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Note Investing And Buying Bankruptcy Loans

March 31, 2021

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GDNI 146 | Buying Bankruptcy Loans

 

As much as we may hate to think about bankruptcy, it’s probably something we’re going to see a lot of soon once all of these COVID restrictions get lifted. This is because many people who have equity in properties over the last couple of years and those who may have been unemployed or have trouble paying their mortgage would be filing for bankruptcy instead of losing their house. For note investors, this could be a lucrative project. In this episode, Chris Seveney and Jamie Bateman discuss several case scenarios of bankruptcy and note investments you can take advantage of. They explain the difference between Chapter 13 and Chapter 7, and discuss what you as an investor should know if you want to start buying bankruptcy loans or if those you already own go into bankruptcy.

Listen to the podcast here:

Note Investing And Buying Bankruptcy Loans

Jamie, how are you?

I’m doing pretty well, Chris.

Why don’t we start with some trials and tribulations? What have you got going on?

I can talk about a bunch of things, but I’ll talk about one since we brought it up before. It’s this CFD in North Carolina. Long story short, we’ve been trying to work with this borrower for a year. It was March of 2020 when everything is shut down. I’m trying to give her options for modifications and different options. Here we are twelve months later, her boyfriend is in prison and she was arrested for different things. We offered her a three-month deferment and then she went dark. I may have mentioned that previously. We’ve gotten her attention through our attorney. At the end of the day, we’re moving forward with the forfeiture unless she can come up with a full reinstatement. I feel like I’ve said this but we’re here a few months in. This will tie into my Note and Bolt later on.

I got an email from a servicer. I have a borrower contesting the force-placed insurance fees and saying they were never notified and stuff. Thankfully, when I bought all these loans, we did send out all the letters and so forth and so on. I went through that whole process. I got to get the servicer copies of those letters, but that was going through the notes with the borrower and stuff in the servicing portal. Going back, I’m like, “Did the borrower have insurance?” I forget to pull it off. If there’s a way to track your insurance, it would be wonderful for that purpose.

GDNI 146 | Buying Bankruptcy Loans

Buying Bankruptcy Loans: Don’t get aggressive on anything you bid in bankruptcy.

 

I went through and the borrower looked to get insurance back in late 2019 or early 2020 but all they do is get a quote and they never sign the agreement. At first, I’m thinking it’s not uncommon sometimes as an investor if you manage your own force-placed insurance. A borrower gets their insurance, a servicer gets it and sends it to you and it’s like, “I forgot to cancel.” If it wasn’t something or accidentally out the email or what it may be but, in this instance, I’m like, “No. I’m good.” We’re talking $20 a month. It’s what it is. It’s $200. The reason why she is contesting it was the servicer, I send them every month the money that I paid for force-placed insurance with every loan outlined and stuff to add as a charge. The servicer didn’t add the charges for eight months that I’ve been screaming in for. The borrower sees a one-time bill of $180, not the $20 a month. It was like, “I don’t want to pay that.” We’ll talk about that in the Note and Bolt.

That is an area that’s a little confusing regarding the CFPB compliance. For example, I’ve got a letter returned, “This property was vacant.” In the second notice, “Have they been notified officially?” It would be nice to have someone who could manage that for you.

As a note investor, insurance and taxes are the two things I don’t want to ever have to deal with. I use a provider that assists with the taxes but there’s got to be a better way to skin the cat on these. That’s my goal for 2021. I’m going to find a way to make my business easier on insurance and taxes. That one is at the top. We are talking about bankruptcy. It’s probably something we’re going to see a lot of in the near future once all of these COVID restrictions get lifted because a lot of people have equity in the properties over the last many years and people who may have been unemployed or have trouble paying their mortgage. The best thing for them instead of losing their house would be to file bankruptcy. We are going to chat about that. What are your comments, Jamie?

Bankruptcy is an area you can get a leg up as a note investor if you are willing to. Click To Tweet

We don’t know what property values are going to do across the country, but I do think it sets up for more bankruptcies than we are seeing. We decided we would frame this in such a way that I’ll ask you the questions primarily and we’ll go through some case studies. You’ve had a good bit more experience with bankruptcy loans, not your personal bankruptcy, than I have. Bankruptcy is one of those certain things when you’re a note investor or a real estate investor. They may seem intimidating if you haven’t dealt with it. You tackle it and you’re like, “Okay.” You’re not necessarily an expert but you’re not afraid to deal with it in the future. I know you’ve had Tony on the show going deep before. It’s one that I need to pony-up and deal with it head-on.

I’ve had a dozen cases in bankruptcy of notes I bought, not my own personal, but the sarcasm in me is I don’t get to the guru status in note investment until I’ve either filed personal bankruptcy or owed people millions of dollars. That is one of the qualifications that I’ve heard if you need to be considered a guru in this space.

I do think we’re going to see more bankruptcies. You touched on the fact that there’s likely going to be equity. People like to compare this recession and economic conditions to the 2008, 2010 crash. Housing prices tanked and that caused the recession. In these economic conditions, most people have a lot of equity in their homes. You couple that with the fact that lending institutions have tightened up dramatically. Eddie Speed referenced something where 30% to 35% of borrowers that could qualify in 2020 for a loan can’t do in 2021. People have equity in their homes but it’s trapped. If they’re unable to make their mortgage payment, this is going to be a leading option for people to get out of their issues. In bankruptcy, you primarily see Chapter 7 and Chapter 13. Do you want to touch on those two briefly? What are the differences?

Chapter 13 versus Chapter 7. The difference is in Chapter 7 is when somebody is looking for a complete liquidation of their assets. I’m not an attorney. This is my definition, which is they want everything wiped clean. When you file Chapter 7 on a mortgage, you’re removing that debt. The borrower is no longer owes that money to you in Chapter 7. What’s confusing in that is the borrower is like, “I don’t owe any money on this house.” It doesn’t mean that they get to keep the house for free. That’s a little confusing because I’m dealing with that with a borrower who thought they could get their house for free. What it means is you still have that security instrument, which is the mortgage or Deed of Trust.

If they want to keep the house, they have to sign a reaffirmation agreement, which is, “I want to keep this and I can keep paying.” If they don’t, then they’re no longer obligated for the debt and go on their way. Chapter 7 is a very quick process. When somebody files, it’s usually resolved in several months if the plan is confirmed. Chapter 13 is restructuring. This is what most people hear. People may get in over their heads in credit card or somebody may have lost a job for six months. They can’t afford their bills or their mortgage. What happens is all that debt gets restructured and they may pay a percentage of the credit card debt, but your mortgage, because it’s secured, let’s say they were $600 a month and you are ten payments behind which is $6,000.

Whatever is owed before they filed, it gets divided by 60 because most plans are 60 months. They can go to 48, now to 72 with COVID, but 99% is for 60 months. That number gets divided by 60 and they pay that amount back over those 60 months along with their regular mortgage payment. That’s another thing investors get a little confused about. In this instance, $6,000 divided by 60 is $100. Their payment was $600 already. You should now be getting $700 a month throughout this bankruptcy. That may have gone too deep. Chapter 7 is wipe. Chapter 13 is restructure.

Chapter 7 is a complete liquidation. Chapter 13 is a restructure. You see a lot more Chapter 13 in the note investing space.

Sometimes you’ll see what they call Chapter 20, which is they do Chapter 13 then do Chapter 7.

How we were going to approach this is Chris has a few case studies we’ll talk about. In my mind, it’s two separate categories, bidding on a loan that is already in bankruptcy, purchasing a note that’s in BK. The second one is you’ve got a note that goes into BK. For the first one, do you have a case study you want to talk about where you’ve purchased a loan that was already in bankruptcy and how you approached that?

I had a loan that I bought that was in bankruptcy. This was a unique situation because the UPB at that time was roughly $60,000 but the total payoff at that time was about $130,000. This was one where people are like, “Do you pay above UPB or not?” It was in bankruptcy and the plan was confirmed with that amount listed in BK. It was reviewed as accepted. I didn’t get overly aggressive because, in a sense, I paid under $50,000 for it. In that sense, I paid $0.80 something on the dollar. It was nonperforming as well. The borrower had not paid in five years and filed the bankruptcy. When I was reviewing the bankruptcy, here are a few things that caught my eye.

GDNI 146 | Buying Bankruptcy Loans

Buying Bankruptcy Loans: You have to understand what the seller is thinking because some sellers just see bankruptcy and sell it as a non-performer.

 

One is in the bankruptcy, the borrower has to provide verification of income to confirm they can afford the plan. They provide verification for the courts to show they can pay the plan. I saw that this person didn’t have a lot of income. By looking at it, he couldn’t afford this property. That rolls into the next question of, “What’s the property worth?” This property was worth over $200,000. There was equity in there. I don’t pay more than UPB. I thought at this time and this was back in 2017 when I bought this, I was like, “I don’t think other people like bankruptcies. A lot of people may pass on it.” I looked at this as a golden opportunity.

I was avoiding it for quite some time. I do think it’s an area you can get a leg up as a note investor if you are willing to.

That was one. There was a second one where the borrower was performing in bankruptcy and he had been performing for about eighteen months. His regular payment was about $800 a month. His bankruptcy payment on top of that was another $600. This was a loan that they’re selling as a nonperformer but he had been paying in bankruptcy. It had a UPB of around $80,000. It was in Maryland at the time when everyone thought the debt collection license was coming up. The total payoff was about $150,000. The property was worth about $120,000 to $140,000. It was underwater but he was paying about $1,500 a month. This one was bought in late 2017. We paid $35,000 for that loan. I still have this loan. He’s still paying in BK. He’s in his last payment and now we are completely even on this deal. Everything moving forward now is profit.

From your experience, how many loans that are in BK when you’re purchasing them or looking at them are performing versus nonperforming?

When I look at them or the ones I bought?

The ones you look at. How many loans do you think are out there that are in Chapter 13 BK that are performing versus nonperforming?

It’s under 50%. There are two thoughts that people file. They file to keep their house for a little longer knowing they can’t afford it and it’s a stall tactic, then there are the people who can. For me, from what I’ve seen, it’s almost 50/50.

You learn so much more by experience. Click To Tweet

How do you approach it if it’s a performing loan that’s in BK as far as pricing? I know it all varies based on the equity and a lot of different factors. How do you factor in servicing costs and trustee costs if it’s a performing loan in Chapter 13?

It’s great that I run it through my calculator, but what does my calculator say? You got to make sure you understand the servicing costs because certain services are $95, whether it’s performing or nonperforming in bankruptcy. Other services are treated as two loans. You’re probably going to end up paying close to $100 a month in servicing costs. You don’t have to pay the trustee or anything along those lines. That’s good. Are we talking about not in bankruptcy or in bankruptcy?

In bankruptcy.

There is a difference that I’ll get to. If it’s in bankruptcy, I’ll be honest, my first go-around on the bid is with those arrearages and pretend they don’t exist. It’s all gravy. If the seller is sophisticated and says, “You’re going to get this extra money over the next six months.” I’ll plug to my calculator. For three years, I might get higher payment upfront, and then it drops on that backend. They are more challenging to bid because you’ve got all these other factors of variations of payments coming in the door. If they default, you’ve got legal costs and stuff that might not be recoverable that get involved in many aspects. They are more complex to bid. I like to keep it simple stupid. I ignore the fact that if it’s performing that extra cost, that’s gravy to me. If I’m paying $400 a month or something, I’m going to bid it at 12% or 15% yield, and that extra money again, I’ll consider it gravy.

Will you typically target a higher yield than a performing loan that’s not in bankruptcy to account for that potential risk? I tried to pin Tony down on how many BK loans go nonperforming. He said around 50%. There’s a good chance that they’re in bankruptcy for a reason. I personally wouldn’t treat that like any other performing loan. How about yourself?

It varies a little bit and this is where you got to put on your “what would you do” hat. The reason I say that is if it’s fresh in bankruptcy, it’s nonperforming. In my mind, “I’m going to bid it as a nonperformer if they’ve made a few payments or whatnot.” If they’ve been in bankruptcy for 2 or 3 years, that’s you got to think of, and then you look at their plan, “What’s in that plan?” If they had a lot of credit card debt and all this other stuff, I look at it from the perspective of, “This was me. I got myself in trouble. I am 1 or 2 years from wiping out tens of thousands of dollars in credit card debt.” I’m going to do everything in my power to try and stay in that bankruptcy plan. Try and finish it and work hard.

You may miss a payment here and there. You’re not going to get thrown out of bankruptcy. They allow a little bit of leeway there. Those are bid a little more aggressive than others. Overall, I don’t get aggressive on anything I bid in bankruptcy. Typically, not the same thing. It depends on where it’s at within the bankruptcy. You have to try and understand what the seller is thinking, too, because some sellers see bankruptcy and they’ll sell it as a nonperformer, even if it’s performing. I’ve had that like this one I bought in Maryland that I paid a nonperforming price for. The guy had been paying in bankruptcy. Here’s the thing though, why they thought it was nonperforming? It’s crazy.

You got to remember the priority of what gets paid. Certain things get paid before you do and the plan may be structured differently. First is trustee costs. The trustee might get $5,000. He gets paid first. You may wait 6 or 12 months before you get paid, but the guy is still paying his plan. He was paying his plan, but because they were reporting the servicers from when we weren’t getting payments, they had it as nonperforming. I go in the PACER with MDs and some of these places, you can see like, “This guy’s wages are getting garnished and stuff like that.”

You can review because if the person had gone eight months and the trustee wasn’t getting paid, the trustee is the one who dictates whether or not he files for throw it out of court. If he is not getting paid, he’s going to throw it out of BK. If he’s getting paid, but he can read through that not as another Note and Bolt right there, is the fact that just because you’re not getting paid, it doesn’t mean that he’s not performing. If there are tax liens, sometimes those may get priority and they may put those as super above you. In one of these other case studies we want to talk about, I was second fiddle to get those paid off. We did have to wait.

You’re waiting six months. You can see the light at the end of the tunnel, whereas the note seller didn’t dig deep enough to see the light at the end of the tunnel.

What happened was in that instance, the borrower got confused too because you say, “He still has to pay his regular mortgage payment.” He did, but he thought it was in BK. It was confusing in the seller, the owner of the note, but it was also in BK. The guy had the money. When I bought the loan, we had to wait, but the guy had thousands of dollars like, “No, you still need to pay this.” He was like, “Okay.”

To me, it points out that you’re willing to go the extra step of research and not be intimidated by the word bankruptcy. That gives you a leg up. The other thing we haven’t mentioned too much is that bankruptcy, in general, gives an attorney a lot of information to work with whereas some of these nonperforming borrowers are finding out where they live or what their contact information is can be difficult. This bankruptcy gives you an advantage there because there’s someone to communicate with and a lot of information to work with, which is helpful.

We’ve done the podcast with Tony Sottile. The amount of information that’s available is unbelievable.

We touched on the two, wrappings up the bidding on a performing loan or buying a loan that’s already in bankruptcy. Is there anything else you want to mention on those two case studies?

The other one is time if it goes nonperforming. Bankruptcies are slow. I bought this in April of 2017, and the borrower had been in bankruptcy. This was the one that went to property was over $200,000. It got dismissed in April of 2018 for lack of payments. It went a year. It wasn’t paid and we were stuck. It got dismissed. He immediately refilled again, which I didn’t think he could do, but he was allowed to. This was on April 6, 2018, he refiles. We kept objecting to the plan because the guy had an income of roughly $20,000 per year. In the bankruptcy plan, he’d pay $500 a month for six months.

It would jump up to $2,500 a month for 24 months and the last 30 months will be $3,000 a month. When you make $20,000 a year, how was he going to afford it? If you are I who wrote a loan to a borrower who had a mortgage payment of $3,000 a month on a $20,000 loan, we’d probably be in prison, but when a judge does it, it’s okay. My attorney finally said, “Let’s stop objecting and let them fail, then we can get the Motion for Relief.” I was like, once you get the Motion for Relief, that is like a get out of jail free card. My attorney mentioned that the Motion for Relief is your safe space.

GDNI 146 | Buying Bankruptcy Loans

Buying Bankruptcy Loans: Bankruptcy is a calculation of how much you make versus how much you owe, and they figure out what you need to still survive.

 

He’s like, “If you file again, you can’t include this. We already got relief from this at being in bankruptcy.” It continues on to the next one. The borrower makes the payment at the bankruptcy and paying his mortgage on the side because the regular payment was $1,000 a month. His BK was $500. He was paying the $500 to keep it in bankruptcy, but not the $1,000. We ended up finally getting a Motion for Relief in July of 2020. We’ve foreclosed on the property in November 2020 which is a whole other case study we could do because somebody was supposed to buy it from them.

Their title company was trying to do some unprofessional things. They’re supposed to close the weekend before then the day before. We had already moved the auction once. I told my attorney, “I’m not moving in again.” They show up with a check. They wired the money that morning but couldn’t provide a confirmation. We’re like, “If it weren’t here by 11:00, we’re owner foreclosure.” They wired the money at 3:00 in the afternoon. We’re like, “Sorry. We sold it at auction.”

Where does that stand now?

It stands where we are waiting on the courts to ratify the sale. It’s very unfortunate because, during this process, we’re technically collecting interest on the loan. The payoff doesn’t stop because the foreclosure has been ratified. The courts are slow because they don’t want to throw anybody out of their home. By the same token based on the size of the loan and the interest that’s accruing every month, it’s costing the borrower money because they could be renting in a place that’s cheaper than what the interest accruing is. They’re paying rent. When you think about it, your interest is accruing $1,000 or $1,200 a month. That is getting added because it’s sold at auction for more than what they owed us. Every month our amount owed keeps going up by $1,200, which is giving them $1,200 less each month where the area they’re in could go rent a place for $750 to $800. It costs them $100 a month.

Before we pivot onto the ones that go into BK when you own them, serial bankruptcy filers. If somebody filed seven times in the years, will you touch that note?

I do the Tom Brady Factor. If they filed BK more than he’s lost Super Bowl, I don’t touch them. That was on the Cash Flow Expo. That was one of my things.

Pivoting now to loans that you purchased that were not in bankruptcy at the time of purchase, but then they go into BK. Do you got a couple of case studies to talk about?

I’ve got two right now that I’ll mention. I’m going to pivot because one popped in my head. That’s an interesting one. This was a borrower who filed Chapter 7 back in 2011 and had the loan wiped. They don’t have the mortgage anymore. They filed Chapter 13 in 2020. It’s an older couple living in a condo. We bought the loan and they hadn’t paid since 2013. The reason why though is they didn’t think they had to pay. The challenge was when we reached out to them, they call the servicer and say like, “Why are we getting this? We don’t owe any money.” When they file a Chapter 7, you can’t send them a bill to collect.

You can send them the mortgage that had been sold, but we did send them a demand letter. We sent some type of legal that say, “We’re going to foreclose on this,” which woke their eyes. We had them submit a financial package and the problem was on their bankruptcy, they didn’t list the house as debt because technically, they don’t own it. If they want to keep it, they should have listed it because now they’re paying a higher percentage on all their other debt that they can’t afford the house. Bankruptcy is a calculation of how much you make versus how much you owe and they figure out what you need to still survive. That’s what your payment is based off of giving you enough to still survive for food and everything else.

Their initial plan showed it as if they didn’t have a mortgage to pay. They’re paying all this money to all the credit cards and stuff. What we ended up doing is their attorney was cool. We had filed the Motion for Relief and he’s like, “Let’s get the Motion for Relief approved. I’ll let you get that approved then I’m going to file with the court a Motion to Amend the Plan to reduce the payments because it was a mistake that they didn’t realize the house so they can start making the house payment again.”

The goal was to reduce the bankruptcy payments down so they can’t afford the house, which happened. This is a feel-good story of, “This is an interesting one that also we were thinking outside the box.” To me, instead of saying, “Let’s get the Motion for Relief foreclose on them and throw them out of the house.” It’s, “How can we keep them in their house? This is what we want to do. They’d been in his property for 25 years.”

Can you put some rough numbers to that? As a note investor, what does that look like? What would you buy it for? What are they making payments?

This is in the lovely State of Illinois. Their due date on the loan, for example, was April 1, 2012. The balance is $57,000 and DNI payments of $622 per month. The property is worth about $30,000. Because it’s active, I don’t want to say what I paid for, but let’s say we’ve got it at a nice discount. We’re working on this one, but they’re going to start making or trying to work it out where their payment was $622. We’re trying to reduce it to $500 a month, which would include some of the taxes, which is about $150. Their principal industry was dropped about $350. I’m also looking to modify the loan where we drop the principal balance and waive the late fees or stuff or add a balloon at the end.

Be willing to go the extra step of research and not be intimidated by the word bankruptcy. Click To Tweet

This was one that they hadn’t paid in 7 or 8 years. You bought it as a nonperformer, but it was not in bankruptcy at that time.

It was in bankruptcy. We are in bankruptcy ones now, correct?

Yes. I also want to hit on one where you bought it not in bankruptcy and then it went into bankruptcy.

I thought that was an interesting story. The one not in bankruptcy. I got two of them. One of them is the borrower had not paid and he bought this as a CFD, Contract For Deed that he was renovating. He wasn’t paying. He’s like, “I’ll cut you a check.” He never cut a check. We went through a file for foreclosure, which is the Indiana forfeiture process. We get to the finish line on the forfeiture and he files Chapter 13. You will see this happen a lot where you go spend a few thousand on the forfeiture, you get the finish line, and foreclosure sale the day before, a week before the auction, or even the day they file a bankruptcy and it stops everything. The interesting thing on this one and this is what’s ticking me off. He filed this on March 31, 2020. The plan is still not approved, though. I can’t get paid or the trustee can’t distribute money until the plan gets approved.

For the record, it is March 5, 2021.

This one’s been almost a year. He files a plan. He’s got his wages garnished. I can log in. There’s a website called NDC.org where you can log in and see if you have an interest in that bankruptcy case. You can log in and see everything. It’s better than PACER because it shows all the payments coming in and stuff. All your loans that are in bankruptcy, you can use that to see whether or not they’re paying because as I mentioned before, they may be paying but they’re not paying you. In this one, I’m not getting paid. He’s been making the payments because they’ve been withdrawing his money from where he works, but this form is wrong. He filled it out he owes somebody the wrong amount.

They file an objection. If the attorney they’re using is awful, then it’s going to drag this out which we’ve been a year. I’ve been sitting around paying servicing fees, forced-place insurance, and taxes for a year. All of these costs are coming out of pocket. I’ll get paid for them, but when we talked about like I did in Cash Flow Expo, some of these unexpected costs and making sure you have the money to hold them is important.

How much of that would you say was COVID-related as far as the courts being shut down as far as delaying this?

Zero. Here’s another interesting one. This was the borrower who didn’t attend the foreclosure forfeiture hearing because he had to go on his ten-year anniversary with his wife who has not paid in not 2.5 or 3 years. This was the first borrower I ever spoke with back in 2017. He was behind. We spoke and worked out a forbearance plan. He made two payments for the forbearance plan then stopped, but then we continue with the foreclosure. This guy is a smooth talker. In that process, he calls the attorney. This was also the time where Ohio was getting a little squirrely with the Contract For Deeds with interest rates and stuff.

GDNI 146 | Buying Bankruptcy Loans

Buying Bankruptcy Loans: It’s better to be thoroughly educated on bankruptcy because any of the notes that you own could certainly head that way.

 

I was going to give the guy a lease option on the property. The lease option was much higher than the UPB on loan because on the lease option, you have to pay the taxes and maintenance on the house and everything else, which I was factoring in. We went three months from that purpose. Nothing happened. The foreclosure because it was more than five years kept getting dragged on. We finally get to the finish line and in September 2020, he filed for bankruptcy. This one still hasn’t been approved because in the bankruptcy, he forgot to add that he had other property that he also owned. He also forgot to add other information on the asset side, not the liability side. The ones that go into bankruptcy is a very slow process. That 12 to 18-month whole time you have to throw out the window. My average bankruptcy that is nonperforming and try to get it out is closer to 2.5 to 3 years.

Any lessons learned, red flags or warning signs where somebody has already purchased a note that bankruptcy might be coming? Anything you can think of?

Here’s where I think two things for newer investors. Put yourself in a borrower’s shoes. You have a property and I assumed this one borrower filed bankruptcy, and I didn’t advance the taxes, but there’s $10,000 out on taxes. The UPB is $35,000 and the place is worth $100,000. In taxes, they are usually about $400 a month because it’s Ohio and it’s ridiculous. This guy couldn’t afford his payments. This is my primary residence. I’m like, “This guy is not going to let it. Why would he let it go to foreclosure?” In his memos and stuff that he sent is like, “My kids grew up here.” I don’t want to foreclose on the guy but you can’t keep making promises and not make any payments.

We put ourselves in your shoes. You got a property you own that is worth twice as much as what you owe and your mortgage payment is lower than rent. What are you going to do? Common sense, you filed bankruptcy. Maybe people don’t know about bankruptcy, but if they speak to anyone, that’s what the recommendation is. That’s where some people get the, “I’m buying in a non-judicial state. I’m protected by equity. I’ll be able to foreclose on this property in four months. I’m good. Also, I can pay on a $30,000 note. I’m going to pay $23,000 or something.” It’s insane from that perspective because they forget about that.

Are there particular States that you target or avoid, or is it the same as any other bidding without bankruptcy?

Any other bidding because bankruptcy is federal. All the rules are the same.

I do think this is an interesting topic and it’s going to be applicable. Even if you’re an investor that’s trying to avoid buying loans that are in bankruptcy, it’s better to be thoroughly educated on bankruptcy because any of the notes that you own could certainly head that way. Is there anything you think we’ve not touched on that we should?

With bankruptcies, the thing I mentioned is PACER.gov. If you want to get signed up, you have to sign up in advance. They charge you like $0.10 per page but if you’re under $30 a quarter, they don’t charge you. If you’re going to bid on assets and bankruptcy, you have to have that account. If you don’t have that account, you’re completely bidding blind and you have no idea what’s going on in that bankruptcy.

I’d recommend running a PACER check on every loan you bid on regardless or at least after or during your due diligence process. Everyone should have that account.

Here’s sometimes what people also get caught up on is the Chapter 7s. People are like, “I can get a judgment against the borrower or something if we don’t get fully collected. I can attach a mortgage to another property if it’s a Chapter 7.” No, you can’t. If it goes through Chapter 7, they have no obligation to pay you. You can’t call and ask them for money either unless they sign a reaffirmation agreement, which says, “We agreed to now continue to pay this back.” That’s the one thing that you got to be careful of if you, your service or whoever, or you hire a third party to work out. They’ll usually do a bankruptcy scrub, but if it’s Chapter 7, you got to be super careful.

If you’re moving forward with legal, your legal team, theoretically, you should be running that check.

That’s the other reason why people send their own demand letters, “Are they running a bankruptcy scrub?” Your attorney will ask, “You either skip trace or get the person’s Social?” They’ll ask you, “Do you have the loan app? Put the Social in it so I can do bankruptcy and a military check to make sure they have filed bankruptcy or not in military because if they are, there are different things you need to do.” If you’re sending your own demand letters and you didn’t do that check and they’re like, “What are you talking about,” and they get an attorney, you add a fair debt collection violation.

Any other lessons learned or anything else?

I can’t think of any right now. I could talk for hours on any topic, but those are the major ones. From a bankruptcy perspective, I would hold off and get about ten notes under your belt before you do bankruptcy because they’re little challenging on the bidding. There are many scenarios that can take place. When you’re learning, you do want to bid off of the worst-case scenario. Performing in a straight nonperformer sometimes still could go to bankruptcy. From that, you typically bid them the same with the ones in bankruptcy where it’s been a little hot and contested. You want to have a little bit of experience or run it by somebody because you need to know what costs are recoverable, which ones are not or how much money you may need on top of buying the loan. There’s a lot of that comes into play that you only learn by experience.

I know you’ve already dropped 2 or 3 Notes and Bolts. My Note and Bolt is that when you’re dealing with borrowers, that doesn’t mean necessarily directly whether you’re working through your servicer or an attorney, it comes down to carrots and sticks. It’s like parenting, coaching, or anything where you’re trying to influence someone else’s behavior. You’re trying to encourage good behavior that in our world is a win-win scenario where it’s good for the borrower and good for the investor, but don’t ignore the stick side. I’ll give you some examples. I will send demand letters and then also offer a short payoff, a modification, or something that can keep the borrower in their home but is positive for them as well. “Here’s your bad scenario. Here’s your good scenario.” You’re trying to give them left and right limits or carrots and sticks to encourage behavior that works out for the investor and the borrower.

A few things that I’ll talk about. One is the two websites I want to mention is PACER.gov and the payment side of it is NDC.org. The National Data Center is what it stands for. The other Note and Bolt I’ll touch base on is ordering title reports. Find out if whoever you have doing them runs a bankruptcy check because there’s a lot of companies out there who will check the records, but they don’t run a bankruptcy check. It’s important to understand that from that perspective because as I said, on the first position liens and so forth, you evaluate the property versus the UPB and stuff. On the second position, I’m assuming somebody would check that because it could be wiped out in bankruptcy. I know some title report companies don’t check for BKs. I’ve been using the Accurate Group, Staci Hannebrink. I know they checked because I look at them when they add to the back end the entire report, 197 pages bankruptcies in Ohio for this one County for John Smith. I’m like, “I’m not going to go through that.”

I’ve worked with them before, too. They included all the HOA docs for a property, which I did not go through.

It’s better to have that information than not have it. Any final thoughts before we wrap up this episode?

This has been informative. I’m good to go.

Are you going to start buying bankruptcy loans?

I’m not going to avoid them like I was. I’m not necessarily going to target them but we’re going to see an uptick in them. I am not necessarily afraid of them at this point.

For people, if you’re seeing bankruptcy loans coming down the pipeline and you don’t have experience, I do have a mentoring program where I could mentor you through the whole bankruptcy process.

If you have loans in bankruptcy, Chris and I have our fund that we consider buying those assets.

Thank you, everyone, for joining us on this episode. If you enjoyed our show, please leave us a review on iTunes, Stitcher, Google Play or Amazon. As a note investor, we hope that you go out and do some good deeds.

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