Strategies for Secured Creditors

Posted by Matthew C. Lein, Esq. on May 9, 2015

Matthew C. Lein, Esq.
Lein Law Offices

An investor/company and a debtor can work together to maximize each participant’s return - this is true in both consumer and non-consumer cases. However, because I often perceive a lack of understanding by one or more of the participants, both participants often miss out on an opportunity. In particular, secured claim holders with a basic understanding of the bankruptcy process could maximize their return on investment by working with the company/individual debtor prior to filing.

I hope to give investors examples of how one could work with the debtor to maximize the investors’ return on investment. This article uses variations of a common situation to explain concepts that may be applicable to both consumer and non-consumer situations.

Understanding the general framework of the bankruptcy process is mandatory prior to understanding the concepts in this article.

In general terms, bankruptcy cases follow a similar timeline: (1) The debtor files for relief under the bankruptcy code; (2) Except in Ch. 7, the debtor will file a repayment plan; (3) Each creditor with a claim owed by the debtor will file a proof of claim indicating what was owed as of the date the debtor filed for relief under the bankruptcy code; (4) Except in Ch. 7, the debtor will make payments to the creditors who have filed a proof of claim (sometimes through a trustee).

Please note, whether a debtor receives a discharge and when the discharge may be granted are separate issues that are beyond the scope of this article.

In many instances, secured lenders (e.g. mortgagees, land contract vendors, etc…) could increase their return on investment by helping consumer debtors eliminate the secured creditor’s competition. Examples of how an investor could achieve a higher return on investment include, but are not limited to the following: (1) Eliminating the investor’s competition with other claim holders and satisfying mortgage arrearages; and, (2) Avoiding unnecessary foreclosure costs when judgments have been attached to the property.

Both of the above strategies can be useful if the investor holding the claim works with the debtor.

Assume a situation where Homeowner Hank had a mortgage with Mortgagee Mary. Until six months ago, Homeowner Hank was current on his mortgage with Mortgage Mary. Then Homeowner Hank suffered a traumatic event in his life (e.g. car accident) and could not work.

Now, Homeowner Hank has healed and can return to work. However, during the six months Homeowner Hank was recovering, he incurred a large amount of medical expenses, paid his living expenses using a credit card, and is six months behind with his mortgage.

How can Mortgage Mary work with Homeowner Hank to protect her investment from other creditors (e.g. Mortgage Mary is paid before the medical bill and credit card claim holders)?

Eliminating The Competition And Satisfying Mortgage Arrearages

Assume Homeowner Hank wants to keep his house. Mortgage Mary does not want Homeowner Hank’s home.

If Homeowner Hank qualifies for Ch. 7, Mortgage Mary could pay for Homeowner Hank to file his Ch. 7 petition and Homeowner Hank and Mortgage Mary could come to terms as to how to cure any outstanding mortgage arrearages. In most circumstances, Mortgage Mary will have eliminated her competition by working with the debtor.

If Homeowner Hank must file for relief under a chapter other than Ch. 7, Homeowner Hank and Mortgage Mary could agree on mutually agreeable repayment terms. Mortgage Mary and Homeowner Hank could agree to modify the terms of the loan prior to Homeowner Hank filing his bankruptcy petition in such a way that at the end of the bankruptcy plan, Homeowner Hank would be current and the unsecured creditors would be eliminated.

Avoid Unnecessary Foreclosure Costs When Judgments Have Been Attached To The Property

Assume Homeowner Hank cannot afford his home and Mortgage Mary would like to avoid the time and expense of foreclosing on the property.

If Homeowner Hank qualifies for Ch. 7, Mortgage Mary could agree with Homeowner Hank to pay for him to file his bankruptcy petition and in return Homeowner Hank would give Mortgage Mary a deed in lieu of foreclosure after the discharge is granted. This approach could save Mortgage Mary the time and expense of the foreclosure process to eliminate any judgment attached to the property.

Using tools like those provided by Inforuptcy could help an investor looking for situations like those noted above.

For example, an investor could search the case filings for instances where a debtor has filed for Ch. 7, has few secured debts, a good debt-to-income ratio, and many unsecured debts. In this instance, the secured lender may not recognize his position and want to sell his secured debt to the investor. The noted information is available in every case.

This is one possibility amongst many.

Opportunities exist for holders of secured claims, but those opportunities are often missed by secured lenders and/or the debtor. Understanding the benefits the bankruptcy code can provide and using tools like those provided by Inforuptcy allows investors to identify market opportunities.


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