The Basics of Bankruptcy

In the note business, understanding how bankruptcy works is a must. The process usually lasts about five years, sometimes three years. Once the homeowners are in bankruptcy, they will be making regular payments. The moment the homeowners file for bankruptcy the court will see how far they are in arrears (missed back payments), and they will divide that by 60 payments for

the length of the bankruptcy. There are a couple of sides to bankruptcy such as different stages and whether the homeowners were or continue to be in the bankruptcy. The terms used to express bankruptcy status are dismissed and discharged. Dismissed means that the homeowners were thrown out of bankruptcy, most likely due to not paying into the plan. On the other hand,

discharged means the bankruptcy was completed.

Inside and Outside Bankruptcy

Inside bankruptcy means that the debt is within the boundaries of the plan. You see, when

filing for bankruptcy a party may choose which part of the debt to include in the bankruptcy and which not to include. When in the plan, one will have to file for a voluntary petition which must be done under oath. This oath requires a list of assets and liabilities. The first thing to get paid will always be first mortgage.

There is also outside bankruptcy. What that means for you, the note buyer, is that you have the option to collect arrears at a later time. In addition to arrears, you will be able to rule for foreclosure more quickly once the homeowner is no longer in the plan. Similar to loan modifications, in a sense, bankruptcy helps homeowners buy some time so that they can find the money to make payments while staying in the house. In bankruptcy, unsecured debt ­ such as credit card debt ­ gets wiped.

What to check for when purchasing a loan in bankruptcy

Prior to purchase, look at the homeowner’s credit report. At the bottom where it says public filings, it will show whether they have a judgement against them or any bankruptcies. If bankruptcy is listed, see if they were dismissed or discharged. In addition, check to see if the homeowners were already in the bankruptcy prior to the note purchase. If so, you should file for a Transfer of Claim. If bankruptcy is filed after the note is purchased however, the note holder must send a Proof of Claim to the bankruptcy administrator, which can either be filed by the note buyer or by an attorney. One can find a Proof of Claims form online. It consists of a two page document. On the first page, information is requested which you will fill out and the second page serves as basic instructions.