Update as of 6/14/2021
Jamal Romero, Esq: The Moratorium is almost over which means a lot of you are thinking what happens next. Will there be a new program that allows me to roll my forbearance payments to the end? What steps should I take to ensure my house does not get sold at a foreclosure sale?
This blog might answer most, if not all of your questions.
Most homeowners don’t pay enough attention to educating themselves about the foreclosure process. Look at it this way, if you’re buying a home and don’t know the foreclosure process and your options, you’re like a soldier without a rifle - you are flying blind my home-owning friend. Educating yourself about the foreclosure process and your options should be one of the first things a homeowner should do before or after buying a home. This blog will explore the foreclosure process and how you could save your home or investment property through a bankruptcy.
The Foreclosure Process
Most homeowners have a vague idea of what a foreclosure really is, thus I think it is important to start there. A foreclosure is the lender’s way of repossessing the collateral that was provided by the homeowner for borrowing the funds used to purchase the property. To be clear, the lender can’t just repossess the collateral by locking you out – it has to file a lawsuit (foreclosure complaint) and win before it can repossess the property. This is what a foreclosure proceeding is, and it all starts with defaulting on your mortgage.
a. Defaulting on Your Mortgage
Missing three payments or more will be considered defaulting on the mortgage. Most homeowners think that you have to be behind three consecutive months (or 90 consecutive days) before you default on your mortgage - that is far from the truth. The rule of thumb is this: If you accrue 90 days of missed mortgage payments (whether consecutive or not) you will have defaulted on your mortgage.
For example, you make a mortgage payment on month 1, miss the mortgage payment on month 2, and make two mortgage payments on month 3. In your mind, you’re up to date with the mortgage but the lender doesn’t see it this way – even though you’re current because you made two payments in month 3 - you have accrued 30 days of missed mortgage payments. If this continues to happen over time and you accrue 90 days of missed payments, your mortgage will go into default. This will trigger the mortgage company to stop taking payments and send out a Notice of Intent to Foreclose 30 days before the foreclosure complaint is filed.
b. The Foreclosure Complaint
Thirty days after receiving the Notice of Intent to Foreclose, the lender will then file the foreclosure complaint and must serve it (send a copy of the foreclosure complaint via mail or personal delivery) on the homeowner. This will initiate the foreclosure proceeding which is the lawsuit against the homeowner to repossess the property. The homeowner will then have 35 days from the date that they received the complaint to file an “answer” or response to the foreclosure complaint. You are not required to file an answer but most people do file an answer to buy themselves time.
Filing an answer, however, can be costly depending whether you hired an attorney to do so. I suggest that instead of paying an attorney to file an answer and stall the foreclosure, save your money and speak with a bankruptcy attorney. Filing an answer gives you a limited amount of time to stall the foreclosure. On the other hand, a bankruptcy can stop the foreclosure proceeding and provide you with a breathing room to reevaluate whether it is financially feasible for you to continue to own a home. These bankruptcy options are explained below, but I digress.
If you have received the foreclosure complaint and you filed no answer because you took the “bury your head in the sand” approach (don’t feel bad – most people do), the lender will continue with the foreclosure process and seek a Final Judgment of Foreclosure. Once the lender obtains the Final Judgment of Foreclosure, the lender now has the ability to take action against the property and begin the repossession process by scheduling a Sheriff Sale. Ordinarily, it takes about 6-8 months to get to this point, but if you decided to file an answer to stall the foreclosure, it can be well over a year before a Sheriff Sale is scheduled.
c. Sheriff Sale
A Sheriff Sale is a public auction where foreclosed properties are put up for sale. In order for a lender to schedule a Sheriff Sale it must have a Final Judgment of Foreclosure and submit a Writ of Execution to the Sheriff’s Foreclosure Department. The Sheriff’s will then take the Writ of Execution, schedule an auction date, and notify the homeowner. As a homeowner, you have the right to adjourn or postpone the auction date twice for two weeks at a time. If you have run out of adjournments, and the lender will not agree to provide you with additional adjournments, the only thing that can stop the Sheriff Sale is declaring bankruptcy.
If you were unable to stop the Sheriff Sale, and the house was sold at auction, you have 10 days to try to get the property back – referred to as the Right of Redemption. However, this isn’t as easy as it sounds since you have to pay the entire mortgage in full.
d. The Eviction Process after the Sheriff Sale
Once the property has been sold at Sheriff Sale, you will receive a notification from the Sheriff telling you that you must vacate the property. Unlike some may believe, the eviction process after the property has been sold at Sheriff Sale is not automatic, and neither the Sheriff nor the new owner have a right to change the locks or kick you off the property as soon as the property is sold at Sheriff Sale.
Once the new owner has received from the Sheriff’s office and a “Writ of Possession” (which entitles to new owner to possession of the property), the new owner provides the Sheriff with the Writ. Once the Writ is received and served on the previous owner, the previous owner has 20 days to vacate the property. If the property is not vacated within the 20-day period, the Sheriff will assign a date for the eviction and lockout. If the property is occupied by a tenant, however, a separate eviction action must be taken against the tenant which can take a few months before the tenant can be evicted.
Your Bankruptcy Options
As I mentioned previously, a bankruptcy can stop a foreclosure proceeding in its tracks, and provide you with the time necessary to figure out what your options are. Now, once you file for bankruptcy, you will have several options which will depend on whether it is financially feasible for you to carry out the strategy proposed. Below are the different types of strategies to save your home from foreclosure.
a. Loss Mitigation Program
If you have ever attempted to apply for a loan modification on your own, you know that it’s a bureaucratic nightmare – an endless pit of document requests and document production with no end in sight.
Most bankruptcy districts have instituted what’s called the Loss Mitigation Program (“LMP”) designed to streamline loan modification applications for those people that declared bankruptcy to stop foreclosures that resulted from the housing market collapse of 2008. The program has worked so well that it has become a permanent staple within the Bankruptcy Courts.
Although the loan modification process is the same (as far as document requests go), here are some glaring differences between doing a loan modification on your own and applying for a loan modification through the LMP:
- The loan modification application and documents requested are uploaded to the LMP’s DMM Portal and can be easily tracked by both parties (no more lost documents);
- The DMM Portal maintains an open line of communication between debtor’s counsel and the lender’s representative;
- Deadlines are set for the mortgage company to review the application to avoid submitted documents from becoming stale or expired;
- Judicial oversight allows the debtor to appeal the decision of the mortgage company; and more importantly;
- The foreclosure proceeding cannot continue, and the property cannot be sold, while the debtor is participating in the LMP.
b. The Cure and Maintain Strategy
A Chapter 13 is referred to as a “bankruptcy reorganization” because you will have to file a plan whereby you propose to repay some of the debt you owe. This repayment plan depends on several factors, but for the purposes of retaining a home, the debtor or homeowner can retain their home by filing a “Cure and Maintain” Plan. A Cure and Maintain Plan takes the entire past due amounts owned on the mortgage and spreads it out over a period of up to five years. 11 U.S.C. §1322(d). The debtor will then remit monthly payments to the bankruptcy Trustee to pay the mortgage arrears – this is referred to as the “cure” portion of the plan. While making the “cure” payments, the debtor or homeowner will continue to make their regular mortgage payment directly to the lender. This is referred to as the “maintain” portion of the plan because you are maintaining current with your mortgage payments after the filing of the bankruptcy.
At the end of the bankruptcy case, assuming that the debtor has made all of the payments under the plan to cure the arrears, the debtor will receive a discharge. 11 U.S.C. §1328. Thereafter, the bankruptcy case will close, and the debtor/homeowner will continue to make the regular mortgage payments thereafter.
c. The Cram-Down
Another benefit of filing a Chapter 13 bankruptcy reorganization plan is the “cramdown” provision. A cramdown occurs when a debtor/homeowner proposes to pay the secured value of collateral (the property) instead of the full mortgage amount owed. Section 506(a) of the Bankruptcy Code states, “[a]n allowed claim of a creditor secured by a lien on property to which the estate has an interest…is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property…and an unsecured claim to the extent that the value of such creditor’s interest…is less than the amount of such allowed claim.” 11 U.S.C. 506(a). To put it more clearly, the homeowner proposes to pay to the lender the value of the property and NOT the mortgage owed. Nevertheless, a cram down is subject to the following restrictions:
- You can cramdown investment properties but cannot cramdown your principal residence (with the exception of multi-family homes because technically this is an investment property); and
- The value of the property must be paid over a period of up to five years – no exceptions.
- Surrendering the Property
Earlier today, I spoke with a lady who had just received the foreclosure complaint and she wanted to know her bankruptcy options. After gathering her income information and comparing it to the amount owed on the mortgage, it was impossible for her to save the home because i) she had already received a modification so she couldn’t take advantage of the LMP, and ii) she didn’t have the income to support a cramdown or a cure and maintain plan. I suggested that she surrender the property through a bankruptcy.
The act of surrendering the property simply means that the debtor/homeowner no longer intends to make the loan payments, or as stated by the First and Fourth Circuit courts “means not taking an overt act to prevent the secured creditor from foreclosing its interest in the secured property.” In re Calzadilla, 534 B.R. 216, 218 (Bankr. S.D. Fla. 2015). The downside is that you will lose the property through the foreclosure process. The upside, however, is that the bankruptcy will eliminate the debtor’s personal obligation to repay the deficiency balance after the property has been sold through a sheriff sale.
For example, you owe the mortgage company $500,000. You stop making payments and the lender successfully obtains a Final Judgment of Foreclosure as explained above. The property is then sold at a Sheriff’s Sale for only $100,000. The amount that the lender couldn’t recover ($400,000) is referred to as a deficiency balance. Declaring bankruptcy and surrendering the property thereafter will eliminate the debtor’s/homeowner’s obligation to pay this deficiency balance.
Not surprisingly, when I told this lady that she couldn’t afford the property and that she should surrender she wasn’t too pleased because, to her, giving up the property wasn’t an option – even if it meant throwing more money out the window to save the home. Sadly, I told this very nice lady that I couldn’t take her case because she would pay to help her when there was no way for us to do so. Now, there are other attorneys out there that will take her case knowing that they won’t be able to help, but that’s not who we are as a law firm.
Even if she didn’t take my advice, I hope you do. If you are living above your means and are struggling to pay for a home you can’t afford, as emotional as it may be, you can cut your losses and live to see another day. Even if its your first home, it doesn’t have to be your last. Take my advice and surrender the property through a bankruptcy before its too late.
Don't Wait Until You're Facing a Sheriff Sale
Buying a home, although not an easy process, should be a joyful moment in your life that should not be taken lightly. If you educate yourself on the home buying process and stay within your means when purchasing a home, you minimize the chances of facing foreclosure.
Unfortunately, there will be incidents, like losing a job or becoming ill, that are unpredictable and will force you into foreclosure. However, there is a light at the end of the tunnel if you take an immediate step after falling behind.
Whether it’s through a loan modification, cure and maintain plan or a cram down, a bankruptcy attorney can help you save your home from foreclosure when everyone else can only buy you time. Don’t wait until you’re facing a Sheriff Sale and contact a bankruptcy attorney as soon as you receive the foreclosure complaint. By taking immediate action, you ultimately increase your chances of saving your property.
If you are facing a foreclosure and are considering bankruptcy and want to take advantage of any of the options outlined above, please call one of our experienced bankruptcy attorneys for a free consultation.