NPN Story: Multiple Bankruptcy Tricks
I’ve gotten used to the shenanigans that borrowers will resort to stay in their homes without paying a thing or at least the smallest amount possible. This borrower used an unusual method for the bankruptcy that stopped our original trustee sale. It was unusual enough that a judge ruled it a “scheme to defraud creditors.” A question I keep asking myself is “why don’t these borrowers rent out a room or two? Then they’d have more than enough to make their loan payments.” It makes sense, right?
Chula Vista, California
We looked into buying a non performing note in beautiful, Chula Vista, CA, a picturesque suburb inland from San Diego with lots of construction from the early to mid- 2000s. The property backing this loan was a townhome built in 2006, 3 bedroom, 3 ½ bath, 1564 square feet. Great collateral!
The Notice of Default (NOD) had already been filed by our seller so the foreclosure was already in progress. Even better! The servicing comments showed that there had been absolutely no contact with the borrower for over a year. Had the borrower given up? Was he gone? We couldn’t tell but it’s generally better when the seller hasn’t heard anything from a borrower. When they do, it’s a sign that the borrower is going to put up a fight.
Our value came in where we needed it to and the file passed our due diligence so we pulled the trigger and bought it.
Our servicer tried to reach the borrower over the next couple of months but was unsuccessful. If someone’s trying to save their home, they usually call the servicer to try to work something out. Usually when someone’s quiet, it means that they’ve given up.
About a week before the sale, we noticed that the townhome was listed for sale. The comments indicated that it was a short sale. Funny, though, because the listing agent didn’t bother to call us and was listing the property for $50,000 too high, at a level where it would never sell. (The borrower owed about the same amount that it was worth.)
Last Minute Bankruptcy
Prior to a trustee sale, the trustee will check PACER to see if the borrower has filed a last minute bankruptcy. If there’s a last minute filing, the trustee sale is almost always postponed because the bankruptcy filing creates an Automatic Stay effective on all creditors preventing them from taking action to collect on the filer’s debts. Violating the automatic stay has huge penalties and everybody does their best to avoid doing so.
On the day of our trustee sale, our trustee received a fax from an unknown number. It was a Chapter 13 petition listing a woman I’ll call “Jackie” as the debtor and an unrecorded Grant Deed executed by the borrower. The Grant Deed transferred a 20% interest in the property to Jackie and was executed a few months before she filed her bankruptcy. Her Plan and schedules did not include the property we were foreclosing on.
I couldn’t figure out how Jackie and the borrower were related nor could I see any overlap in addresses, names, or any other connections in the documents I examined. An unrecorded Grant Deed is pretty much worthless and could easily be created. Jackie could be some random bankruptcy filer.
As fishy as the situation was, it was not worth the risk of carrying out the trustee sale so we postponed and filed a Motion for Relief (MFR), which , if granted, would allow us to continue to pursue collections and, in this case, proceed with the foreclosure sale.
When the judge looked at the evidence before him, he agreed with us that this was an intentional scheme to defraud a creditor. He granted us “in rem” relief, which meant that the property was separated from the person and that no bankruptcy filings filed by anyone could stop the next trustee sale.
Nice Try But No Cigar!
Our sale date had been postponed by a little over a month while we sorted out the issues with the hearing. We suspected that the borrower would try something else to postpone the sale a second time and he didn’t disappoint us. This time, he filed a Chapter 7 bankruptcy case for himself on the day of the sale. This time we had “in rem” and the sale went through without a problem. If the borrower had showed up to court or paid attention, he would have realized that another filing wouldn’t stop the sale. He filed bankruptcy and killed the rest of his credit for nothing.
The borrower reached out to us through the attorney that helped him file his bankruptcy. The attorney told us that the borrower had cancer and had run into financial difficulties. I know people who’ve had to deal with cancer including one of my family members so I empathize when I hear things like that. When dealing with collections (which liquidating non performing notes essentially is), it’s hard to gauge when someone’s sincere or just trying to use a ploy to get something from you.
I’ll never know with this borrower but I had my doubts when the attorney quickly turned the conversation and offered to list the property for us. The attorney had an affiliate that had listed the property for sale shortly before our trustee sale. This attorney helped the borrower file bankruptcy and he had the gall to ask to the list the property for us, the people his client just tried to cheat? Really??
No, dude, you’re not going to list the property for us. We find our own trusted agents, thank you very much!
Why Not Get a Roommate?
SIDE NOTE: If you are alone in a big house and you can’t afford your mortgage payment, why don’t you get a roommate or two or more? This will provide much needed income, keep your home out of foreclosure, and help you pay down the loan. Yes, you’ll have to deal with the issues that all roommates have to deal with but why wouldn’t you do that when there’s no other alternative? Isn’t losing your home worse than dealing with roommates?
It drives me crazy. It drives me especially crazy when the mortgage payment is less than what rent would be for the area. We see this situation over and over again.
In this case, we had a single occupant borrower living in a 3 bedroom townhome with over 1500 square feet. His P&I payment was a little over $2000. Renting out the entire place would have brought $2500-$3000/month. He could have taken on one or two roommates at $500-$800/month each to help him make those payments….
The attorney then brought up cash for keys, which is a common arrangement in our industry to describe an exchange of cash for possession of the property, which is vacated and left in broom swept condition. The occupant gets some cash to do with what they please and the lender gets a property without a fight and the high probability that the occupant won’t cause damage to the property. It’s a “win-win”, given the situation.
We made an offer amount and the attorney returned with a “yes” answer including the borrower moving out in 45 days. (Generally, we won’t offer more than 1% of the property value and the borrower needs to leave in 30 days.)
At the end of 45 days, the attorney requested additional time. We agreed but dropped the cash amount and the borrower moved out as promised the second time.
We did a light, cosmetic rehab and put the property on the market. We monitored property prices while we owned the note; the real estate market was warm and properties didn’t stay available for long. Within a few weeks before we got possession, however, the market took a turn and softened significantly within a couple of weeks. It was frustrating having the property sit on the market but so was everything else.
We sold the property at the end of our warm southern California winter. Our hold time was longer on this one because of the softened real estate market, which is something that’s out of our control. We processed the foreclosure as fast as we could, which is the thing that we can control and one of things we take great pride in!
Things I learned:
Be ready to counter a borrower’s use of bankruptcy to stall your foreclosure sale. That means having a trusted attorney on standby to advise and provide strategies on how to respond to the borrower’s actions.
Focus on the things that are within your control. You can only react to the things that are outside of your control. Try to anticipate probable actions and react quickly when they do happen to shorten your timeline.
Other attorneys are not your friends.
Borrowers: Get a roommate!
Purchase Price: $277,500
Total Cost Basis: $304,982
Net Sales Proceeds: $379,328
Net Profit: $74,346
Days Held: 419
Return on Investment (ROI): 24.4%
Annualized ROI: 21.2%