Posted by JT-IN on July 08, 2003 at 11:45:21:
The LOC isn’t eactly secured by the note… You could pledge it as collateral, or the Bank could even require you sign assignment forms to them for the note and mtg, but this would be their call, and somewhat based on their confidence level in your ability and your financial situation.
The Bank wouldn’t actually be in 2nd position, as there will be only one mtg on the property, which is the one that you are intending to buy. No other mtg’s will be placed on the property unless the owner secures such a mtg, and this might be doubtful.
Depending on how the Bank requires you to assign or collateralize the note and mtg, would determine what they could/would do in the event of your default. If the note and mtg are not performing, then either the bank or yourself could seek the full collection remedy under the law to accelerate. This usually means foreclosure or Trustee Sale.
How you would be affected if the Debtor declared BK is you are put on notice and will need to repsond to the Fed’l lawsuit of BK filing to protect your position. Having a mtg on property makes you a secured creditor, which may enhance your position to collect. The only problem here is that some Debtors who may less than forthright, can yank you around for a pretty good while, under the guise of federal law, before you can cut them off at the pass… and collect the funds. If they do not attempt to make it a lifelong game, then you can usually collect within 6 to 12 months, plus the time to finish the foreclosure. However, there are those folks who write new rules to being a deadbeat, and take seriously the ability to use BK laws to continue to possess proeprty, meerly as a time management technique, instead of a means of restructuring and repaying Debt. If you run into a NutCase like this, you may wish you had stayed out of the Note and Mtg business. Not saying it will happen, but it can… and it is best to know this in advance of buying debt intruments.
Wish you all the best on the decision…