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#987353 - 07/03/08 12:59 PM Accruing interest while borrower is in Banruptcy?
Many Hats Offline
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Joined: May 2008
Posts: 915
Orlando, FL
We received notification of a borrower filing a CH. 7 bankruptcy; however, he is reaffirming his debt with us (which is a HELOC).

Do we have to put the loan on non-acrual until after the BK is discharged, or since he's reaffirming...can we just leave it alone?

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#987485 - 07/03/08 02:29 PM Re: Accruing interest while borrower is in Banruptcy? Many Hats
Ray_ Offline
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Joined: Aug 2006
Posts: 879
Dallas, TX
Nonaccrual -- For purposes of this schedule, an asset is to be reported as being in nonaccrual status if:
(1) it is maintained on a cash basis because of deterioration in the financial condition of the borrower,
(2) payment in full of principal or interest is not expected, or (3) principal or interest has been in
default for a period of 90 days or more unless the asset is both well secured and in the process of
collection.


From the Call Report Definitions. There is more info that follows what I quoted. But, just because of bankruptcy alone doesn't mean you have to put the loan on non-accrual. Definitely your bank's Watch List though.

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#987524 - 07/03/08 02:46 PM Re: Accruing interest while borrower is in Banruptcy? Ray_
Many Hats Offline
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Joined: May 2008
Posts: 915
Orlando, FL
In our case, the loan is not in default...he's been paying us well and even since the bankruptcy declaration, he's been paying us fine.

For some reason though, loan ops director is itchy to put it on non-accrual.

Is there a link to the information you provided that I can refer to?

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#987537 - 07/03/08 02:50 PM Re: Accruing interest while borrower is in Banruptcy? Many Hats
Ray_ Offline
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Joined: Aug 2006
Posts: 879
Dallas, TX
http://www.ffiec.gov/PDF/FFIEC_forms/FFIEC031_041_200806_i.pdf

In the glossary. We had a customer the same way. He paid us in full and we were still getting money from the trustee.

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#988304 - 07/07/08 12:23 PM Re: Accruing interest while borrower is in Banruptcy? Ray_
Many Hats Offline
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Joined: May 2008
Posts: 915
Orlando, FL
I just found out that unbeknowngst to me, a processor already put the account on escrow, because her "boss told her to". The boss doesn;t realize that the borrower is reaffirming the debt with us.

Now that it has been done, they want to wait until the BK is discharged, then take it off accrual.

This is a mess. Months from now, we will have to take it off non-accrual, re-figure all the accrued interest and re-apply it to the loan.

We have examiners coming in a couple weeks. Is this something they will criticize us for, or should I just not worry about it and we'll have to deal with it later?

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#988312 - 07/07/08 12:32 PM Re: Accruing interest while borrower is in Banruptcy? Many Hats
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 77,241
Galveston, TX
This only penalizes the bank. I'm not sure why somone would move a loan to non-accural when it was still performing and you contemplate that it will continue to perform according to the contract.
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