Loans Answers

Will bankruptcy stop foreclosure?

Question: I’m considering loaning money to someone to purchase an investment house. The loan will be 65% of the house’s appraised value, and the borrower will not be living in the house (he intends to fix it up and resell it).

Question: In the unlikely event the borrower declares bankruptcy, will I still be able to foreclose on the house?

Answer: No, not at all. AND , it is possible that if the debts exced the assets that even though you are ’secured” that you could end up with a judge that drops your lien down and you get less than was borrowed. PLus, interest cold be dropped.

I had a balloon on a note due and the guy declared bankruptcy. the judge felt sorry for this poor guy that was left out of the boming economy (He decided he didn’t want to work, so stoppped for 8 months and then built his house on the lot he bought from me. the judge ignored that, and took all the unsecured credit cards and dropped them to ZERO payoff. This man had his house built for FREE because he bought all the lumber, appliances and trades on credit!) and said that my balloon for the lot was now to be amortized over 10 years. Period. And, my 10% interest rate would be dropped to 5%. Period.

The courts suck when it comes to bankruptcy. People play it all the time. SO, yes, you can lose out. the only thing that didn’t change for this guy was the real estate tax liens. they remained intact, remained at full price, and remained at 16%. That’s why I like borrowing from my HELOC at 4% (prime) and buying tax liens at 16%. There may be a way to avoid loss, at least in some places. About 10 years ago I sold a house and took back a mortgage (“vendor take back”). The lawyer set it up so that, if the buyer later stopped making the payments and declared bankruptcy, I would still get the house back. This was in California. Maybe it is different in the case of lending the money to someone to buy a house rather than a vendor take back mortgage, I do not know. I cannot remember the details, but it may still be possible to protect yourself. Ask a lawyer. More or less, yes you can. However, there are some things to understand about a bankruptcy.

When a person files a bankrupcy (which is in federal court), all legal actions the person is involved in are stayed until the bankruptcy is complete. At the completion of the bankruptcy the bankruptcy judge will issue a final order, which will include orders to the judges of the other cases how they must decide the cases. In other words, if you foreclosure and the borrower files a bankruptcy, the foreclosure action is essentially removed from the local court and thrown into the bankruptcy court. Your foreclosure will still be successful, but there may be a delay because everyone has to wait for the final word from the bankruptcy judge.

Note that in a bankruptcy there are two classes of creditors: secured and unsecured. Secured parties are allowed first dibs on the collateral, i.e., if you have a first mortgage on the property you get the proceeds from the sale by the receiver in bankruptcy. After all the secured creditors get whatever their collateral brings, the rest of the debtor’s assets (including any surplus that the mortgaged property brings above the mortgage amount) are shared by the unsecured creditors.

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