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Chapter 13 Trustee and Regular Payments

Posted: Mon Jan 24, 2022 11:20 pm
by wtech_josh
You report the arrears to the court and the trustee will be paying you back on those arrears over time. And your borrower resumes their regular payments on the loan.

There's the easy way and the hard way. There's value in simplicity, so let's start with the easy way:

First, record a payment of the arrears on the main loan. Then you make a new loan (give it the same account number but with a _chap13 or _trustee or something stuck on the end of the account number) at zero percent interest for that same amount as the arrears. On one side, it looks like you just received all that money as a payment, and on the other it looks like you just paid out all that money as a new loan. So the payment and the loan balance each other on your books, the money in = the money out. It looks like you made a profit because some of that payment is probably interest and fees, but you are guaranteed by the bankruptcy court to collect those funds. The second loan is principal only, so there will be no reportable profit from that loan ever. In exchange for a court guarantee that the funds will be paid, you pretend they are paid and account for their payment accordingly.

Record payments from the trustee to the second loan, slowly paying down that zero-percent-interest account. Record the regular payments from the borrower on the first loan as normal. 8-)

Now, you might say "Hey! :evil: I never actually got paid all the interest and fees from that big payment, but you're telling me I have to report it all now and then collect it over time? I don't want to do that!" Ok, here's a much harder way to do it but you only report the profit when your wallet is actually fattened by it:

First, record the big payment on the first loan for the amount from the bankruptcy filing. Run the Payment Distribution report and make a note of the interest, fees, escrow and principal that it paid. Now, delete that payment. Record these adjustments on the loan, all with the date from the bankruptcy filing, and put something like "Chapter 13" in the description:
-Adjust the Principal down by the amount from the payment (negative number)
-Adjust the Interest down by the amount from the payment (negative number)
-Adjust the Fees down by the amount from the payment (negative number)
-Adjust up the Escrow by the amount from the payment (positive number)
-Adjust down the EscrowDue by the escrow amount from the payment (negative number)
-Adjust down the AmountDue by the total payment amount (negative number)

That's the equivalent of having the payment on the loan but only with adjustments. Now it doesn't look like a payment, it looks like forgiving things.

Next, we make the trustee loan as in the easy way, but make the loan at 0% and only for the principal amount from the payment. Once the loan is created, record opposite adjustments to all the values from the first loan with the same dates and descriptions as before:
-Add an adjustment to Interest by the amount from the payment (positive number)
-Add an adjustment to Fees by the amount from the payment (positive number)
-Add a negative adjustment to Escrow by the amount from the payment (negative number)
-Add an adjustment to EscrowDue by the escrow amount from the payment (positive number)

And now record payments from the trustee to this loan and they'll pay off the escrow first, and then fees and interest and finally pay off the principal at the end. This avoids reporting the amount from the bankruptcy as profit immediately, but at the expense of requiring a lot more configuration on your part. If you're going to be receiving most of the interest and fees within the first year anyway, the net result is that your taxes will be practically the same. If the bankruptcy takes effect in December, then doing it this way will delay the reporting of much of the income by a year or more.

The negative escrow balance will even ensure that your escrow bank account reconciles seamlessly with the escrow totals from Moneylender.

In the end, you'll get your money as it trickles in, and you'll pay taxes on it under whatever structure you're invested through and everything will line up very nicely. It's more up-front work, but perhaps allows more elegant accounting in the end. There's value in that, too.

I put the angry face in the hard way, and maybe it seems like I'm being a Snarkington Q. SnarksALot. And I am. :P But if that's how you choose to account for your loans, that is absolutely perfect 100% a-ok. Moneylender is a platform for automating all this math, and I'm really glad that people are testing its limits and that it is actually capable of this kind of stuff. :)

Good luck, have fun, happy lending!