How Can Bankruptcy Act as Foreclosure Prevention?
Mortgage payments are most homeowners’ largest monthly expense. Falling behind on mortgage payments is usually a symptom of larger, more global financial issues. Many people first exhaust their savings and default on other debt before missing their mortgage payments. This is why falling behind on mortgage payments may be a sign of a need for professional assistance. This is especially true in the commercial lending context, where a homeowner’s business may also be in distress. Bankruptcy should be one of the various options considered when researching the professional assistance and potential foreclosure prevention needed in a given situation.
The Pre-Foreclosure Process
Before resorting to foreclosure, mortgage lenders may be willing to attempt to assist homeowners who fall behind on their mortgage payments. These lenders, usually acting through a servicing company, may process applications for loan modifications, forbearance agreements, or other arrangements to provide homeowners with assistance. These agreements may include giving the house back to the lender in a process called a “deed in lieu of foreclosure”, and can also include a process by which the homeowner sells the house to a buyer for less than the amount owed on the mortgage, which is called a “short sale”. However, each lender is different, and there’s no guarantee that a lender will offer or approve a person for this kind of voluntary assistance as a means of foreclosure prevention.
The Foreclosure Process
If a lender does not voluntarily assist a homeowner as foreclosure prevention, it may seek to enforce the terms of the mortgage loan. It does this by commencing the legal process of forcing repayment of the money it lent to the homeowner by taking back the house, thereby realizing its value, or by selling the house to others and obtaining the sale proceeds. This is the process of foreclosure. The foreclosure process can take, from start to end, between 6 to 9 months, and sometimes longer depending on the circumstances. This timeframe can also vary between the commercial lending context and the residential/consumer lending context. Foreclosure is a state court procedure by which the lender proves to the court that it holds the legal right to take back the house as a result of the missed mortgage payments, or some other cause defined in the loan documents. A lender starts a foreclosure case by filing a complaint with the state court, and serving it with a summons on all of the homeowners, lenders, tenants, any anyone or any company with an interest in the house. If no answer is filed in response to the complaint, or if the homeowner files a response the lender still proves their right to foreclosure, the lender is given a foreclosure judgment against the house. This foreclosure judgment is then used by a lender to put the home up for sale by a sheriff.
The Sheriff’s Sale
A sheriff’s sale is a publicly advertised auction, and gives third parties the right to bid on the sale of the house by the sheriff’s office. The lender has the right to bid using the money it’s already owed in a process called “credit bidding”. Third parties can also bid with cash. If the house is sold for more than the amount due on the mortgage, which is generally rare, the homeowner is given the proceeds after administrative costs. However, if the house is sold for less than the amount due to the lender, the lender may pursue the homeowner in a second legal action seeking a money judgment for the difference between the amount of the loan and the amount realized in the sale, which is called a deficiency judgment. Once a sheriff’s sale is completed, there is very little that a homeowner can do to get the house back. This is why it’s crucial for homeowners to take immediate steps to prevent foreclosure and sheriff’s sale.
Foreclosure Prevention and the Automatic Stay in Bankruptcy
Bankruptcy is a federal process available to people and businesses. Bankruptcy can also act as a means of foreclosure prevention in some instances. The filing of a bankruptcy can in many instances put a “freeze” on creditor collections actions, and this includes the lender’s attempt to collect on their debts using the foreclosure process. This is called the “automatic stay”. When a bankruptcy is filed, the automatic stay generally stays the foreclosure process, including a sheriff’s sale. It must be noted, however, that the automatic stay does not go into effect in some instances, and it does not stay all kinds of actions. Also, the automatic stay may expire in other instances, and can be lifted by the court upon request by a lender for certain reasons. One of these reasons is the homeowner’s failure to pay the mortgage during the bankruptcy. As explained below, paying the monthly mortgage following bankruptcy may be a requirement in many cases to keep the automatic stay in place.
Foreclosure Prevention – Chapter 7 Bankruptcy versus Chapter 13 Bankruptcy
In order to understand how bankruptcy impacts foreclosure, it’s first important to understand the differences between liquidation bankruptcy and reorganization bankruptcy. In a Chapter 7 liquidation bankruptcy, a trustee is assigned to sell a bankruptcy debtor’s assets in order to pay their creditors. This means that Chapter 7 bankruptcy cannot act as a form of foreclosure prevention. Compare this with a reorganization bankruptcy, where the debtor is responsible for making payments over time to pay back certain debts, including repaying missed payments, called arrears, to secured creditors on assets the debtor intends to keep. This includes missed payments on a mortgage. Liquidation bankruptcy may temporarily stay a foreclosure but, unlike a reorganization bankruptcy, it does not give a homeowner any structure through which to repay missed mortgage payments and often cannot act as foreclosure prevention.
Curing Mortgage Arrears in Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, which is a kind of reorganization bankruptcy, allows homeowners to propose a plan to repay their missed mortgage payments and to engage in other loss mitigation options, such as an application for a mortgage loan modification. This makes Chapter 13 bankruptcy a viable option in terms of foreclosure prevention. In a Chapter 13 bankruptcy, a homeowner will make monthly payments to a Chapter 13 trustee under a plan of reorganization. Where a homeowner enters bankruptcy in a foreclosure, that plan of reorganization will require a proposal to repay missed mortgage payments, or to otherwise cure them through the bankruptcy. In the case of repayment of the mortgage arrears, the homeowner has 36 to 60 months to repay those missed payments. Alternatively, a homeowner can propose to cure those arrears through some other process, such as loan modification, short sale, or some other voluntary arrangement. In either case, the homeowner will need to make regular, post-bankruptcy filing payments to the lender. As stated above, if the homeowner fails to make those regular payments, the lender may request that the bankruptcy court allow the lender to go back to foreclosure once again. In some instances, a homeowner may not qualify for a Chapter 13 bankruptcy due to having too much debt, and this may require that they use a Chapter 11 reorganization to pursue similar goals.
Junior Mortgages and Home Equity Lines of Credit in Chapter 13 Bankruptcy
A homeowner in Chapter 13 must propose to treat not only their first mortgage through their plan of reorganization, but also any additional mortgages, lines of credit, and liens. If there are arrears to be cured on those obligations, the homeowner will also need to propose a treatment for them as well. In a reorganization bankruptcy, a homeowner may also propose to modify these junior mortgages and other liens by removing them from their home completely and treating them, essentially, as credit card debts in their plan of reorganization. This process, referred to as a “strip off”, can remove these mortgages and liens from the home and allow them to be discharged in a Chapter 13 bankruptcy. This relief relies, primarily, on the homeowner proving to the bankruptcy court that the value of the home, after considering the amount of the first mortgage or other prior mortgages, is less than the amount of the senior mortgage(s). If this is proven, the junior mortgage/lien in question is considered completely unsecured, and is stripped off of the home.
Schedule Your Free Bankruptcy Consultation with Middlebrooks Shapiro
If you are actively in foreclosure or if you think you’re headed in that direction and are interested in foreclosure prevention options, you have everything to gain from a free bankruptcy consultation with the dedicated attorneys at Middlebrooks Shapiro. Our team specializes in all aspects of bankruptcy, including Chapter 7 and Chapter 13. While bankruptcy may not be the right option for everyone, in many instances, bankruptcy can be a powerful tool to work to save your home from foreclosure, to reorganize the debts secured against the home, and to address many of your other debt issues in one case. It’s crucial that you fully understand your options, which is why we encourage taking advantage of our free initial bankruptcy consultation.
