy, that’s what most people think of when they think of bankruptcy. It’s not as simple as the office line or Steve Carell throws his hands up in the air and says, “I declare bankruptcy.” Chapter 7 is pretty close like that. The trustee is going to look at all of the debtor’s assets and all of the debtor’s liabilities. If there are assets that have value that the trustee can liquidate, turn into cash and make distributions to creditors, that’s what that trustee’s going to do. The debtor may have a house or have a car. The debtor may have some jewelry, clothes and retirement accounts.
Can retirement accounts be rated in a bankruptcy?
No, most retirement accounts if properly funded, as long as they’ve not been putting an inordinate amount of money in there lately to hide money. As long as they’re contributing another 401(k) or their SEP-IRA or some qualified retirement plan like that. Retirement plans are generally exempt from creditors. Exemptions are all state-specific, even though bankruptcy is all federally governed. A certain amount of money is protected in different states. We don’t need to get into exemptions. They don’t worry us in the creditor role too much. It’s more of a debtor topic. If there is some equity in a house or a car that’s beyond the debtor’s exemptions, that a trustee can force a sale of that and bring in money to the bankruptcy estate and then disseminate that to creditors. It doesn’t happen very often. 95% of Chapter 7 bankruptcies are what are called No Asset Cases.
The debtor has already done this. The honest debtor has already done what a trustee would do. They’ve already gotten rid of the jewelry and the fancy cars. They’ve tried to pay the bills. They’ve paid down what they can and they still can’t get out of it. They’re short, typically four to six months. It’s the most common chapter of filing. One thing you need to know in Chapter 7 bankruptcy is there’s no code data protection. All of my states are noncommunity property states. This is where that plays in. If it’s community property state, ignore that no code data protection because it’s community property. In my jurisdictions that are not community property states, if you’ve got a husband and wife that are on the note and only one file of Chapter 7 bankruptcy, you can go after the other one, non-filing code debtor. There is no protection for that non-filing code debtors. There is in Chapter 13, and that’s one of the big differences between 7s and 13s. There are a lot of differences but that’s a big one.
Chapter 13s are the actual title, Adjustment of Debts of an Individual with Regular Income. The individual is key. You’re not going to see businesses file Chapter 13s. Regular income is key. That’s why there’s Chapter 12 for farmers and fishermen that are only paid a couple of times a year. Chapter 13 debtor needs to have money coming in. Wage income, social security income, disability income, money that they can count on receiving weekly, biweekly, monthly in some regular fashion. It could be a borrower who also makes too much money and can’t file a Chapter 7 bankruptcy. There are income limitations in Chapter 7 bankruptcy.
How much before you can’t do it anymore?
It varies by state. It’s a decent amount of money. I honestly can’t remember exactly the number, but in Ohio for example, I think it’s in the high 40s. If you’re making in the high 40s and you’re the only person in your household, you can still file a Chapter 7 bankruptcy as long as your allowable expenses exceed your income, you can do a Chapter 7. Generally speaking, you don’t have to be destitute to file a Chapter 7 bankruptcy. You can have some money coming in to do that. Let’s try to stay on the creditor side if we can, otherwise we will bog down in debtor world, which I did do for my first couple of years as an attorney. I do have some experience with that as well.
Back to Chapter 13s. The debtor is going to reorganize their debts through a court confirmed plan. That’s what you hear about in a Chapter 13 bankruptcy. What does the plan say? We’re going to talk about plans when we talk about different terminology but know the fact that Chapter 13 bankruptcy is going to last you three to five years. Only about 27%, less than 30% complete. Chapter 13s is difficult to complete all the way through discharge and it’s because they’re three to five years if you ask me. They need to be, I understand that, but a lot of Chapter 13s fail, which is frustrating.
Some jurisdictions do a lot better than others. You’ve got some very good Chapter 13 trustees out there that take their shepherding of these cases seriously and do an excellent job of getting all parties involved. You’ve also got some Chapter 13 trustees out there that are strictly by the book. If you’re not doing X, then Y is going to happen. If you’re not doing A, then B is going to happen and they don’t see a lot of grays. Those tend to fail a lot more. If you think about your own household, a lot can happen to your own household in terms of income and expenses over the course of three to five years. It makes it difficult for borrowers.
Reviewing and understanding these plans are very important. There are debt limits to a Chapter 13 bankruptcy. I’ve put the numbers up there. They’re weird numbers because they’re adjusted for inflation, but these numbers are important. Because for someone to file a Chapter 13 bankruptcy, their unsecured debt must be less than about $395,000, and their secure debt must be less than about $1.18 million. They sound like big numbers, but unsecured debt less than about $400,000, that’s a bad hospital bill. That can accumulate very quickly. These numbers, if a debtor needs to file a Chapter 13 bankruptcy to reorganize their debt and pay off arrears and they have more debt than these limits, then they have to file a Chapter 11, which is extremely expensive and extremely complicated.
There’s a big push to always up these numbers and get more people in Chapter 13s and keep them in houses. Don’t force them in 7s or don’t force them into Chapter 11. Those numbers are pretty important. Not for our perspective, but I want to give you guys an idea of what a debtor looks like in Chapter 13. A big thing in Chapter 13 bankruptcy is you have code debtor protection. That same husband and wife and only the husband filed a Chapter 7 bankruptcy. You can go after life for collection purposes, and Chapter 13, if only the husband filed it, you can’t do anything with life, even in non–community property states. That non-filing person has code debtor protection.
It doesn’t mean you can’t go after them. It just means you have to go through the court to do that. You have to seek relief from the code debtor stays. That’s another big reason why people file 13 because they’ve got arrearage on the property that they want to keep. People file 13 because they have too much money coming in. People file Chapter 13 because they’re trying to protect the co–debtor. I see it a lot with student loans, mom or dad co-signing for a car loan. Not so much on houses and not so much on real estate but student loans and cars are very big. That’s 30,000–foot view of the big differences between 7s and 13s. I honestly could spend an entire episode on any one of these, but I want to give everybody the basics, give everybody the differences between the two chapters.
Tony, will you go through the differences of owning a note when it’s in Chapter 7 versus Chapter 13 because I know there are some differences there?
Let’s talk about some common terminology. The automatic stay, that goes into effect when the bankruptcy is filed. When that debtor files bankruptcy, nothing else needs to be filed. The simple act of filing that bankruptcy brings about the automatic stay. It bars all collection activity. This is a good point to your point Chris with owning notes and 7s versus 13s. If you own a note and it’s in default, you’ve got foreclosure proceedings going on, somebody’s going to file bankruptcy. They’re going to file that on the eve of the sale date. I see that very often. As much as we don’t like it, it’s a completely legitimate tactic that borrowers used. In a Chapter 7 bankruptcy, if you want to keep that property, you have to be current on it. Otherwise, we can seek relief from that automatic stay. Those are MFRs. If you’re an attorney, you talk about an MFR, Motion for Relief from the automatic stay.When the debtor files bankruptcy, nothing else needs to be filed. The simple act of filing brings about the automatic stay. Click To Tweet
In a Chapter 13 bankruptcy, if you own that note that the borrower is behind on, you’ve got to wait until that plan kicks in. You’ve got to wait until that trustee starts dispersing payments. It’s a little different. No two cases are the same. Everything is very case-specific in bankruptcy, which adds to the frustration. Back to the automatic stay. In that Chapter 7 case, if they’re behind, you can go straight in bankruptcy court and ask for relief from the automatic stay, you don’t have to wait. In a Chapter 13 bankruptcy, you do have to wait a little while and you’ve got to see what that plan says. You’ve got to see what that debtor’s trying to do with that property. You have to give them a chance to succeed with that plan. If they say they’re going to pay you and they don’t, that is cause for you to go into court and ask for relief from stay. You just prove to the court that there was another instance where the debtor did not pay and you want relief from stay to be able to collect your property back in state court. That’s a big difference like you were asking, Chris. As we’re going along, that’s something that I’ll make sure to hit on.
I want to say for people who are learning a lot of this for the first time, one of the most important things to remember as a note investor, if you have a borrower that you’re attempting to reinstate or be more regular in their payments, if they declare bankruptcy, you cannot contact them at all. You cannot have someone contact them. There is no contact except from your attorney to their attorney.
Gail, that’s an extremely good point. All collection activity stops when that bankruptcy is filed. It’s not just you’ve got to stop the foreclosure. You can’t call and ask where the payments are anymore. You can’t send a letter and say, “Where’s the payment?” You can’t do that. You’ve got to get an attorney.
You can’t even ask them what your plans are.
If they’re representing themselves in the bankruptcy, then you’ve got a little bit more room, but you still can’t ask for payment. It has to be voluntary at that point. You’ve got to let the court take over. You’ve got to let the creditor attorney take over that in that case. All collection activity has to stop. Multiple filings within a year. I want to cover this very briefly because people hear about this and think this is a way out of bankruptcy. It doesn’t work like that. When that bankruptcy is filed, that automatic stay goes into effect. That’s not always true. If the debtor has already been involved in one bankruptcy within the last year before their current bankruptcy, that automatic stay is only in effect for 30 days. They only get a 30-day reprieve from creditors contacting them. What’s going to happen is that debtor is going to file to extend the automatic stay. It may upset you and you may get ticked off. The debtor, they got out of bankruptcy and they’re in another bankruptcy. They want more state protection. This is an instance where 99 out of 100 times, let the stay extend beyond that 30 days.
They’ve got to file a motion that a debtor does. You have the right to object. You have your right to a day in court. What this is doing is it’s giving the borrower another chance and judges are almost always going to give the borrower another chance. That’s one filing in the past year before the current filing. Gail, you talked about this with your note in Pennsylvania. If there are two or more filings before the current filing, the automatic stay does not go into effect. In order for that borrower to get state protection, at the same time they file that bankruptcy, they need to file a motion to implement the automatic stay. That’s filed with a shortened objection timeline, a matter of days instead of a matter of weeks.
You have to act quickly on these motions, get them to your attorney, alert the court, whatever you need to do. You need to slow the debtor down on this. They may have a good reason why they filed a third bankruptcy within the last year. They have to attach to that motion to implement the automatic stay. They have to attach an affidavit that talks about why this case is different than the other cases. Talk with your attorneys on this. If it’s worth objecting to, we can object. We have some success with objecting. I will tell you though, it’s difficult to win these. Assuming there’s no fraud or dirty dealings. Assuming it’s a down on their luck debtor who’s filed a third bankruptcy in the last year, then there’s not a whole lot we can do.
An area where we do have some success though is we will object to that motion to implement. What we’ll try to do is we’ll try to work out a scenario where we will let this day be implemented here. We will let there be stay protection. We will give this debtor a chance but in return, we want a 180–day bar against them refilling if this case gets dismissed. We’ll give you yet another bite of the apple, but if this doesn’t work, then we want 180 days or a year or whatever we know we can get or what we can shoot for in that court. We want that in order to give you this case. We do have some success with that and that’s a good tool in our arsenal to guard against multiple filings within a year.
You have the downright abusers. Gail, it sounds like your person in Pennsylvania was a downright abuser of the system and filing nonstop. There are ways to combat that. You’ve got to watch those multiple filers within a year. The bankruptcy estate, it’s all the property that the debtor has an interest in. Even if it’s owned or held by another person, that’s the bankruptcy estate. That’s what the local trustee is in charge of. They’re in charge of seeing what comes in and goes out of that estate. You’ll hear a bankruptcy estate in the bankruptcy world. You’ll hear the word petition a lot. That’s the document that’s filed by the debtor that opens the bankruptcy case. That’s the first pleading that’s filed, the voluntary petition page. It’s only a couple of pages, but that petition is usually accompanied by a lot of schedules and a lot of forms. It’s an official form. A lot of bankruptcy is done on official forms and the petition is one such form.
Discharge, this is what the debtor wants when they file bankruptcy. It’s the debtor’s release of liability on their unpaid debts. On a Chapter 7 bankruptcy, they’re not making any payments on their unpaid debts. They’re not making the payments to the mortgage company after surrendering. They’re not making payments to the Visa bill, to the doctor bill, to the car company on the repo. After four to six months, if they do everything correctly, they’re going to get a bankruptcy discharge. Once that debt is discharged, it can never be collected again. That’s important to know. It’s different than a dismissal. A bankruptcy dismissal is when a case gets dismissed. We talked about Chapter 13 gets dismissed all the time. Very few Chapter 13 completes and get a discharge. A lot of Chapter 13s get dismissed and that puts you right back into the spot you were in before the case was filed.
If you are on the eve of a foreclosure sale, if your attorney was garnishing their wages, you can go right back into court and garnish wages. You can do all kinds of things like that with the dismissal, but discharge is very different. In Chapter 13, they’re going to make some payments to that Visa company, some payments to that repossession. Not many pennies on the dollar, but at the end of the day, if they’ve completed their plan, the amount they have not paid is discharged like all of it in Chapter 7. We’re going to talk about the plan a little bit. A Chapter 13 plan has to be filed within fourteen days of the bankruptcy being filed. Usually, they’re done at the same time. All these attorneys that filed bankruptcies for debtors, they have a software that they use and the software generates all of these documents and helps them file them all at once.
Generally speaking, you will see the bankruptcy plan filed on the same day that petitioners file. The court can grant an extension so debtors can ask for additional time to put that plan together. Maybe in our context, we’re on the eve of a foreclosure sale. We’re getting ready to take that property back and they filed bankruptcy. They may not know how they’re going to repay that, but that debtor knows they need to file that bankruptcy before the gavel falls at that sale the next day. They’re going to file their bankruptcy. If they can’t put that plan together within fourteen days, they’ll ask the court for some additional time. It’s something we can object to but they’re going to get additional time.
A question came through regarding the discharge in regard to Chapter 7. The question is, “You can’t file a judgment if there’s a Chapter 7 bankruptcy. It gets discharged, then you can’t go after that person for that debt anymore. Correct?”
That’s correct. That debt is discharged forever. It can never be reinstated. You’re not looking for a statute of limitation issues. They get a discharge on that, it’s done. You don’t lose your lien. You don’t lose your property. I hear that sometimes from people in bankruptcy that it means you lose your house. You’re the note buyer. You don’t lose your house. You have every right to collect that house back. You have to do that then through state court and your remedies are limited to getting your property back. You can’t go after the borrower for any deficiency after a foreclosure sale.
I think some people might be confused too. In Chapter 13 when it’s discharged, that means a person has made all the payments based on whatever their arrearages were and whatever the plan stated. You don’t lose the rest of the payoff when Chapter 13 is paid off.
The main way a note is extinguished or a note is a discharged in a Chapter 13 bankruptcy is if the debtor doesn’t want the property anymore. If relief from stay has been granted, that is discharged in a 13. In most cases, a note as long–term survivable debt, so that survives the bankruptcy discharge in Chapter 7 and 13 bankruptcy. That’s a big difference between 7s and 13s and holding paper in both of those chapters. In a 13, if that borrower wants to keep that property and they make their payments and they get a bankruptcy discharge, they’re still on the hook for that property.
I think what’s a little tricky to understand in a 7 and correct me if I’m wrong, people worry about the lean being stripped from the borrower. Essentially it is. The borrower has no more personal responsibility for paying off that mortgage, but the mortgage doesn’t go away, it’s still on the house.
The lean still exists. You can’t collect from the borrower or any longer.No two cases are the same. Everything is very case-specific in bankruptcy. Click To Tweet
You can’t chase them personally.
That’s called in personam. You can’t go in personam anymore in your underlying state court action. You have to go to in rem. You can only go after the thing. You can only go after the property.
You could negotiate a new deal with them if they want to stay in the property.
That’s up to you whether or not you want to do that.
Having shown their true colors, be careful about doing that.
If you don’t like the treatment in your bankruptcy plan, you must object. For example, they want to pay you $100 a month on your note and then in month 60, so the last month of their bankruptcy, they’re going to pay off the debt. If you don’t like that and you probably don’t like that, you have to object to that plan. If you don’t and that plan is confirmed, then you’re stuck getting $100 a month until month 60. Good luck getting a nice big lump sum in month 60. We’ve gone five years getting $100 a month. These are very timeline, very deadline driven. There are timelines for all of this that will help you review the plan. They will review the plan for you. This is what we do. We provide you with an analysis. We boil that plan down to what that debtor is trying to do. We’ll make suggestions on whether or not you should object and go from there. It’s not something a layperson should be messing with. You don’t have to use us. I’ll pitch our firm over everybody any day, but make sure you get some help with reviewing a plan. It could mess your world up if you don’t know what you’re doing.
A proof of claim, it is what it sounds like. It’s a document that you file in bankruptcy court, or your attorneys are filing it, that proves your claim. What that means is we are filing a document with the court and we are attaching certain appendices to them. We’re going to attach the note, the mortgage, any assignments, any endorsement to the note and an allonge to the note. We’re going to attach arrearage information. We have to prove up the arrearage. There’s a lot that goes on in these proofs of claims. They must be filed in Chapter 13 cases. If you’ve been around long enough, the general consensus since you have a recording of the lien on the property, you don’t need to file a proof of claim and you’ll get paid. That’s not the case anymore. It is a bright-line rule that says if you want to get paid in a bankruptcy, you have to file a proof of claim. That goes for all Chapter 13 cases.
You’re not going to file a proof of claim in a Chapter 7 case. It’s pretty rare that you will file a proof of claim in a Chapter 7 case. I don’t want to slow everything down too much. Always in 13s, sometimes in 7s, that’s what you should remember from that. Courts require additional documentation. That’s going to be a copy of all of the mortgage note deed. It’s used for pre-petition arrears and to show the ongoing payment. Part of that proof of claim is on that day that bankruptcy was filed, this is how much that debtor was in arrears. It’s a financial snapshot on that day. Anything that was behind on that property by the day that bankruptcy was filed needs to be on that proof of claim. If it’s an escrowed loan and an escrow account and you’ve advanced taxes or you’ve advanced insurance and then they file bankruptcy, now’s the time for you to put that stuff on a proof of claim.
If they filed bankruptcy on Monday and on Wednesday you’re paying taxes, that does not go on a proof of claim. That’s something different and that’s for another day as well. Anything pre-petition goes on that proof of claim. That proof of claim also shows the trustee, the court and the world what the ongoing payment is. That starts the process with the court. The trustee is going to disperse that amount. The trustee is going to pay that arrearage amount. The debtor may not like your proof of claim and they may object to it. The trustee may object to your proof of claim, but a properly filed proof of claim is incredibly important. You have to have it filed no more than 70 days after that bankruptcy was filed. It is a very quick timeline. It used to be about 130 to 140 days from the time the case was filed. It was very confusing.
There is a bright line, 70 days from the day the case was filed. You’ve got to have that proof of claim on file. You have an extra 50 days if you need more time to get your allonge documents in order. If you’re still waiting on that recorded assignment, if you‘re still waiting on the allonge, if you’re still waiting on things like that, we can petition the court for an extra 50 days for that and then amend the proof of claim within the 50 days after the 70 days. Our firm pushes very hard to get these done within those 70 days. It helps you, the debtor and us. It helps everybody to get these claims file as quickly as possible. That is a very quick overview of proofs of claim. I have literally spent days talking about just proofs of claim. They’re complicated. We do them in all 94 bankruptcy jurisdictions. We spent about a year putting together all of our jurisdictional rules and what needs to go into these proofs of claim and all these jurisdictions before we took a single proof of claim in a jurisdiction that we don’t practice in.
Are you saying that you can do a proof of claim anywhere in the United States?
Yes, all 94 bankruptcy jurisdictions.
Is attorney pricing to do a proof of claim standardized the way supposedly foreclosure fees are standardized?
Yes, on the foreclosure side, you’re familiar with the Fannie Mae foreclosure fee. Fannie Mae has numbers for bankruptcy cases as well. For example, a proof of claim and a plan review, it’s a bundled service. That debtor files bankruptcy, you’re going to get a notification. You give us a call, give your attorney a call, give somebody a call who can take a look at that bankruptcy. They’re going to review the plan and they’re going to work with you to file a proof of claim. That’s $650. It should be the same that you’re getting charged everywhere because that’s what these Fannie Mae fee guidelines give attorneys and investors clarity in billing. Most of these Chapter 13s also have arrearage. They’re behind on the property. That’s why they’re filing bankruptcy. In order to complete a certain attachment to that proof of claim called the 410A Attachment, that’s a loan history not a default history on loan, your attorneys are going to charge you an extra $250 for that. That’s why you see $900 for a proof of claim. That’s an easy number to budget. You budget $900 for a proof of claim, but that $900 gets you a plan review, a proof of claim and your form 410A completed.
One thing I want to mention, Tony, too for our audience, this is like an intro one-on-one. We do plan on having Tony come back and go into PACER and look at a proof of claim, look at things that you could be looking at a little more advanced course of a lot of this stuff. You may read it and wonder what it is. We are going to have a follow-up that shows you those things. You’ll probably won’t end up seeing that and coming back to both of them. I want to let you know, there’s a lot of verbiage being tossed out there. There’s going to be something that we’ll show you what all that stuff is on another episode.
I’m curious if you ever strategically drag your feet on doing a proof of claim. In the case of my guy, the county tax sale is at the end of September. This guy would always declare bankruptcy right before the tax sale and he would fail to create the plan or do anything that was required and he would file on a bankruptcy and then we would repeat the process the following year. When someone has a pattern like that, I assume you don’t rush to do a proof of claim because you know it’s just a giant joke anyway.
Yes, I’m concerned that this happened so long in this case, Gail. I’m surprised that nobody went to court and said, “Your honor, this is the third time they’ve done this.” I’m shocked that happened.
I had a very inexperienced attorney. I’m convinced.All collection activity stops when the bankruptcy is filed. Click To Tweet
That’s going to happen. If you find an attorney you like, stick with that attorney if you can or ask that attorney for recommendations. I do a proof of claim in Missouri for example, but I don’t practice law in Missouri. If you have a proof of claim and we’re going to want to plan review in Missouri for you and our plan analysis is that you should object to the plan, I can’t object to that plan in Missouri because it’s not a state that we’re licensed in. I’m going to tell you, talk to your Missouri counsel and they can object to that plan for you. If you don’t have Missouri counsel, I can point you in the direction of somebody. I see these questions all the time in the Facebook groups. I try to chime in when I can if somebody is looking for a counsel on a place where I have trusted counsel that I refer matters to.
Chris said my attorney was a divorce attorney and I believe he is correct about that.
That’s frustrating. Gail, I feel your pain with that. I’ve been doing this for fifteen years. I learn new stuff every week. Bankruptcy is always changing and always adapting. No two cases are the same. It‘s not something you dabble in. If you get somebody like that who handles divorces and they want to do a little bankruptcy on the side because they think it’s easy money, it‘s not. That $900 goes quick.
I understood after two and a half years of this, what I should have done, which is call the sheriff’s office and the county where this was happening and ask them who does all the foreclosures. I assume in the states where you are practicing, your name would come up very often.
You would see people in Pennsylvania as well like that. Let’s talk about a little bit of timeline action. I want to lay out some assumptions because everybody wants to know timelines. Virtually, every bankruptcy is different. We’re going to assume that we’re only covering 7s and 13s from a high viewpoint as we’ve talked about. Bankruptcy is very circuit, district, division, judge and trustee specific. I’m going to use very broad general timeframes on things. Each one of these could be its own presentation.
Chapter 7s briefly, a creditor’s perspective. Pre-filing, that debtor is wanting to see an attorney. When they go to see an attorney, that attorney is going to tell them, “You can tell your creditors that you’re filing bankruptcy.” As a creditor’s attorney and as talking with creditors on this podcast, until that bankruptcy is filed, you can do whatever you want. You can collect, you can go file actions, you can get judgments. You can do everything until that bankruptcy is filed. Just because they tell you, “I’m going to file bankruptcy, here’s my bankruptcy attorney’s name.” Until they have a bankruptcy case number, that generally speaking means you can keep going with what you’re doing. The debtor’s going to complete their pre-filing credit counseling and the debtor signs all their paperwork.
I talk about this pre-filing stuff in case we ever have to go back and look at some of this paperwork if we think there’s some odd involved. I do a couple of these cases a year. Our firm handles some of these cases. I will go back and ask a debtor, I’ll go to a 341 meeting of creditors and say, “When did you see your attorney? When did you take this credit counseling?” This is important to our timeline not usually, but in the case where we’re trying to prove some surreptitious behavior, hiding an asset, we may care about when they completed their pre-filing credit counseling, when they sign their paperwork, when they first went to see their bankruptcy attorney. That may lay a case. I see it more of a car issue than it is a real estate issue. Buying a car and then finally bankruptcy the next day, “Did your attorney tell you to do that? You can’t do that.” It’s not so big on the real estate side but it can be important.
Day one, let’s start with counting days. That bankruptcy case is filed, an automatic stay goes into effect and the judge and trustee are assigned by the clerk of the court. It’s a draw of the hat. That all happens on day one. For the next couple of weeks, up to about a month, between days fourteen and 30, all the creditors that were listed will get notice that the bankruptcy was filed. You will get served a copy of the filing and a Chapter 7 bankruptcy. You should be reviewing the statement of intent.
Chapter 7 bankruptcy has a statement of intent. What does the debtor want to do with your property? What do they want to do? Do they want to keep it? Do they want to surrender it? What are they trying to do with it? I’m not going to get too much in the second lien position on these one-on-one presentations, but there are things to keep in mind if you invest in seconds when it comes to 7s and 13s. Are they current? If they want to keep the property in Chapter 7, I always suggest you’re doing what’s called a reaffirmation agreement. It is an agreement that you enter into with the borrower. It’s another promise to pay on a debt that would otherwise be dischargeable.
When that debtor gets their discharge in the 7, that debt is discharged. There’s no more personal liability on that debt. If they sign a reaffirmation agreement and they get a discharge in that bankruptcy, that debt is not discharged. If you ask me and I don’t counsel on buying and selling notes. I’m the attorney on the back end of those deals. It strikes me that makes your note that much more valuable if you’ve got a reaffirmation agreement on that Chapter 7 Bankruptcy. That’s something that your attorney does. Your attorney will fill out the reaffirmation agreement, will solicit the borrower through their attorney to sign that reaffirmation agreement. It has to be filed prior to the discharge being entered all the way up until that day that you have to get that reaffirmation agreement file. That’s what you should be thinking a couple of weeks after that bankruptcy is filed.
MFR, if the debtor does not want to keep the property in a Chapter 7 bankruptcy, nothing is going to devalue that property more than a debtor who does not want to pay for it and does not want to keep it. My advice, even though a Chapter 7 Bankruptcy is only four to six months, things can hold that up. My advice is that if that bankruptcy is filed and that statement of intent says surrender, file that motion for relief from stay, get that property out of the bankruptcy estate and right back into state court. You’re not going to get any money from the borrower. That’s not going to happen, but you’re going to get your property back after the foreclosure sale or whatever process we’re in in the state court. You can wait until that bankruptcy is discharged and closed and then go back into state court. You’re looking at many months and that property continues to devalue. This is a plug to seriously consider spending some money on legal fees and getting that property out of the bankruptcy estate as soon as possible. That’s about the timeframe you want to look at doing one of those.
If they say they do want to surrender it, can you make a Cash for Keys offer at that point?
You are not able to do that. You have to get relief from stay before you can do that. You are disposing of the property. You are transferring the property. You cannot do that. Everything has to be cleared through the court. Once you get relief for staying, then you can do that all day long. Then you can solicit for Cash for Keys. That can be part of a motion for relief from stay. I’ve put that in motions for relief from stay that we are interested in Cash for Keys. You cannot do that without relief from stay unless and until that bankruptcy is discharged and closed several more months down the road. It’s got to be filed prior to the debtor receiving their discharge. Around day 120, the debtor’s going to get that discharge. That’s about the four–month mark. Providing there was no asset that the trustee recovered, providing that the debtor got a no–asset case, which is the vast majority of Chapter 7s. The case is going to close a couple of days later, generally within a month.
Post–discharge, some things you need to keep in mind after that discharge is entered. You want to make sure that our account is updated from the bankruptcy case. If it was discharged in bankruptcy, make sure you’re not trying to collect from them anymore. If it was reaffirmed, make sure that if you changed any terms of the loan that you’re collecting for the terms of that reaffirmation agreement. It’s a term of art, reaffirmation agreement. I believe they’re invaluable to a Chapter 7 note. Get a reaffirmation agreement signed, executed and entered. Make sure not to be collecting on discharge debt. If the debtor wants to make voluntary payments, by all means take the voluntary payments. If the voluntary payments eventually pay off the note, if the notes still existed, send them a cancellation of the note and it’s done. The property is theirs.
What if your servicer was sending a monthly statement, is that considered trying to collect on the debt?
No, because there are guidelines that say they have to send those monthly statements. Those statements should have bankruptcy disclaimer language on there if you’re in a bankruptcy, if you’ve received a discharge. This is not an attempt to collect the debt. It’s merely due to governing that.
The reason I ask is a perfect example is I have a borrower who had a Chapter 7. It’s a land contract and they had been making sporadic payments. I’ll spend three, four months without payment. I reached out to a certain law firm in Indiana and your office reviewed it and said, “We don’t send a demand on this.” I forget what it was that Franco mentioned, but it’s not a demand for payment. It’s like a demand to get the property back in a sense.
You’re not demanding for payment. You’re demanding your property back. Any questions on a timeline for a Chapter 7 bankruptcy? Pretty quick. Four to six months. Most of your notes are going to be involved in 13s in all honesty because they’re in default. If a debtor’s in default and they want to keep the property, they’ve got to file a Chapter 13. We’re going to gloss over the pre-filing and gloss over the day one because it’s the same in both cases. Those dates could become important later on, but they’re not right now.
We’re into the next two to four weeks. You’ve got a copy of the paperwork. Assuming you’ve been listed, you’ve been served. We talked about by day fourteen that Chapter 13 plans are going to be filed. It must be reviewed. By day 30, that debtor should start making their plan payments. Even though that plan is not confirmed, that debtor is supposed to start making payments to the trustee. Every trustee is different. Some trustees don‘t even want payments to start until day 45. Some trustees expect the payment on the day the bankruptcy is filed. Day 30 should be out the day that the debtor should start making their payments.
About day 45 is when that meeting of creditors is held. It’s the same timeline in Chapter 7. I didn’t put it in there. That’s a good date to keep in mind because that is about the time when you need to be objecting to the plan. There’s going to be a date certain that you have to object to that plan and keeping in mind, that’s about day 45. That means before day 45, you had to have gotten this paperwork to your attorney to have that plan reviewed and be started on that proof of claim. You need to be well-started if not filed with that proof of claim.The main way a note is extinguished or discharged in a Chapter 13 bankruptcy is if the debtor doesn't want the property anymore. Click To Tweet
Around day 60 or 70 unless that plan was objected to, that plan’s going to confirm. You’re looking a little over two months in if you let that plan go through, you didn’t object, you were okay with it. That plan is going to confirm. If there are objections to that plan, a lot of people are going to object to the plans potentially. You’ve got creditors that aren’t going to like their treatment. It’s not just creditors that are owed money. It could be an ex that’s owed some disbursement. The trustee can object to the plan because the trustee doesn’t like the terms that are in the plan. Oftentimes, multiple people do objective plans. These trustees have a lot of guts trying to get these plans to confirm. A lot of deals are made to get these plans confirmed and you want these plans to confirm after your objections are resolved and you’re getting what you want. You want these plans to confirm because that’s where you’re going to start getting money from the bankruptcy.
Tony, I have a quick question. I think it’s time to ask this one when we talk about objections. A lot of times you’ll see when they file the plan they’ll put a value of a house that might be a little light versus what it’s worth for one of two things. Sometimes if it’s a first, they may try a cram down. Then if it’s a second, they may try and get that completely stripped. The question is how often do you see crammed downs? The other question is if your second get a strip, do you have any remedies? It’s two questions I want to throw out there with objections because that’s when I’ve seen them. I’m curious from your perspective what you’ve seen.
First lien position residential property cannot be crammed down. If you are the first lien, you generally don’t care what value they put in there in a Chapter 13 Bankruptcy. Because if you’re a first lien and it’s their residential property, you cannot be crammed down. If you hold a second or a third or lower than that, you do care about the value. That is something that you would want to object to. Your different jurisdictions cover lien strips differently. Some jurisdictions allow you to do it in a plan. Some jurisdictions force you to file what’s called an adversary complaint, but by and large, seconds need to be very concerned with value and non-residential lien holders need to be concerned with values. Make sure you understand what your note is on and what the debtor is doing with that property.
These are humongous questions. That means they’re very large questions that are not easily answered. We’ll do the best we can and we’ll keep marching forward. Don’t forget these last years. These are things that we need to watch after day 70. You’ve got to monitor for objections to your proofs of claim. Different people can object to your proof of claim. They may not think that the arrearage amount is right. They may not think that you’ve got the appropriate documentation attached. I see a lot of note buyers trying to save some money filing their own proofs of claim. You’re playing with fire when you do that. You don’t even need to use me. I would advise you finding counsel and having your counsel file personal claim for you. They will monitor for objections to claim. They will work with you to get those objections resolved if they’re filed.
If a plan objection was filed, this is also the time that you’re going to want to be working that plan objection. To use your example with the house being undervalued. Let’s say they’re undervaluing the house and you’ve objected to the plan. This is the time that you want to be working with debtor’s counsel to get that plan objection resolved and it may not be able to be resolved. It may go to court and the judge may have to decide. That’s the dirty underbelly of Chapter 13s with seconds is that if there is no equity outside of the first position and you’re in the second position, you can be stripped. Valuation is very important to that second position note holder. Now’s the time to be negotiating that day 70 through going on. We’ve got a couple of little timelines here on after confirmation. If nobody objects, confirmation is going to be after about day 60 or 70. If everything’s sailing through just fine, the plan is confirmed. You’re going to watch for your payments to come in. If the plan is confirmed on the 60th day, you probably got to give it 30 to 45 days before you see payments.
Payments take a little while. You’re not going to get payment the day after the plan’s confirmed. You’re going to see that a month, month-and-a-half later. Watch for payments. If the debtor falls behind on payments, talk to your attorneys to see if relief from stay should be sought. It may be that those trustees know that trustee takes two months, 60 days to make their first payment. Don’t say, “Tony Sottile said payments should come in on day 30 because it’s in a jurisdiction where that trustee lets them go 60 days before they make the payment.” I’m trying to stay in broad general terms here. That’s something that your bankruptcy attorney in that state will be able to tell you.
If the payment changes after confirmation, if it’s an escrow loan and taxes are going up, something like that. Insurance is going up that you’re dispersing. You have to file a notice of payment change. If that payment changes, you must notify all parties after confirmation if you’re selling the note. If you’re acquiring a note after confirmation, you’ve got to make sure that we’re getting a transfer of claim on file. If you’re selling it or if you’re buying it, that’s a cost you’ve got to keep in mind. The transfer of claims is $125. That’s something that you might need to keep in mind if you’re buying or selling a note after confirmation. You’ve got to get that transfer of claim file and it’s exactly what it sounds like. You are transferring that claim to you from the previous creditor.
It reminds me, Gail, we’ve got to do that with that Wisconsin asset that I mentioned to Tony.
If you’re looking to charge the borrower for any of the fees that you’ve accumulated in the bankruptcy, not all but some jurisdictions allow you to charge the debtor for these fees. You’ve got to file a PPFN, Post-Petition Fee Notice or Notice of Post-Petition Fee Expense and Charge. It’s another thing about bankruptcy that complicates, there are different terms for the same thing. It’s difficult to call it sometimes, but I tried to stay consistent with the terms that I use. If it’s in a jurisdiction where you can pitch someone. Even if some of your fees are recoverable against the borrower. Before you collect those from the borrower, before you assess them to their account, you have to file a Post-Petition Fee Notice.
We’re in month 36 through month 60. We’re into the meat of the bankruptcy. It’s chugging along, getters making their payments. You’ve got to continue to monitor the case. Eventually, that plan is going to complete. All the terms that they agree to in that plan will be done. The arrearage will be caught up. Various other things will have a net in that plan. It’s not just a creditor that is paid in that plan. There are other things the vendor has to do in order for that plan to complete. When those arrears are paid in full, the bankruptcy trustee is going to send out a notice to you that says they have paid the final cure, it means the final amount on the arrearage has been paid. You must respond to that notice. You have 21 days to do.
Trustees are starting to show cause creditors for not responding to those. When that is issued, you’ve got to get it to your attorney and you’ve got to get something filed. You may disagree. You may say, “The debtor is not current and we would need to prove that the debtor is not current.” Generally speaking, if all payments were made on that arrearage amount, whatever was in your proof of claim, whatever was in the plan is going to be paid. You’ll just be filing a response that says, “We agree.” The final cure has been paid, the debtor is current. Eventually, the debtor is going to receive their discharge and the case will close just like in a Chapter 7 Bankruptcy.
Post-discharge is the same stuff that we’re worried about in the 7. Make sure the account is updated from the bankruptcy case. Chapter 13 is a little different. They’ve probably made some payments. You’ve got to make sure that those payments are all accounted for. You’ve got to make sure you’re not collecting on a discharged debt. You’ve got to make sure you’re not going after the borrower for fees that your attorney charged you that you didn’t file a Post-Petition Fee Notice for. There are a lot of things to keep in mind. That’s why obtaining good counsel on Chapter 13 specifically is extremely wise. Your attorneys will shepherd you through this process on each case. That is a general timeline on what a 7 or 13 look like from beginning to end.
We’ve talked about rights and remedies along the way, but I wanted to bring up a couple more that we either didn’t get to or things that I want to spend a little time on. We’ve talked about the plan treatment. If you don’t like your plan treatment, you’ve got to object. Look for the valuation of your property and look for the debtor’s use of your property. This goes back to Chris’ question if valuation matters. Yes, valuation matters depending upon your lien position specifically and what the debtor’s use of your property is. Debtors cannot cram down the first lien on residential property. If you hold a first lien on the debtor’s residence, valuation doesn’t necessarily matter to you so much.
Other things to keep in mind, you’re not getting paid. Should you be getting paid? You might not be getting paid because you’re not supposed to get paid just yet. These are some responsibilities that you have. You can do this for your attorney to know when you should be getting paid. You’re not going to be getting paid until that plan confirms generally speaking and certainly on the arrearage. You may call me and say, “Tony, it’s been two months that I filed bankruptcy. I have not gotten any payments.” There might be a reason for that, very jurisdictionally specific.
You have a claim on file is the claim in your name. We’ve talked about filing transfers of the claim. If you bought a note in bankruptcy and the payments are going to Bob and you need them to go to you and you’re not getting paid, there’s a reason why. You didn’t file a transfer of claim to get the payments going from Bob to you. Why else could you be not getting paid? Is it time to file for relief from stay? Your attorneys will be able to keep that in mind and that could be a remedy for you to either start getting paid or to just tell the debtor, “We’re done. We’ve had enough. We want to take this through foreclosure.”
Tony, aren’t there certain things that also take priority? I know the trustee fees usually get paid first and certain other things get paid. It still could be two months before you see the money.
You’ve got some claims that are ahead of you. You’ve got administrative claims and then priority claims that are ahead of you. You mentioned a couple right there. Taxes are going to get paid before you. The debtor’s attorney is going to get paid before you which I find difficult, but it happens. There are people or entities that will get paid before you, but you should be getting your ongoing payment. When I say that your payments may not be coming in, I’m talking about your payments on the arrears. You should be getting your ongoing monthly payments at that point. Finally, for relief from stay. This is a remedy that you have. It gets the property out of the estate, which we talked about. It’s usually resolved with an agreed order. In working with note buyers for as long as I have, you just want money coming in on these notes.
A motion for relief from stay, I’m not going to say scare tactic because that’s not what they are. They’re legitimate pleadings, but sometimes that’s the effect of filing a motion for relief from stay. It gets that debtor paying again. It gets you a little bit more money coming in. That bankruptcy may fail, but that motion for relief from stay got your more money before that case dismissed. They’re often resolved with an agreed order and that agreed order is going to say, “We know they fell behind again. We’re going to let them catch up. Here’s the way they’re going to get caught up. If they fall behind again, we don’t want to have to pay Tony another boo koo bucks to file another motion for relief from stay. At that point, we want to get our relief from stay. It holds the debtors speak to the fire to get the payments coming into you all. Another remedy with repeat filers, check out how many filings they have filed prior to the current filing, then you may have some remedies with that as well.Valuation matters depending upon your lien position and what the debtor's use of your property is. Click To Tweet
A collection of your attorney’s fees from the debtor. Attorney’s fees are not allowed everywhere. For example, Ohio, you’re not allowed to get your attorney’s fees from the borrower, which is frustrating, but that’s the rule in Ohio. If you are in a jurisdiction where it is allowed, then you have to file this notice and that has to be filed within 180 days of the charge being accrued. We can argue over when accrued is. Unfortunately, it’s not bankruptcy lawyers, creditors and debtors that are writing these rules. It’s congressmen and congresswomen and they don’t know bankruptcy. They use a word like accrued. Accrued can be when I bill you. Accrued can be when you pay me. Accrued can be when you assess the borrower that amount. Generally speaking, in most jurisdictions it’s going to be when the service was incurred. When I bill you, that starts that 180 days and you have 180 days to file this notice and then you can collect it from the borrower. You wouldn’t be pulling the borrower. It would come in through the bankruptcy court. This varies widely by jurisdictions.
Some jurisdictions will not allow all of your fees and costs to be recovered but will allow a portion of them. For example, the Northern District of Illinois has a trustee, Deb Miller. I’m still going to charge you $900 for a proof of claim, plan review and those pleadings. Deb’s only going to let you collect about $400 of that from the borrower. If I do that for you in the Northern District of Indiana, and you want me to file this notice, we’re only going to file it for $400, because that’s all that Deb will allow you to get back.
“Can I buy or sell a note and bankruptcy?” Yes, you can but make sure you know what you’re buying. Make sure if you’re buying a note that was discharged in a previous 7, you can’t collect on that. You’re limited only to getting your property back. That may change your pricing on that note. Make sure you know what you’re buying. We’re talking about some costs here next. Those are also things that you should keep in mind when you’re pricing a note that is in bankruptcy or a note that looks like it’s going to be in bankruptcy. Those were some other things to keep in mind of your rights and the remedies that you have. The last topic that we have is cost and what things are going to cost you. I wanted to make sure that we’ve got everybody up to speed so far. Are there any questions that would be good to ask?
We have a question, “At what point if a loan is in BK should you not buy the loan if these timelines are important and is there a point that’s too late to do anything?” I’ll get your answer and I’ll answer after you do as an investor what my opinion is.
It would be different between a 7 and a 13. In a 7, if the debtor wants to keep the property and your goal is to get a reaffirmation agreement on, you need to do that before the discharge is entered. That’s going to change your timeline quickly. In a Chapter 13 honestly, if that debtor’s paying in that case and that’s the case that’s going along well, most of the attorney’s fees are at the beginning of the case. Most of the attorney’s fees had to do with the proof of claim getting filed, a plan being reviewed. That’s that $900 fee that we’ve talked about. $900 may not sound like a lot, but if you’re looking at the note that’s only a few thousand dollars, that $900 is a lot of money. It may be more advantageous to buy a note if money’s a concern like that to buy a note after that legal work’s already been done.
I like to buy my bankruptcies when the plan’s been confirmed for about twelve months. That way you know that they’re probably not a constant filer. The fees are already paid and they’re at a point where they’re slowly starting to see the light at the end of the tunnel where they might have three or four years left on it. You have to remember, once the plan’s discharged, all their credit card debt and a lot of their things are out from underneath them, so they’ll have probably more payments to continue paying the mortgage. A lot of them will look to refinance because there are companies that have refinanced you within 60 days or 30 days after a BK which to me is insane, but companies will do it.
For me as an investor, I like to look at BK 13s that have been about twelve months and longer. If they’re towards the end, that doesn’t bother me because I know they’re going to be discharged on the debt. Chapter 7s on the other hand, if it’s an inactive Chapter 7, I’m assuming that you’re getting an REO. All the times I won’t deal with the property in Chapter 7 because my goal is usually to work to a borrower. Alot of times, you can also see when you read the court filings whether or not they want to keep the property or not because that’s something that they will put if they want to surrender it or try and work something out. Usually, you can find that in the case as well.
Let’s talk about some costs that are involved with bankruptcy. These are general costs of common pleadings. These are taken right off of the Fannie Mae fee guidelines. I don’t raise my rates until Fannie Mae raises their rates. I don’t lower my rates unless Fannie Mae lower their rates. Our firm tries to abide by these Fannie Mae fee guidelines because it’s very transparent. These are readily available on the internet. When they increase, that’s readily available. You should not ever get a surprise from our firm or from any firm as to what the fee should be. These are the general costs of the most common pleadings in bankruptcy.
I do notices of appearance. Notices of appearance are not a Fannie allowable fee type. That’s going to be charged differently by your firms. When we started out, we had a client that wanted us to file notices of appearance on all their cases. We came up with $150 number and we’ve since learned that that’s a good average number. We’ve stuck with a notice of appearance for $150. I want to be clear in talking about fee clarity and that’s where that came from. When must you file a pleading? We talked about these along the way. When Chapter 13 is filed, you must review the plan and file a proof of claim. You must file a plan objection if you don’t like your treatment. You must file a transfer of claim if you acquire a note and bankruptcy and expect to be paid.
These are things you have to do. These are not things that you can maybe do. That’s why there’s a definite cost to dealing with notes in bankruptcy because there are fees that you will have to pay. Otherwise, you run the risk of losing your lien. You run the risk of a plan that you don’t like being confirmed. What you’ve completed a deal on, you’re not going to see the benefit from because you didn’t have somebody review the plan that understood what they were doing. These are a series of pleadings that you must file. When should you file? We talked about those as well. If an account becomes delinquent, you should consider a filing for relief from stay.
How are you going to wait to see if that debtor makes that payment? In that Chapter 7 context, consider getting that reaffirmation agreement. It’s going to cost you some money. We’re going to file a notice of appearance, so that’s $150 and the reaffirmation agreement is $250. That’s $400 right there. We’re not talking about chump change. That’s good money in order to get a reaffirmation agreement. That reaffirmation agreement will allow you to then collect from that borrower, post-discharge in a Chapter 7 context. That while not a must pleading is a should pleading. I have a lot of my clients don’t want to make motions for relief in Chapter 7 because they’re pretty short, only four to six months.
A lot of things can hold up Chapter 7 cases. Nothing devalues a property more than a debtor who is not paying and doesn’t want to keep the property anymore. I hate seeing somebody tried to save a little money and not file a motion for relief from stay and that property sits there. Consider filing motions for relief from stay in Chapter 7 cases, especially if you catch them at the beginning. You’re getting the benefit of getting that property back that much sooner than waiting for the discharge to be entered. How are we doing with questions, Chris?
We have a question, “What are the ways to get the property back if the debt is discharged besides foreclosure? Is there any other way to get a property back?”
There are all the state court remedies. You’ve got Cash for Keys, deed in lieu of foreclosure. You’ve got things that you can do that aren’t collection methods that if the debtor wants to do and is voluntarily doing, you can’t force them to do Cash for Keys as you know. Those are remedies that may save you time and money overtaking a house through the entire foreclosure process, which is depending upon the jurisdiction. If it’s a judicial district or a nontraditional district, it could cost a lot of money and a lot of time. If you know your jurisdictions, have your attorney or your servicer post-discharge, reach out for Cash for Keys offer.
You mentioned servicer. One of the things that popped in my head as I know some servicers will do proof of claims. I am more conservative, so I have my attorneys do it. It sounds like you don’t need to be an attorney to do it. Anyone can do it, but I think the recommendation should be from somebody who’s very familiar with it.
That’s my opinion and that’s my recommendation, yes. When you say some servicers file the proofs of claim, I see some servicers filing proofs of claim. If they know what they’re doing and they’re cheaper than me, maybe that’s not the worst thing in the world. Some servicers say they do it, but then they go on hire me to do them. We file a lot of proofs of claim on behalf of servicers like FCI, SN Servicing and Madison Management. Some of these servicers that note buyers are using, were the ones filing those.
One thing that I didn’t realize until it happened to me and you mentioned it a few times was, I logged in because I’ve got an account. I forget what’s the name of the company where you can get an account to see your case files and see the payments that the trustee gets. There was $4,000 in there. I was like to the trustee, “How come you’re not disbursing the payments? There’s $4,000 in there.” They replied back, “The case hasn’t been confirmed yet, so we can’t pay until any money until it’s confirmed.” It’s been going on for five months because there’s something where the borrower either didn’t take the right training or he waited too long for something. That’s something that was educational for me in bankruptcy as well.Nothing devalues a property more than a debtor who is not paying and doesn't want to keep the property anymore. Click To Tweet
That’s a good topic to cover at advanced level things. That could be some inside information if you’re pricing a note that’s for sale. That’s pre-confirmation. You’re doing some due diligence and you happen to see that the trustee is holding on to some money and they’re not dispersing it yet because the plan is not confirmed. There are ways to get that money pre-confirmation. You may be sitting on a deal that you can pull the trigger on and be able to get at that money pre-confirmation. Because if that trustee has that $4,000 in your case and that debtor dismisses, that money goes back to the borrower, that doesn’t go to you. If you are able to get into court and file some appropriate pleadings, you may be able to get at that money before that case dismisses.
The other secret that I’ll throw out there is during this timeframe, the borrower might be making payments but they’re not going to you or the servicer. When a note seller puts out a tape, it may look like there haven’t been payments in six to eight months, which would be non-performing when it technically could be performing. The other component to it is a lot of times I see these trustees, they almost pay in blocks. It’s not always monthly. It might be like nothing, nothing and then the third month I might get a check for $2,000 sometimes. You’ll see that sporadic payment and people think, “That’s a non-performer.” The reality of it is, no, the person’s been paying me. It’s the trustee may have gotten lazy or didn’t issue your money at that point in time.
Those are some of the things that I’ve learned, my secrets I’m telling people out here when you’re looking at some of these things when you’re trying to buy assets and bankruptcy that you don’t look at it and take it for granted what’s there. You should look at the big picture and realize that the payment they got in three months was the three months of payments. Was it the trustee or the person still made the three months of payments? It may have taken a little while. “If you’re under contract with a loan that’s in BK and doing your due diligence, can you review the BK to let us know what your options and what would that cost?” This is a question to you, Tony, is if they’re doing due diligence and there’s something in bankruptcy, can they hire you to go into PACER review everything and see what’s what?
We do those very frequently and we charge $100 for those.
One of the things that we want to do is, not to take anything away from Tony and his business, but just going into PACER and show people around on some of the things to look at. For example, if you’re buying a note and bankruptcy going in PACER and seeing the claims register to see what they did file at the time and to see if there were a lot of objections and see where the case is. Because you’ll get a case at six months old and there could be 90 something different filings just in that BK. There’s a lot that goes into it, but also there’s a lot of great information like tax return, information for the borrower, how much they make their other debts if they own other properties. It’s amazing how much stuff is out there.
PACER can definitely be your friend and that doesn’t take money for me. I like an educated client. An educated client is a good client if you ask me. Gaining some knowledge on PACER. There are all kinds of different courses you can take on how to navigate PACER and we’ll do a little bit of that. My interactions with PACER are pretty limited, but I’m looking at the same things that you’re looking at. I don’t have any necessary PACER secrets. These are all very good topics to talk about next time.
For people out there, it’s PACER.gov. That’s where you can search all bankruptcy records. You do need to register and if you download stuff, it’s $0.10 a page. It’s short money, but anybody that’s interested in buying notes that are in BK, definitely you want to get a PACER account. It’s a must in my mind to have.
I completely agree, you’re dealing with pennies. It’s $0.10 a page. If you don’t charge that much, if you’re not downloading that much, I don’t know what the numbers are. You’re not even charged. You’re billed quarterly. If you’re below a certain amount, there’s no charge. For example, I think my last quarter PACER bill was about $8,500 for a quarter. We use PACER a lot. We’re always checking PACER. We’re always on PACER for things for you all. Use us for that.
As a note investor of mine is maybe $20 to $30. What it is, is I’ll be looking at a note and I’ll go pull the original plan, which might be 20 or 30 pages. You might knock $2 or $3 right there. I may go pull some things from existing files that I have possibly. You shouldn’t be spending more than $20 or $30 doing due diligence on PACER. That’s a drop in the bucket.
It’s just good common sense.
Tony, it was an excellent dive into a lot about BKs. It’s one of those things that I see people are afraid to jump into. One of the first notes I bought was in BK because I wanted to learn the process and it is a learning experience. There’s not a lot of risk in my mind when you’re getting something in BK because the numbers are the numbers. If you’re buying an existing note in BK, the arrears are arrears. Everything’s already agreed to, so there’s nothing more that they can contest. It’s not like you’re buying a note that’s in foreclosure and they’re going to turn around and file a countersuit against you because they feel that there is a fair debt collection violation or they don’t like the amount. It’s a non-performer on training wheels almost in my mind.
Bankruptcy is good. If it’s done the right way, if the trustee is an involved trustee, the trustees are doing all the accounting for you. If I were to buy notes, I would specialize in buying notes in bankruptcy. I think they’re great. There’s a lot out there. I’m not going to say a lot of the work is done for you, but some of the work is done for you.
The other thing too that I’ll mention is as part of doing due diligence, one thing I’ll look at too is not only looking at notes that are in bankruptcy, but if there’s a borrower that’s non-performing, I’ll go look to see how many times that borrower has filed bankruptcy. I’ve learned my lesson the hard way. Similar like Gail had that if you see somebody filed two, three bankruptcies in the last three years and they’re non-performing, they’re filing again. You’ve got to put plug–in those costs and numbers and timeframes because they’re dragging this out. It’s something you don’t even want to have to deal. The most part, I’ll shy away from those because it’s not worth it.
It’s going to be a money pit. All your money is going to go to your attorney for attorney’s fees.
You’re going to get it back from the borrower. If there’s no equity in the property, it’s money that’s out the door.
Thank you, Chris and Gail. Thank you to you both for the opportunity to be here.
No problem. We’ll definitely have you back on to do a little deeper dive into things and a little more insight for people on that. This was very beneficial for others. For people who are reading, what’s the best way for them to get in touch with you?
The best way to get in touch with me is via email or just call the office directly. We have grown. If you’ve been with me since the beginning, getting me on the phone might be a little more of a challenge because I’m on the road a lot. The benefit of that is that we have quite a few attorneys in the office. We’re up to ten attorneys between all of our offices and all of our states and all of our practice areas. You’ll be able to get to somebody quick and be able to get your questions answered.
I was joking with Franco talking to him and I said, “I think I’m paying for your contractor’s renovation bill because he did twenty collateral reviews and three forfeitures and few of the things for me.” I saw that you have a new office space that you’re renovating. When is that can be done?
We took on some space next to our current space. We had about 3,000 square feet in Loveland, Ohio, Cincinnati, where my office is. We outgrew that soon after we moved into it. We took over this space next to ours, which is an additional 8,000 square feet. We’ll tear down those walls between the two suites and we’ll have one big office of about 11,000 square feet. We have 23 people in our Cincinnati office. We’re at about a 36 firm-wide, ten attorneys and trying to do the best work that we can and trying to help everybody out.
I have a last question. Out of curiosity and you’ll need to answer this, I was curious if you’re looking to expand into any more states besides Ohio, Kentucky, Indiana, Michigan and Illinois?
Probably not. Illinois was an easy add because I was licensed federally in Illinois. We’ve got a significant mortgage creditor client want us to go into Illinois. We’ve looked at Tennessee because it’s an adjoining county. We’ve looked at West Virginia, we’ve been asked to go into West Virginia by a significant client. We passed. We’re happy where we are and expanding the volume that we have in those jurisdictions.
Thank you again for joining us on this episode of the show. If people need to reach out to Tony, you can reach him at Tony.Sottile@SottileAndBarile.com. Thank you for reading.
About Tony Sottile
Tony was licensed as an attorney in 2002 after graduating from Ohio Northern University, Pettit College of Law with a Juris Doctorate and from Transylvania University with a Bachelor of Arts in Business Administration. Upon graduating and passing the Ohio Bar, Tony began working for a national firm representing consumer debtors and small businesses in Chapter 7 and 13 bankruptcies. In 2006, Tony began working for a firm specializing in representing creditors. Since then, Tony has handled matters pertaining to bankruptcy, real estate foreclosure, eviction and more and in 2015, he opened Sottile & Barile, Attorneys at Law.
Tony is licensed in the States of Ohio, Kentucky and Indiana as well as in the Federal District Courts of Ohio, Kentucky, Indiana, Michigan and Illinois. Tony is a member of the Ohio, Kentucky and Indiana State Bar Associations, the Cincinnati Bar Association and the National Association of Chapter Thirteen Trustees (NACTT).
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