Part IV in a series: Bankruptcy Borrowers

Last year over 1 million households filed for personal bankruptcy protection. That breaks down to 80,000 new potential customers each and every month!

"Be kind, for everyone you meet is fighting a harder battle."
~Plato

If you haven’t heard about it by now, take note. The bankruptcy spectacle is back in full force. From corporations to consumers, fiscal hardship does not discriminate. Multi-billion dollar corporations and multi-millionaire executives are just as likely to file for “protection” as hard working Mr. and Mrs. John Q. Public.

Although the new rules instituted in October, 2005 caused the number of bankruptcy filings to slow dramatically in 2006, it’s on the upswing for 2007 and shows no signs of slowing down. This is Uncle Sam’s way of giving back – some would say after “taking” for so many years.

A Short History of Bankruptcy

When one wishes to understand bankruptcy, it is important to trace the history, which goes back as far as biblical times. The Bible references “sabbatical” years in which debts are forgiven. Coincidentally, they occur every seven years – and are the basis of modern bankruptcy law. Even in medieval times, bankruptcy existed. From the Italian word “banca rota” (meaning “rotten bench”), we have a situation where the merchant who could not (or would not) pay bills had his marketplace bench “broken” and assets auctioned off to pay creditors.

From this evolved the French word “banqueroute”, which implied debtors were “on the road” – and possibly running away from their debts. In turn, this gave rise to the idea that bankruptcy was fraud committed against creditors. Before long bankruptcy was considered a crime – violators were imprisoned while their poor families scraped for every penny to repay those debts.

Little changed from medieval to renaissance times. In fact, debtors prisons got so full in England that in 1542, they passed the first law allowing creditors some options (other than prison) in reclaiming their debts. Within 30 years, more laws were passed giving creditors even greater rights. The poor peasants were still shipped off to prison, and merchants fared little better. First their assets were seized and sold, then the creditors could continue collection proceedings even after the bankruptcy case was complete.

Punishment for bankruptcy increased dramatically, to the point where in 1604 a law was passed allowing a debtor’s ear to be sliced right off. It took another 100 years before any kind of bankruptcy reform was instituted. Finally though, reform was eventually enacted. There were two classed of debtors at that time – cooperative and Uncooperative. The former were allowed a discharge of the unpaid portion of their debts and surprisingly were allowed some exemptions (certain property was untouchable). On the other hand, the uncooperative bankrupt debtors may have begged for the old ear chopping laws, because the “new and improved” bankruptcy guidelines sentenced them to death.

The United States took notice and wrote some bankruptcy laws based on British law (without the death penalty), but it didn’t go very far. It wasn’t until 1841 that debtors prisons were outlawed in the US and we progressed one giant legal leap – the first “voluntary” bankruptcy filed by the debtors and not the creditors. Some things never change however, and within a couple of years those laws were repealed due to “too many people taking advantage of the system”.

Our lawmakers never gave up though, and after several cycles of new laws, too many people taking advantage and finally the repeal of those laws, in 1898 Congress passed massive bankruptcy reform in the US. Voluntary bankruptcies were allowed, and debtors were protected not only from prison but from creditors – virtually all their debts were wiped out.

Bankruptcy Mortgage Profits, By the Numbers

Although newspaper tales of financial woe and personal loss abound, this niche is best understood when you can translate tangible statistics into valuable business opportunities.

Last year over 1 million households filed for personal bankruptcy protection. That breaks down to 80,000 new potential customers each and every month! Contrary to popular belief, the typical filer is a white, married homeowner who works full-time, with a household income of less than $30,000 and an average debt of $47,000 (not including home mortgage). Imagine the possibilities of helping those customers purchase a home or refinance their way out of bankruptcy once and for all.

Source: http://www.uscourts.gov/Press_Releases/bankruptcyfilings120506.html

Do you think that by focusing on this market you could charge the kinds of rates that experts charge? Of course. Do you know why? Because you ARE the expert. Upon completion of this article, you will know more than 99.9% of all Americans about personal bankruptcy. Just picture what a little light reading on the subject could do for your positioning as the “go-to” expert in the field.

No longer will you struggle to market yourself as having the lowest rates and fees. In fact, you can easily make 300%-400% more per loan by specifically targeting this market. By focusing – by being narrowly specific in your marketing efforts – you will not only make more money per loan, but will fill a niche that is in desperate need of experts.

The Different Kinds of Bankruptcy

When most people think of bankruptcy, it’s usually due to their own personal financial difficulties. They don’t think about “Chapter X” or “Chapter Y”, they panic over how to pay bills, avoid humiliation and ridicule and then somehow get back on their feet. You however, must know the different types of bankruptcy, how certain guidelines fit your business profile and the debtor. Below is a brief summary to get you started:

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapters 11, 12, and 13 involve the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under Chapter 7, 12, 13, and some 11 proceedings, a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. After a bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors' interests.

Source: http://www.law.cornell.edu/wex/index.php/Bankruptcy

One additional point – while civil liens are sometimes discharged when a bankruptcy is filed, criminal liens are not.

Unless you’re going to specialize in the disbursement of corporate fixtures, equipment and other property, it’s safe to say that your expertise will lie with individuals who have filed personal bankruptcy. For this, you’ll need to “self-educate” in Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code.

Chapter 7 and Chapter 13

These are the most common Chapters that fall under Title 11 of the US Bankruptcy Code. Further, each state has its own rules and guidelines with regard to the Bankruptcy Code – so be careful.

Chapter 7 Basics:

This personal bankruptcy filing is also known as a “liquidation”. It is the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee is appointed by the court to gather and sell the ‘non-exempt’ property from the debtor, using the proceeds from the sale to pay the creditors. Don’t worry, they don’t sell everything. There is ‘exempt’ property that a debtor is allowed to keep. Each state has different laws and guidelines regarding exempt property.

Chapter 13 Basics:

This filing is for those who do not qualify for Chapter 7 – mainly because they have too many ‘non-exempt’ assets and too much income. It is mainly for individuals (married couples file separately) or sole proprietors of a business. The purpose is to repay all or part of the outstanding debts. An attorney will aid the debtor in proposing a repayment plan (to the court) in which to pay the secured creditors over a three to five year period.

The three year plan is commonly for those whose income falls below the state’s ‘median income’ level. The five year plan is for those whose income is above that level. Five years is the maximum repayment period.

Some of the main reasons people file Chapter 13:

• Real estate obligations covered by a mortgage. No one wants to lose their house, so this is the plan of choice for those people.
• Debts that cannot be wiped out in Chapter 7, such as back taxes, child support payments and student loans.
• Unrealistic (in my opinion) moral conviction that they absolutely must every debt down to the last penny, no matter how long it takes.

Some of the absolute rules to qualify for Chapter 13:

• Stable income with enough disposable income to pay the bare necessities of life such as shelter, food and utilities.
• Secured debt cannot exceed $922,975 (such as property a creditor could claim is non-exempt).
• Unsecured debt cannot exceed $307,675 in unsecured debt.

There is much more to learn if you wish – used the link provided above as a good start. Remember to use Google for all the free information you can imagine.

Who are my Clients – my Target Market?

If you can imagine a physical deformity that causes a person to shun the public, ignore friends and family – that causes deep depression and long term guilt...then you have just taken a sneak peek into the emotional lives of those who have been through a personal bankruptcy.

The stigma is almost universally self-imposed, only because we are taught from a young age to juggle several financial aspects of our lives successfully, at all costs. When these people fail to do what they see others around them doing easily, the emotional pain lasts a very long time. As a caveat, let me assure you there are plenty of people who absolutely love bankruptcy and use it as a tool to beat the system. While they could be potential clients, we are not interested in them. Your goal is to be a source of uplifting inspiration and restorer of self-esteem.

The Top 6 Reasons People File for Bankruptcy:

1. Medical Expenses
2. Job Loss
3. Divorce
4. Business Failure
5. Loss of Income Due to Work-Related Injury
6. Death in the Family

Far and away the least cited reason for filing personal bankruptcy is financial irresponsibility.

Many of these potential clients are looking to purchase a home – possible for who do not own a home and filed for Chapter 7 or Chapter 13 bankruptcy. The alternative is to help refinance the home of someone already in a Chapter 13 plan. This can be done inside the plan or with the help of a “buyout” (complete payoff of the debt inside the plan, as per the local Trustee).

Why Don’t They Go to a Local Bank?

Unsurprisingly, such borrowers have an added layer of risk that lenders need to address. Some lenders are not willing to entertain that risk, while others see the need for helping such individuals rebuild their financial lives. They work with this risk, but in doing so generally spread out the risk with higher fees and rates. Typically, local banks work only with borrowers with the least amount of credit risk.

It is your job to seek out the alternative lenders, to learn their programs and guidelines. Most are wholesale lenders that borrowers have probably never heard of. Some are local, some regional and some national. As in other niches, each lender has its own set of guidelines that it is comfortable with.

Put yourself in the borrower’s shoes for a moment. Think about the things that keep them up at night. Figure out the answers to questions they need to know. Become the expert, show them you can help them and earn their trust. A famous man once said that people who like you will gladly listen to you, but people who trust you will do business with you.

Stay tuned for the next article in this series of niche markets.

Grant C. Robin is a Nationally Recognized Mortgage Expert based in Miami, Florida. He is a niche specialist and has been mentored by some of the finest trainers in the industry. For more information about Grant C. Robin, contact his office at (786) 522-5321 or write to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

NOTE: This is the third in a short series of articles on the power of niches. Please watch for future articles. Click here to read the first article here for the second article and here for the third article.