Yes, in general. A bankruptcy filing leaves the note in your hands, and you can still assign it to a buyer while the case is open. Fewer buyers will bid, and they pay less until the court has shown how your loan will be treated, so the real choice is between selling into the uncertainty and waiting for it to clear.
What the filing changes for you
When a person files bankruptcy, the court puts a hold on collection that lawyers call the automatic stay. In general it means creditors, including you, have to stop demanding payment, stop sending default notices and stop any foreclosure until the court allows it again.
Your note survives the stay, and so does your lien, the recorded claim on the property that secures it. What you give up while the case runs is the freedom to enforce the note on your own timetable.
Hire a bankruptcy attorney in the borrower’s state now. The court sets dates for creditors to file paperwork, and what you should file depends on the case. Until the attorney has advised you, leave the borrower alone on the subject of payment.
The kind of case matters most
Personal bankruptcy comes in two broad forms, and they treat a note holder differently.
| Kind of case | What generally happens to the home loan | What a buyer wants to know |
|---|---|---|
| Liquidation (commonly Chapter 7) | The borrower’s personal duty to pay may be wiped out, while the lien generally stays on the property. A borrower who wants to keep the home has a reason to go on paying. | Whether the borrower intends to stay and pay, or to give the property up. |
| Repayment plan (commonly Chapter 13) | The borrower proposes a plan to catch up missed payments over time while making the regular payment. | Whether the court has confirmed the plan and payments are arriving under it. |
A general description only. How a particular loan is treated depends on the case, the court and state law, and your attorney can tell you where yours stands.
How a buyer prices a note in bankruptcy
Someone buying a paying note is buying a stream of payments. Someone buying a note in bankruptcy is buying an outcome nobody can predict yet, so the note is priced much like a non-performing note, meaning one where the payer is not paying as agreed.
Equity comes first. It is the amount by which the property’s value exceeds everything owed against it, and plenty of it protects the buyer whichever way the court rules. After that the buyer asks whether the borrower has paid since the filing date, because those payments carry weight even where earlier ones were missed. Then comes the stage of the case: a plan the court has confirmed, with a record of payments under it, is worth more than a case filed last week.
Buyers who take these notes want a higher return on their money than they would accept on a paying note, and the more they want, the less they offer you. The same arithmetic applies to other non-performing notes, where the price starts from the property and what it would cost to reach it.
Sell now or wait
Selling during the case gets you out of the legal fees, the court dates and the waiting. You pay for that with a wider gap between the balance owed and the price you receive.
Waiting can pay off if a repayment plan is confirmed and the borrower pays under it for a stretch, since that record is what brings more buyers to the note. It can also pay off if the case is dismissed or finishes and the borrower keeps paying, at which point the note can be priced as a paying note again.
Waiting is the weaker choice when the property has little equity, when the borrower has said they will give it up, or when you cannot carry the attorney’s bills. The weighing is much the same as when you are selling a note when the payer has stopped paying, except that here a court keeps the timetable. Of the reasons gathered under when selling a note makes sense, bankruptcy is the one where legal cost runs every month you hold on.
Before you ask for a price
Get your deadlines from the attorney first. Then put together what a buyer will ask for on day one:
- the bankruptcy case number, the court and the filing date
- a record of every payment received, marked before and after the filing date
- any plan, claim or court order your attorney has sent you
With those in hand, send us the note details and include the case number. The stage of the case decides whether a buyer will bid now or would rather see the plan confirmed.
Related questions
Does a borrower's bankruptcy wipe out my lien on the property?
Generally no. A bankruptcy can end the borrower's personal duty to pay, but a properly recorded lien usually stays on the property. How your loan is treated depends on the case and state law, so confirm it with a bankruptcy attorney.
Can I keep accepting payments while my borrower is in bankruptcy?
The borrower or a court trustee may keep making payments during the case. What you may not do is press for payment on your own. Ask your attorney how payments should be received and recorded in your case.
Will a past bankruptcy stop a buyer from bidding once the case is over?
A closed case does not rule the note out, because buyers look at what has happened since. A borrower who has paid on time after the case closed, on a property with solid equity, can still be an attractive payer.