When Good Loans Go Bad: Avoiding the pitfalls in collecting on accounts

Transcription

1 When Good Loans Go Bad: Avoiding the pitfalls in collecting on accounts BAKKE NORMAN L A W O F F I C E S

2 Presentedby: Thomas R. Schumacher & Deanne M. Koll Thisoutlineisdesignedtoprovidebasicinformationaboutcollection pitfallsandstrategiesforlendinginstitutionsinwisconsin.italso containsspecificinformationaboutforeclosures,replevinsand bankruptcyissues. Thetopicsaddressedinthisoutlineinclude When do I call the attorney? What is the process of a foreclosure action? How does the replevin fit? What if the customer files bankruptcy? Disclaimer:Thisoutlineisdesignedtobeeducationalandinformative,butitisnot legaladvice.thelawandcollectionconceptscontainedinthisoutlineareaccurate today.however,collectionlawisconstantlyevolvingandsubjecttochange.each situationisunique,andeachforeclosureshouldbeaddressedtofittheunique situation.

3 When do I call the attorney? Beforeyouclosethedeal!Asattorneys,wecannotstressoftenenoughthatafew hoursofattorneyreviewonadeal sfrontendwillsaveyoumanyhoursoflegal workandthousandsofdollarsonthedeal sbackend.ifthebankisclosinga significantcommercialtransaction,it sprobablyworthsendingtoyourattorneyfor reviewbeforeclosing. Inaddition,oncethedealhasgonebad,itisimportanttoturnthefileoverbefore it stoolate.usually,bankshaveaninternaltimelineinwhichtheloanofficermust sendthefiletoanattorneyforcollection,usuallyaftertheloanbecomes90days pastdue.atthispoint,itisimportanttosetupameetingwithyourattorney. Additionally,beforethefilegoestotheattorney,itisimportantfortheloanofficer toreadalldefaultprovisionsintheloandocumentstoensureallrequired cure noticeshavebeensent. Whenthebankdecidestocalltheattorney,thefollowingarealistofdocumentsthe loanofficershouldbepreparedtosendtheattorney: PromissoryNote GeneralBusinessSecurityAgreement(GBSA) UCCorOtherPerfectionDocuments Mortgage Guarantees BusinessLoanAgreement Authorization NoticeofRighttoCure CurrentPayoff(brokendownintoprincipal,interest,latecharges,andso on) RecentAppraisal What is the foreclosure process? Theforeclosureprocessismorethanjustacourtdocumentandasheriff ssale. Thereareseveralstagesoftheforeclosureprocess,andeachstagediffersdepending onmanydifferentfactors.thefollowingisageneralsummaryofthewisconsin procedurewithexamplesofthingsthatcangowrong.remember:minnesota foreclosureprocedureformortgagesandlandcontractsisdifferentfrom foreclosureinwisconsin.

4 SummonsandComplaint ASummonsandComplaintmustbefiledwiththeCourtandservedonthedebtor (thepersonowningtherealestate)andsubordinatelienholdersortenants possessingtheproperty.thesherifforaprivateprocessservermustformallyserve thisdocument. Answer Thedebtor,generally,has20daystofileananswerinaforeclosureproceeding.The Answeradmitsordenieseachindividualparagraphoftheforeclosurecomplaint. Thistimeisextendedifanydefendantsarethestateorfederalgovernment.For example,ifthedebtorhasafederaltaxlienagainsttheproperty,theusgovernment has60(ratherthan20)daystoanswer.thiscanincreasetheforeclosuretimeline. Judgment Thecreditormayobtainaforeclosurejudgmentinthreeways.Thefirstisbydefault judgment.ifthedebtorfailstoanswerorcontestthecomplaint,thecourtwillissue adefaultjudgmentuponarequest(or motion )filedbyplaintiff.thesecondoption isamotionforsummaryjudgment.ifthedebtorconteststheforeclosure,the creditorwillmoveforsummaryjudgment,allegingthatnomaterialfactsarein dispute,andthus,thecreditorisentitledtothereliefitsoughtinitscomplaint.last, iftherearefactualdisputesabouttheforeclosure,atrialwillbenecessarybefore thecourtgrantsajudgment. Thejudgmentincludesanordersettingtheredemptionperiod,currentbalance owed,attorney sfeesandcosts,amongotherthings. Receivership Inacommercialforeclosure,thebankmightwishtohaveareceiverappointedto collecttherentalpaymentsfromthecurrenttenants.thiscanbeaccomplished beforeorafterjudgmentisentered.however,itisimportanttonoteafewthings.

5 First,thebankitselfcannotbeappointedreceiver.UnderWisconsinrules,an individualatthebank(usuallytheloanofficer)mustbeappointedreceiver.thisfact isimportantbecauseacourt,occasionally,mayrequirethebanktoself indemnify itsemployeeinhisorherroleasreceiver. Second,thebankmightneedtopostabondwiththecourtforthevalueofthe property.thisisuncommon,butcansometimesbeorderedbythecourt. Finally,somebanksfeelitisnecessarytohireapropertymanagementcompanyto handlethereceiver srole.ifthebankisuncomfortabledealingwithutilities,tenant complaintsandenforcingrentpayments,thebankwillneedtohireaproperty managementteamtohandletheseissues. WinterizingAbandonedProperty Apropertycanbecomeabandonedeitherbeforetheforeclosureactionis commencedoraftertheactionhasstarted.ifthisoccursduringthewintermonths, thebankmightbeconcernedaboutwinterizingandproperlysecuringtheproperty. Thiscanbedonethroughaprocessshortofareceivership.Thebankonlyneedsto calltheattorney,andtheattorneycanrequestahearingtoallowthebanktotake stepsnecessarytowinterizeandsecuretheproperty. Deficiency A deficiency isthemoneythebankisstillowedafterdeductingthesalepricefrom thebalanceowed.ifthereisadeficiencyowingtothecreditor,thisthenbecomesa judgmentagainstthedebtor.thedebtorstillowesthedeficiencytothebank, thoughthecreditortookbacktheproperty. Intoday sdepressedrealestatemarket,itwouldbecommonfortheamountduethe creditoratthetimeofsaletobemorethanthevalueoftheproperty.thus,ifthe creditorbidsfairmarketvalueforthepropertyatthesheriff ssale,therewouldbea deficiencyowingtothecreditor.takethefollowingasanexample:

6 Amountduetocreditorattimeofsheriff ssale $200,000 Creditor sbidatsheriff ssale $150,000 Deficiencyamount(duetocreditor) $50,000 Intheaboveexample,ifthecreditorwerethewinningbidderatthesale,itwould thenapplyforadeficiencyjudgmentagainstthedebtorfor$50,000. Adevelopmentinthecaselawallowsthecreditortowaiveitsrighttodeficiency againsttheprimaryobligorofthepromissorynote(typicallyabusiness)andstill pursueanyunpaidamountsagainsttheguarantor(s).thisrecentcasehasmajor implicationsforlenders,allowingthebanktowaiveitsrighttoadeficiency,thereby shorteningtheredemptionperiodandtheforeclosureprocess.however,thebank retainsitsrighttogoaftertheguarantors.thisisalarge win forcreditors. RedemptionPeriod Theredemptionperiodisthetimeallowedthedebtortoredeemtheproperty beforesalebypayingthejudgment,interestandcoststothecreditor.the redemptionperiodisthetimegrantedbythecourtafterjudgmentisenteredbut beforethesheriff ssaleisheld.notethatforthedebtortoredeemtheproperty successfullyduringthisperiod,thedebtorwillhavetopaytheentireamountdue, notjustthebackpayments. Thepropertymayberedeemeduptotheconfirmationofsalehearing(heldafter thesheriff ssale).thelengthoftheredemptionperioddependsonthetypeof propertyforeclosedaswellaswhetherthecreditorisrequestingdeficiency.

7 Thefollowingarethepossiblemortgageforeclosureredemptionperiodsforthe creditor: Redemption Period TypeofProperty Deficiency? 12months Owner occupied property Requested 6months Owner occupied property Waived 6months Non owneroccupied propertyor propertyof20acres ormorethatisnonowner occupied Requested 3months Non owneroccupied property Waived 2months Abandonedproperty (eitherowner or non owneroccupied) Doesn t matter Itwouldbecommoninarealestateforeclosureagainstadebtorwithnoassetsora debtorwhowilllikelyfilebankruptcyforthebanktowaiveitsrighttodeficiency. Thisisusuallydonebecauseitreducestheredemptionperiodinhalf(from12 monthsto6monthsifowneroccupiedorfrom6monthsto3monthsifnotowner occupied)andthelikelihoodofevercollectingonanydeficiencyjudgmentisslim. Publishing Creditorsarerequiredbylawtopublishthedateandtimeofthesheriff ssaleina localpaperand(undernewlaw)onthecounty swebsite.thisisdonetogivenotice topotentialbuyersthatthepropertyisofferedforsaleinthehopesthatsuch publicationwillattractsufficientinterestedbuyers.

8 Sheriff ssale Theforeclosuresaleisconductedbyauctionbetween9:00a.m.and5:00p.m.atthe stairsofthecountycourthouseinwhichtheforeclosureactionwascommenced.the foreclosuresaleisanauctioninwhichthecreditoropensthebidding.ifathird partyisthebuyer,thesheriffwillrequirethepurchasertopay10%ofthebidprice atthetimeofsale.ifthecreditoristhesuccessfulbidderatthesale,nosuch paymentisrequired. ConfirmationofSale Attheconfirmationofsalehearing,thecourtmustmakeafindingthat fairvalue wasbidfortheproperty.ifthecourtmakesthisfinding,thecourtwillorderthe outsidepurchasertopaythebalanceofpurchasepricewithin10daysofthe confirmationhearing.or,ifthecreditorwasthewinningbidder,thecourtwillorder thatthesheriffsignadeedtransferringownershipofthepropertytothecreditor. Last,thecourtwilladdressdeficiencyjudgments,ifany,attheconfirmationofsale hearing. Asoutlinedabove,itisnotuntiltheconfirmationofsalehearingthatthewinning bidderatthesheriff ssaletakestitletotheproperty.recall,also,thatthedebtor s righttoredeemthepropertyrunsuntiltheconfirmationhearing. How does the replevin fit? Mostcommercialloansincludenotonlyrealestateascollateralbutalsopersonal propertycollateral.occasionally,thebusinessequipmentmightbethemost valuablecollateralassetforthebank.whentheloangoesbad,thebankwantsnot onlytherealestatebackbutalsothebusinesscollateral.eventually,theattorney sendsyouajudgmentstatingthatthebankhastherighttorepossessthecollateral nowwhat? VoluntarySurrender Often, the debtor will work with the bank to turn over the collateral, the easiest and most efficient way to repossess the collateral. Though the bank might not have been in contact

9 with the debtor in months, it is usually worth a call to attempt to work directly with the debtor to repossess the collateral. The debtor may voluntarily surrender the collateral at any time before judgment or after the judgment is entered. WritofReplevin Inthecircumstanceswhenthebankisnotongoodtermswiththedebtor,itmight benecessaryforthebanktorequestawritofreplevinfromthecourt.awritof Replevinisanordersignedbythecourtdirectingthesherifftohelpthebank repossessthecollateral.suchwritisgrantedasamatterofcourseinmostcounties. WarranttoSheriff Ifthedebtorisnotworkingwiththebank,andthedebtorhasthecollateraleither (1)insidehispropertyor(2)atsomeoneelse sproperty,itwillbenecessarytofile forawarrant.thewarrantisanorderfromthecourtdirectingthesherifftoentera dwelling(house,shed,barn,andsoon)andpickuptheproperty.thisisnecessary inadditiontothewritofreplevinifrepossessingthecollateralwillrequirethebank toenterproperty. SupplementalHearing Intheunlikelycasethatthebankandthedebtorarenotspeakingorifthedebtor refusestotellthebankwherethecollateralis,itmightbenecessaryforthebankto requestasupplementalhearing.atthesupplementalhearing,thedebtorisordered bythecourttoappearandtotestify,underoath,aboutthewhereaboutsofhisor herassets.thishearingmayalsobeusedbyabanktohavethedebtortestifywhere thecollateralis.oncethebankistoldwherethecollateralislocated,itmaythen requestawritofreplevinorawarrantfromthecourttorepossessthecollateral. SaleofCollateral Oncethebankhasthecollateralbackinitspossession,thebankmustfollowspecific disclosurerulesaboutthesaleofthatcollateral.thespecificsofthenotice requirementsaretoocumbersometooutlinehere.therearespecificnotice requirementsiftheloanisaconsumerloanandspecificnoticerequirementsifitis

10 not.additionally,notethatevenifthebankdoesnotintendtopursuethedebtorfor adeficiency,itmuststillsendarequirednoticeoutliningthatitintendstokeepthe collateralinsatisfactionofthedebt. Thisdetailedareaofthelawshouldbediscussedwiththebank sattorney. What if the customer files bankruptcy? Unfortunately,itisalltoocommonthatcollectionactionsbyalendinginstitution aretheresultofthedebtor sotherfinancialdifficulties.thus,itiscommonfora debtortofileforbankruptcyprotectionduringthecollectionprocess.bankruptcyis acomplexareaofthelaw,andmanyissuescanarisewhenadebtorfilesfor bankruptcy.however,forlendinginstitutions,themostimportantaretheautomatic stay,reaffirmationandtheeffectabankruptcyfilingcanhaveonaforeclosure. AutomaticStay A bankruptcy affords debtors a powerful form of relief the automatic stay. The automatic stay stays further actions by creditors to collect pre-petition debt while the bankruptcy case is pending. The automatic stay is designed to maintain the status quo, at least for a limited time, by having the bankruptcy court control resolution of actions and claims against the debtor and the debtor s property. The automatic stay takes effect immediately upon the filing of the bankruptcy petition. The automatic stay applies to all creditors despite whether they receive notice of the filing. The stay encompasses almost any action taken to collect a debt. Some examples of precluded actions include Filingalawsuitagainstadebtor Continuingalawsuitagainstthedebtororprosecutinganappeal Enteringajudgmentagainstadebtor Writtenorverbaldemandsforpaymentsoroffersofsettlement Actionstorecoverafraudulenttransfer Bankruptcy courts routinely grant relief from the automatic stay to secured creditors who do not have adequate protection. A creditor not having adequate protection means that the debtor has no equity in the creditor s collateral or fails to make periodic payments to the creditor while the case is pending. A creditor must make a motion for relief from stay to receive such relief. A court will grant relief from stay:

11 Forcause,includinglackofadequateprotectionofthecreditor sinterestin thecollateral Ifdebtorhasnoequityinthecollateralanditisnotnecessaryforaneffective reorganization The automatic stay terminates for a creditor 30 days after the request for relief from stay is made, unless the court rules otherwise after notice and a hearing. ReaffirmationAgreements Manydebtorshavedebtssecuredbycollateral,suchasvehiclesorhomes.The debtorsmightwishtoretainthepropertysecuringthedebts.debtorshaveseveral optionsbywhichtheymayretaintheseassets,butthemostcommonmethodis through reaffirmation. Inareaffirmation,thedebtormakesanewagreementwith thecreditortopaythedebt. A reaffirmationagreement isanagreementbyachapter7debtortocontinue payingadischargeabledebt(suchasacarloan)afterthebankruptcy,usuallyto keepthecollateral(thecar)thatwouldotherwisebesubjecttorepossession. Reaffirmationagreementscanbetimeconsumingtohaveexecuted,buttheyare worththeeffortonthecreditor sside.withoutareaffirmationagreement,acreditor couldcontinuetotakepaymentsfromthedebtorpost bankruptcyandretainthe securityinterest.however,bynotobtainingareaffirmationagreement,ifthedebtor failstomakepaymentspost bankruptcy,thecreditorhasnorighttoseekdeficiency rightsagainstthedebtor itmayonlyseekrepossessionofthecollateral.thus,an executedreaffirmationagreementkeepsthedebtoronthehookpost bankruptcy, whichcanbealargeincentiveforthedebtortokeepcurrentwithallpaymentsand tocontinuetoworkwiththecreditor. Althoughitisusuallyadvisabletoacceptreaffirmation,acreditorisnotrequiredto doso.eachcaseshouldbeindividuallyevaluatedbythecreditortodeterminewhat isinitsbestinterest. HowDoesBankruptcyAffectForeclosure Bankruptcyfilingsarecommonduringtheforeclosureprocess.Theobviousresult ofabankruptcyfilingistheautomaticstay.forthecreditortocontinueits foreclosureprocess,itmustwaituntilthedebtorisdischargedorapplyandreceive relieffromstay.theresultsofafilinginaforeclosurearedifferentdependingon whattypeofbankruptcythedebtorfiles.

12 Chapter7andForeclosure If a debtor files a Chapter 7 bankruptcy petition, the filing will only delay the foreclosure process. A Chapter 7 filing will not allow the debtor to force reinstatement of a mortgage. Additionally, while it is possible to sell a house while in a Chapter 7 bankruptcy, doing so is complicated with added costs which will reduce any net proceeds to the debtor. However, a Chapter 7 will discharge any deficiency the creditor might have had against the debtor because of the foreclosure. The filing will also usually expand the time in which the debtor has to move out of the property by several months. Chapter13andForeclosure IfadebtorfilesaChapter13bankruptcypetition,thedebtorwillbeallowed toreinstatethemortgagebycatchinguponanydelinquentpaymentsover time,whichcanbeveryappealingtodebtorswhohavebeenunsuccessfulin renegotiatingtheirdebtafterthebankhasacceleratedthenote. Forexample,adebtormighthavea30 yearmortgagenotewith27years remaining,butthedebtor,failingtomakepaymentsforthelastsixmonths,is now$3,000inarrears.underchapter13bankruptcyrules,thedebtormay curethatdefaultoverareasonabletimeandreinstatetheoriginalmortgage anditsoriginalmaturity.however,whilecuringthearrearagethroughthe plan,thedebtormustcontinuetomakeallcurrentpaymentsdueunderthe mortgage. Additionally,inaChapter13filing,juniorliensorunsecuredportionsofliens maybestrippedfromthepropertysothepropertycanbemoreeasilysoldor refinanced. Forexample,underaChapter13plan,thedebtormaybifurcatetheclaimsof undersecuredcreditors.thus,thecreditorhasasecuredclaimtotheextent ofthevalueofthecollateralandanunsecuredclaimforthebalance.the debtormaypaythesecuredclaimwhiletreatingtheunsecuredportionofthe claimwithallotherunsecuredcreditors.thepracticaleffectisthatthe securedclaimwillbepaidinfullthroughtheplan,releasingthelienonthe debtor spropertyservingascollateral,whiletheunsecuredclaimwill receiveaverysmallportionoftheamountdue.

13 Copyright ~ 2011 Bakke Norman, S.C. R0511