Based on our experience as we talk to investors across the country, we’ve found that when most investors hear the word “bankruptcy,” their first reactions are intimidation and avoidance.  Why?  Well, the biggest reason is the fact that bankruptcies are a legal process involving the federal government.  Clearly, these typical reactions confirm why we’ve found bankruptcies to be an incredibly untapped and profitable market that offers little or no competition … for those who are willing to learn the simple basics and stick to a plan!

In this article, we’d like to help you understand the incredible opportunities available to you by investing in a particular type of bankruptcy – the Chapter 13 bankruptcy – commonly referred to as a reorganization plan.  The reason a Chapter 13 bankruptcy is referred to as a “reorganization” is simply because the purpose of the bankruptcy is to “reorganize” the debtor’s back-payments, penalties, and interest charges into an installment payment plan that can fully (or partially) repay their creditors what is due over an extended period of time.  During this time, which can be extended up to five years, creditors are not allowed to start or continue collection activities against the debtor.  This “payment plan” is instituted by the Trustee of the court and generally implemented through a wage garnishment against the debtor’s income.  Payments collected by the court are then distributed to the creditors according to the plan approved by the court.

The important thing to note as an investor, however, is the fact that the debtor is required to make their bankruptcy payments to the court in addition to their normal monthly payments to their secured creditors (i.e, mortgage companies) as well as their current monthly living expenses (utilities, food, day-care, gas, phone, etc).  If at any point after the bankruptcy has been filed, the debtor fails to make a mortgage payment on time, the mortgage company can file a “motion for relief from stay” with the court asking to essentially be removed from the bankruptcy.  If the motion is granted, the mortgage company can then proceed with the foreclosure process.

This process provides many opportunities for us as investors.  But first let me make something perfectly clear:  just because there are profitable opportunities when investing in bankruptcies, these opportunities do not have to be at the expense of the person involved in the bankruptcy – or at ANYONE’S expense, for that matter.  Every property I have ever purchased that was involved in a bankruptcy ended with all three parties (the lender, the homeowner, and myself) coming away from the closing table pleased with the transaction.  Without exception, the homeowner was quite relieved and excited to be out from under the circumstances surrounding their home … and the lender was thrilled to have a non-performing loan off their books!

Now the opportunities:

1)  We don’t have exact figures on the number of Chapter 13 payment plans that fail but we’ve heard experts in the field say that 70 - 90% of the plans don’t make it to completion.  And this makes sense doesn’t it?  If a homeowner hasn’t been able to keep up with their payments to-date … and they have a mortgage plus a car payment, credit card debt, medical bills, etc., do you really expect that the court can garnish their wages and they still be able to make their normal monthly payments?  Not surprisingly, the mortgage is usually the biggest debt contributing to them not being able to fulfill their payment plan obligations, so this is where most homeowners first stumble.  Of course, this is also where we as investors have the opportunity to step in and “save the day” so to speak with regard to their home.

2)  By the time most homeowners have reached the point of losing their bankruptcy protection, they fully understand that they have pretty much exhausted all options for saving their home.  Many times homeowners have “played the game” of foreclosure, bankruptcy, legal actions, etc. for many, many months - even years sometimes!  By the time they finally lose the protection of the bankruptcy court, they realize they’ve run out of options and are going to lose their house.  This is often very different from people who are in foreclosure, where many people understand that they still have several options and possibly can go several more months of living in their homes without making mortgage payments.  By the time the courts have removed the bankruptcy protection, we as investors are possibly the only option left that can stop the impending foreclosure.  And if we are the only investors who know the owner has lost their bankruptcy protection, we are in a very powerful position to be able to purchase that house!

3)  Lastly, we’ve found that most mortgage companies are extremely motivated to get these “non-performing” loans off of their books.  Because of this, most seem much more willing to discuss short sales.  You need to understand the fact that lenders are all required by federal regulations to back all of their outstanding debt by a certain percentage of cash.  In the case of “non-performing” loans, the cash on-hand required is several times the amount for a typical “performing” loan.  This fact, coupled with the fact that a bank’s investors consistently judge how successful the bank is at loaning money, gives lenders a strong incentive to unload as much “non-performing” debt as quickly as they can.  In the case of bankruptcy, lenders understand they may have a non-performing loan on their books for as long as five years!  Now you can understand why banks might be more willing to negotiate on a property tied up in bankruptcy.

All of these facts - a failed bankruptcy, an extremely motivated seller, and an extremely motivated mortgage company, all lead to incredible opportunities for us as investors.  If you are willing to take the time to learn the facts, understand the process, and identify the prospects for your marketing focus, the ‘sky’s the limit’ for you as an investor in these deals.  And the best part is – virtually nobody else knows about these people or can identify them, which literally translates into NO COMPETITION!

Caryn McKinney and Mark Klee originally partnered in 2002 to create www.PostBankruptcyReport.com. Now they are a national voice on investing in bankruptcies. At the request of their subscribers and others, they have developed quality training materials and seminars to promote this incredible investment opportunity as well as provide the important educational component. Their simplified and detailed information includes everything you need to know as a real estate investor wanting to purchase homes in the bankruptcy niche market, including showing you how to access the hottest leads coming out of bankruptcy! Now you can enjoy the same amazing profits as Mark and Caryn reveal all their secrets.