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Bankruptcy Basics for Real Estate Investors
Good morning gang. This is Alfred coming to you again from the pockets of specialized knowledge studios. And this morning, we're going to talk about bankruptcy basics. Now I'm not an attorney. I don't pretend to be. I don't give legal advice, but this is a topic that trust pants a lot scarier when you're the one in it versus you're the one being affected by somebody else's filing. So let's take a look at it. It's nothing to be afraid of. Um, I hope to make you more comfortable with the topic here as we shortly move forward. Here we go. Introduction to bankruptcy. What's the purpose of a bankruptcy filing in Florida. A lot of the practice that I've seen people filing bankruptcy is just be for a foreclosure auction occurs two days or the day before. So the bankruptcy filing and sometimes in an emergency basis is just filed to prevent something from happening or continuing. Um, I'm sure there are a lot of people that have for one reason or another experienced financial difficulty. And they decided that bankruptcy was the best way to get out from underneath all their debt. Uh, it's not an easy road by any means. Trust me. And I'm not laughing at it. I'm just for those of you that think it's easy to just file and you're done. It's not, but the purpose of filing really is to protect something. If you have nothing, there's really no reason to file bankruptcy. You could speak to your bankruptcy attorney about it. Work in your file for bankruptcy protection. You file at the federal courthouse. Each city has got at least one federal courthouse. For example, Broward county Fort Lauderdale, Fort Lauderdale is Broward county's county seat. They have the circuit court in downtown Fort Lauderdale. There's four branches of county court in Fort Lauderdale and there's one federal courthouse. So there's always going to be one federal courthouse, at least. How do you file for bankruptcy? It's I guess it's pretty easy. You go down to the clerk, the clerk will help you with the filing, uh, and you'll, you can file right downtown at the federal courthouse. However, before you file, you have to know that you have to take an online class. Um, I don't know how difficult it is and never had to take it. Um, but I don't think there's a test, but you have to take it. You have to attend because I believe that the government wants to give you a chance to completely understand what you're doing because bankruptcy may help in the short term, but it's gonna cost you a little bit in longterm. And I think that class is what teaches you. That's what it teaches you. How much does it cost to file? It can't cost more than a couple of hundred bucks. Uh, the most expensive part about filing a bankruptcy, uh, your attorney. And the next question is, should you be represented by an attorney? The person who represents themselves represents a fool. In other words, you need to always have an attorney when you go to court, because it's not like when you're playing tennis, you play against, uh, somebody else. That's just regular tennis like you are, but let's say you played against Rafael and the doll. You don't want to play against a pro. You don't know, you don't know how good they are. You don't know the things and the tricks that they know, same thing. As with law, man, you cannot represent yourself. You're going to need an attorney if you go to court, okay, here's the next one? The consequences of a bankruptcy filing first consequences. There's an automatic stay. And her, see the top of the top sentence is brilliant. Automatic stay is automatically in effect. I don't know. I don't know what I was thinking when I typed that up, but the fact is all credit or collection efforts must come to a complete stop. That that's the minute they're the filing. The minute the case number or the little rubber stamp hits the case. Number thing on your document, the stay is enacted. So that's the first and most important thing that a bankruptcy state does or a bankruptcy filing does. Any collection efforts can not be resumed until the stay is lifted. And only the judge, the bankruptcy court judge that's assigned to your case can and the stay or bring relief from stay from a creditor seeking it. Okay. So the most important information on this slide is that the automatic slave stay is in effect and every collection effort must come to a complete stop. There's a few different forms of filing. Uh, the most you'll be exposed to is chapter seven and chapter 13, chapter seven is personal liquidation. So what happens is the court essentially, uh, watches or monitors as the debtor sells all their assets. It's all court approved. You can't deal with the debtor themselves. You have to deal with the trustee. The trustee, by the way, makes a fee of 10% of whatever they collect. So there's some impetus for them to get a high number for whatever items you're selling, you know, your old baseball cards or your car or whatever it is. Chapter 13 is personal reorganization. That means you had something that happened to you, give you a little bump in the road and you make enough money to bring everything back the way it's supposed to be. Bring all your creditors current, but you're going to need some time. So chapter 13, bankruptcy is going to give you time to personally reorganize so you can get your affairs in order chapter live in its corporate or wherever organization. You're hardly ever going to deal with that as an investor. But I just wanted you to know that it was out there. Those are the three most, most popular, uh, filings. Now, by the way, when you file bankruptcy, there's a few things that are exempt. And I know in Florida, one of the exemptions is your homestead. The house you live in is exempt. So for example, when Bowie Kune was a vet was alive, I don't know if any of you remember him. He was the old baseball commissioner. When he came to Florida or you moved to Florida on purpose. And then he spent a year here and then he started paying off his house, getting rid of his, all of his assets. And then he filed chapter seven because the money that was in his house could not be touched. He couldn't be can't reach the money and somebody's homestead, but listen, all this is lawyer talk. I'm just want to get over the basics. The 30,000 square foot look so you understand a little bit more about, well then you did. When we first started number seven liquidation of assets, the trustee controls the sale only non-exempt assets must be delivered to the trustee. So like I said, the trustee will control the sale. Like if you have a watch, that's has some money and value to it. You have to bring it to the trustee. The trustee will have a bankruptcy sale. It's advertised and notified and people show up and they'll bid on the, on the watch. And if the trustee feels like the sale price was sufficient enough, they'll accept it and take the cash and give the watch over to the buyer. So that's chapter seven, chapter 13. Again, a repayment plan must be submitted and approved by the court missing payment sometime we'll convert your convert to a chapter seven liquidation. So what happens is you say, okay, judge, I need four years, uh, based on my income to satisfy all my creditors, even though they're all upset with me right now, uh, I'll get them all current within four years. So we're asking the court to please give us four years to pay off our debts and get things going again. So the judge will agree. And if you miss payment, 37 out of 70, then he'll wait and find out, are you, uh, are you going to continue with this? Are you sure you're on track with this? And if you miss a few payments and don't know what the rules are, if you miss a payment or two, uh, the trustee can convert you to a chapter seven. So like I said, the bankruptcy stuff, it's not an easy path, no matter what, it takes a certain amount of courage to get up there and file. But for those of you that are in need of it, I hope this works out for you, investors. You shouldn't be afraid of it. I think I cover one chapter at the end here. That'll be more applicable to investors, but I want you to, I want you to know what the effect is. And chapter 11 is corporate reorganization. Like I said, you guys are never going to see this in your investing life. I don't believe so. It's just there for your education. Okay. Bankruptcy available remedies. Okay. So what happens here is that, um, should the debtor file bankruptcy, the creditor could ask for these things, these things can be done. Um, one is they can ask the court for relief of stay. Uh, they go into the court and they say, judge, my claim should not be included in the bankruptcy because of a, B and C. And if they prevail, then there'll be relieved from the bankruptcy law and be able to continue. That doesn't happen a lot. Although there's one instance that it does. And I think it's on the last slide. What's going to happen with your bankruptcy. If they complete their plan or they completely finished their chapter seven, they will be discharged from bankruptcy court. So if a debtor is ever discharged, that means they have completed their bankruptcy and believe it or not, they can go back. Even after they've been discharged and reopen. If another creditor that they forgot to name comes forward. And lastly, if a debtor is dismissed from bankruptcy, um, they did not complete their plan. And creditors do not have to abide by the, uh, the bankruptcy law as it would have applied if they were discharged. So if you're discharged from bankruptcy, it means you did everything you were supposed to and all your, all your debts go away. And if you've dismissed from bankruptcy, it means that your debts are still alive and your creditors will come after you just as they did before Discharge. Yay. They're happy. They get all their debts put behind them. There are some other consequences about being discharged, uh, with bankruptcy. It's, it's mostly credit related. There are some things that you will be allowed to do, and some things you won't be allowed to do. And you know, what's funny about this is when I first started looking at a debtor that gets discharged. I see a credit application. They say, if you've been, if you've been discharged from bankruptcy within the past two years, you can't apply for our credit card. And I'm wondering why, because if you're a discharged debtor, that means you have zero debt. Why wouldn't you let him get your credit card? But anyways, listen, there are people a lot smarter than I am to making the decisions. So I just don't know. That's just one of those things that puzzled me and here's a debtor that's been dismissed and see, that's a lock there because they're still in trouble. They still got problems. They did not complete their either seven or 13 plan. And somehow some way they're going to have to complete that plan or those debts are just going to keep piling up and they're going to come after the poor guy. Okay. So this is, this is interesting. This is where investors are going to bump into bankruptcy. So here we got a homeowner in foreclosure files, bankruptcy. Okay. So let's say he's, uh, the final judgment has been entered, but the sale date is just on the way like the sale date is Friday, but today's Monday. They run down to the court and they filed bankruptcy. What happens is the sale is going to be delayed. The sale can not go forward on Friday if the defendant or the debtor filed bankruptcy on Monday. So it doesn't even matter if the court receives notice, because if the sale goes forward, that's an error. The court will set it aside and everybody gets their money back. So once the filing has been complete, no sale can go, go ahead, unless, and until the stay gets lifted. So what's going to happen is here they file. On Monday, the sales delayed, the plaintiff's attorney in bankruptcy court will file for a lease of stay. So what happens is the sale got stopped because of the bankruptcy being filed. The plaintiff's attorney will immediately go to bankruptcy court and ask for relief of stay. The reason they do that is because the note is the promise to pay. The note is what's going to be extinguished in bankruptcy court, but the protection for the note, the security for the loan is the property. So what happens is, is the plaintiff's attorney goes into bankruptcy court and explains to the judge, judge, we're not going to seek relief under the note. We understand that it may get discharged or dis discharge. Yeah. And what we just want to get the security for the loan that we gave them. So we gave them a loan based on the note, but it's secured by the property. We want you to give us the relief of stay so we can continue with our foreclosure auction. You can't go forward with the auction as it was living on Friday, because it's going to take longer for the relief estate have come from the court. So once you get the stay relieved, then you're going to go ahead and go back to court. Uh, once you go back to court, it'll take, take as many as 60 to 30 days to get your new date rescheduled for your bankruptcy court. Once release, obtained, the bank can be rescheduled. Okay? So the, so the here here's the order. It gets delayed. The bankruptcy attorney. I mean, the plaintiff's attorney goes to the bankruptcy court. The bank's attorney asks for relief. They get their relief. It's going to take 60 days to get it filed. Then once they get the relief, they go back to the foreclosure court, reset the sale. And what happens next? Well in Florida, someone else in the household files bankruptcy, and it can stop again. That's what happens. And I don't know how many times people can file. I don't know how often they can file. I don't know all that. All I know it's a pain in the butt and the fact is there's nothing or there's nothing that you can learn that I can tell you, that's going to change the facts. So if they file bankruptcy again, everybody goes through the same trouble again. So let's see what's on the next slide. Okay. Here's a good one. I just bought a house at the foreclosure sale and the homeowner filed bankruptcy. So the first question is when was the bankruptcy filed? If the packer bankruptcy was filed after the auctioneer hit there, their gavel onto that little piece of wood and sold it to you, then you stand a chance. Um, I don't think it's much of a chance, but I think you're going to stand a chance. However, if the filing took place two days before the sale date, I think I mentioned this before. Notice is not an issue. Once the case number is slammed onto your bankruptcy file. The stay is relieved. Whether everybody knows that you filed or not. So that means the sale could not have gone forward. So you you're, you just bought a house. The bankruptcy was filed before the sale was finalized or before the sale even took place, the sales is going to be nullified and you're going to lose your teeth. You're going to lose your clerk's fee. Everything else should be refunded in full. Now you could set a hearing. You could have an attorney talk to the judge and say, judge, the bankruptcy was filed before the sale. I should get my clerks feedback, which is like having to put another partner to like 2%. But, um, you should get your clerk's feedback. If you asked the judge and the judge will probably deny you because the foreclosure law in Florida says that when you pet pay for a sale, if it gets set aside, you get a refund of everything, but your clerk's fee. So it's all about money. So the sale will be reset. After this day is lifted. You get your money back. It goes right back to sale. You don't get an advantage. You don't get first shot at it. You don't get nothing. So the bankruptcy stops the sale and you lose everything, including you could lose your clerk's fee and you get everything else back. Okay? In conclusion, you can't control the filing of a bankruptcy. All you can do is learn your options about what you might be able to do. And I want to thank you again for attending this little bankruptcy quickie, uh, please visit my website, P O F S k.com. It's a heck of a lot better than having to write out pockets of specialized knowledge every time. So until that until next time, listen, I hope you have a great day happy investing. And remember, you don't know what you don't know. See you next time.
