It is no secret that filing bankruptcy is a tool in a borrower’s arsenal that they will not hesitate to use to temporarily drag out or halt a foreclosure sale or judgment collection. A bankruptcy case has become an inevitable headache that banks, private lenders, and other judgment creditors will face before being able to enforce a promissory note, guaranty, or monetary judgment to get paid in full. While borrowers have a range of bankruptcy chapters to choose from, this year has seen an unprecedented increase in Chapter 11 filings, which require a more complex set of procedures for borrowers and creditors alike. As a result, secured lenders and judgment creditors have dealt with a longer and more expensive time period before they are paid in full.
So how long can a creditor expect a bankruptcy case to delay their ability to be paid in full? While the specific timeframe for each individual borrower varies from case to case, we generally see the following types of cases:
The Incomplete Filing. Debtors are required to file several documents with their initial bankruptcy petition. Often times, Debtors do not comply with this requirement because they file the bankruptcy case at the last minute with the sole goal of postponing a creditor’s foreclosure sale. If a Debtor fails to file all of the necessary documents with the court, they then have two weeks from the date of the bankruptcy filing or the court will automatically dismiss the case. This is the best-case scenario for most lenders as it provides the fastest and most cost-effective way for the bankruptcy case to be dismissed to allow a foreclosure sale to move forward. A surprisingly large number of cases are dismissed this way and lenders can foreclose within three weeks of the bankruptcy petition being filed.
The Immediate Motion for Relief from Stay. In some cases, circumstances exist at the time the bankruptcy was filed that allow the lender to immediately prepare and file a motion for relief from stay. These circumstances include multiple prior bankruptcy cases affecting the property, complete lack of equity in the real property collateral, and other bad faith acts by the debtor. Depending on the judge’s schedule and local rules, the motion for relief from stay can be filed and heard as quickly as two weeks after the bankruptcy filing. Often times, lenders can receive relief from stay to proceed with the foreclosure within one to two months of the bankruptcy filing.
The Wait and See. When circumstances to obtain relief from stay do not exist at the time of bankruptcy filing, lenders must wait for the debtor to miss monthly payments on the loan or to sell the property collateral and pay them in full. Most judges require at least two, if not three, missed payments before they consider taking action to grant relief from stay or they may order the debtor to make adequate protection payments to the lender in lieu of allowing the lender to foreclose. If a secured creditor finds themselves in this situation, they can expect approximately four to eight months before receiving relief from stay to foreclose or be paid in full by the sale of the collateral.
The Lengthy, But Ultimately Ineffective Case. When the debtor is continuing to make monthly payments to a lender through the bankruptcy case and/or there is plenty of equity in the property, most judges will not grant a lender relief from stay. For example, in a Chapter 13 case, a debtor is allowed to repay all pre-petition debt over the course of five years. Unsurprisingly, many debtors fall behind on payments to the Chapter 13 Trustee and/or to the lenders after the first year or so. If a debtor fails to make plan payments or lacks income to continue making the payments, the Trustee often will file a motion to dismiss the case. Many debtors slip up after the first year or two, which results in the case being dismissed.
The Long-Haul. In extremely rare cases, the debtor will be able to drag out a bankruptcy case for three or more years. As stated above, a debtor in a Chapter 13 case who is consistently making its monthly payments to secured creditors and the Trustee can repay its debt over the course of five years and then receive a discharge at the end of the case. While this delay can last up to five years, the lender will be receiving payments during this time and should not need to proceed with the foreclosure as such.
As always, there will be cases that do not fit into these categories, or the case could change from one category to another depending on various factors. A good attorney can work with you to create a strategy specifically suited to your borrower to ensure you’re paid in full in the fastest and least expensive way possible. If you have questions about the best strategy for your borrower and to ensure you are paid in full on your loan, contact Kahana & Feld LLP to work out a strategy now.