Tips for When Your Borrower Files Bankruptcy

July 1, 2019 by Alexa P. Stephenson, Esq.

You’re a lender or secured creditor. Your borrower filed bankruptcy. There’s now a stay in place prohibiting you from taking any action to enforce your lien against the property.  What do you do now?

Contact bankruptcy counsel, like Geraci Law Firm, to figure out the best options moving forward. However, as we all know, attorneys are expensive. Is there a way to get the benefit of an attorney while keeping your attorney’s fees and costs as low as possible? Yes!

Here’s the information your attorney will need up front to give you the best strategy moving forward, while also keeping your attorney’s fees down. If you give this information and documentation to your attorney at the outset, you’re one step closer to getting paid in full.

1.   Notice of Bankruptcy Case Filing

This is the document that most debtors will send to a loan servicer or foreclosure trustee immediately upon filing bankruptcy. The Notice of Bankruptcy Case Filing includes a lot of relevant information your attorney will need, including:

Who filed the bankruptcy

Sometimes your borrower is not the person who files bankruptcy; sometimes it’s an affiliated individual, or third party.

What court the case was filed in

Different deadlines and rules apply, depending on the specific district court the bankruptcy case is filed in.

What chapter bankruptcy was filed

A debtor can file a Chapter 7, 11, 12, or 13 bankruptcy petition. There are different rules and strategies for each.

Case number

Your attorney will need to look up what documents were filed in the case, as well as the deadlines that the court has already set.

Whether the debtor has an attorney

If the debtor is representing themselves, there is a good chance the bankruptcy case will be dismissed early on for failure to file documents required by the court.

2.   Security instruments

The security instruments, including the promissory note, deed of trust, assignments, and modifications, are vital to establish a lender’s interest in the property. Judges often require the security instruments to be filed with the motion for relief from stay and proof of claim. Be sure to send your attorney the recorded versions of the loan documents so they have all the necessary recording information to present to the court.

3.   Other loan documents

Other loan documents from loan origination are useful for your attorney in determining the full extent of the borrower’s default on the loan.  For example, debtors often claim a property is their primary residence when they actually signed a Notice of Non-Owner Occupancy during origination.  Providing a certificate of business purpose, declaration of non-owner-occupancy, and other related documents executed during loan origination will help your attorney prove the debtor has a history of lying and breaching the provisions of the note and deed of trust.

4.   Foreclosure documents

Copies of the Notice of Default, Notice of Trustee’s Sale, and Trustee’s Deed Upon Sale are necessary so your attorney can determine what stage of the foreclosure process you reached before your borrower filed bankruptcy.  The recorded copies of these documents are best so the court can take notice of the recording information in the motion for relief from stay and any other documents filed with the court.

5.   Accounting

The court and bankruptcy trustee will need to know the amount of your claim as of the day the bankruptcy case was filed.  Providing your attorney with a recent payoff demand and accounting will allow your attorney to file out the necessary documentation with the court, including a proof of claim and motion for relief from stay. It also provides the court with a detailed history of the borrower’s default on the loan.

6.   Proof of Insurance

A lender can be entitled to relief from stay if the debtor has failed to provide proof of insurance in violation of the note and deed of trust.  Knowing whether your borrower has kept the property insurance current and having proof of same will let your attorney know whether relief from stay on this basis is an option. Your attorney can also bring up the lack of insurance with the bankruptcy trustee at the meeting of creditors at the beginning of the case.

7.   Preliminary Title Report, or Trustee’s Sale Guarantee (TSG)

A preliminary title report, or Trustee’s Sale Guarantee, will help your attorney determine how many liens are on the property so he or she can get a sense of whether the property has a significant equity cushion. If the property is over-encumbered, you may be entitled to relief from stay to foreclose. These documents also will help your attorney determine the lienholders entitled to notice if and when a motion for relief from stay is filed.

8.   Appraisal

One of the most common reasons lenders receive relief from stay is that the property has little to no equity cushion. While some judges allow Broker’s Price Opinions (BPOs) to determine equity, the vast majority require a full appraisal and may even require the appraiser to testify in court about their valuation.

9.   List of borrower’s known assets

Sometimes borrowers, intentionally or otherwise, exclude assets from their bankruptcy schedules. Since lying about what assets are part of the bankruptcy estate is considered fraud and is punishable by fine or even jail, it is important for your attorney to know whether the debtor has committed this fraud. If so, your attorney can inform the U.S. Trustee of the missing assets and potentially get the U.S. Trustee to take further punitive action against the debtor.

10.   Communications with the borrower

It is important for your attorney to know the background between you and the borrower. If your borrower made promises about repayment or threatened to transfer the property to someone else before filing bankruptcy, your attorney could use this information to potentially get you relief from stay to foreclose. Your prior communications with the borrower also give your attorney a sense of the lender/borrower relationship, the extent of the default, and whether the borrower will be taking further litigious action to halt the foreclosure sale.

Takeaway

How you, your lender, your loan servicer, and your foreclosure trustee organize the loan file for quick dissemination to your bankruptcy attorney can reduce your attorney’s fees by hundreds, if not thousands, of dollars. In addition to having the documents above ready to go the minute the borrower files bankruptcy, having the documents organized and presented in the correct format plays an equally big part in keeping attorney’s fees down. For example, having these documents ready to go in one legible .pdf file per document saves at least an hour of time of attorney review and permits the attorney to, at a glance, determine the best strategy.

If you are a lender, loan servicer, or secured creditor and your borrower filed bankruptcy, or you have questions about the bankruptcy process, contact the Geraci Law Firm today. We are happy to give you a free initial consultation on your bankruptcy matter.