Is your state a recourse state? Why it’s important to know if you are facing foreclosure

By Peter Bricks , an Atlanta bankruptcy attorney.

The number one reason I consult with debtors about filing bankruptcy is due to underwater real estate. A lot of them have a home that previously had equity, but

does not currently.

In these scenarios, the client is worried about whether the bank will pursue a deficiency against him if he misses mortgage payments, and the bank does not agree to waive the deficiency through a short sale or a deed in lieu of foreclosure.

If you find yourself in that position, it is critical that you find out whether your state is a recourse or non-recourse state. What does this mean? It means you must learn whether the bank can pursue a deficiency balance after foreclosing. A full list of recourse states is available here; however, note that you need to check your state’s updated law to verify the information is still accurate.

To explain why this distinction is so important, consider these two scenarios. Let’s say two debtors who owe little to no unsecured debt, each have a home that is about $80,000 underwater and is facing foreclosure.

The debtor in a non-recourse state is possibly protected against the bank pursuing a deficiency and therefore will probably have no need for a bankruptcy to discharge a debt to the bank. However, the debtor in a recourse state can be pursued for a deficiency and thus might need or want to file bankruptcy to avoid this large debt.

Note that it is not as simple as knowing whether one’s home is located in a recourse state. There are nuances to consider and one should consult with a local attorney. Even in recourse states, the banks do not always pursue a deficiency for example. Georgia is a non-judicial foreclosure state, and the banks usually do not pursue deficiency judgments.

Also, even in a non-recourse state, that prohibition against pursuing a deficiency might very well apply only to the foreclosing bank. Therefore, if a second mortgage held a note as well, that bank can still pursue a deficiency. Also consider that even in a non-recourse state, the ban against collecting might only apply to purchase money loans. Therefore, if the debt originated from a refinance, the bank might still be able to collect against the debtor.

Peter Bricks is a member of the National Association of Consumer Bankruptcy Attorneys. He has bankruptcy attorney offices in Dunwoody, Woodstock, Cumming and Jonesboro, Georgia.

Is surrendering a property the same as letting it foreclose

So you have decided that you can no longer afford your home mortgage payments; you also realize that in this difficult real estate market, there is no equity and you can not either sell the property, or get the bank to approve a short sale due to the fair market value.  You are now faced with the decision what to do about it.  You have several options at this stage.

First, you could simply do nothing, pay nothing and wait for the bank to foreclose upon your home, and kick you out.  Where I practice in Massachusetts, it would take at least 150 days from the date the bank decided to send you a letter with their intent to foreclose before an auction could occur.  Even after the foreclosure sale, the new owners will need to have you evicted.  The whole time this is happening, you can save money for a down payment on your next place to live.  If this does happen however, and the lender sells your property at a foreclosure sale for less then what is owed to them, they can seek a deficiency judgment and come after you for the remaining balance.  The lender can even seek a judgment in court which will incur interest, for example in Massachusetts, a judgment incurs interest at 12% a year until the debt is paid off, and the judgment is good for 20 years, where the creditor can chase you, garnish your wages, and attach your bank account or tax refunds.  With all of this said, you can see that option one is probably not going to be yours best bet.

Second, you can try to surrender your property.  There are several ways you might go about surrendering your home.  You can try to contact the mortgage company and offer them a deed in lieu of debt.  What this means is that you will agree to leave the house, transfer the title to the mortgage company and in exchange, the lender will agree not to pursue you for any shortage.  This can often be difficult and the bank has absolutely no obligation to accept the deed in lieu.  You can also file a bankruptcy and inform the court and your creditor that you will be walking away form the house.  The benefit of this is that the bank and you may at that point come to terms with a surrender date, or at the worst, once you receive a discharge of debt in your bankruptcy, the lender will not be allowed to chase you for the deficiency.  In addition, once you file your case, the law imposes an automatic stay on the lender doing anything, so you may be able to again stay in the home for several months if not even more time, and save some money where you are not making payments.

Just because you file a bankruptcy and on your petition states you’re surrendering the property, this action in and of itself does not convey title.  The lender has a process they must follow and obtain relief from the automatic stay.  After this happens, they can then choose to either accept your surrender of the property, or move forward and foreclose.  There is no obligation for the lender to actually accept your surrender, just like negotiating a deed in lieu of debt.  However, as stated earlier you are protected against any future law suits on the value of the mortgage in relation to the foreclosure sale price.

Regardless of which avenue you choose to pursue, you owe it to yourself to at least speak to a consumer debt attorney who can advise you on your various legal rights and risks of any decision in your jurisdiction.

Court Adds Additional Requirement to Foreclose in Massachusetts

The Highest Court in Massachusetts has made foreclosure just a little bit more complex and difficult for lenders. More specifically, in June of this year, the Massachusetts Supreme Judicial Court in the case of Eaton v. Federal National Mortgage Association, held that a bank who seeks to foreclose against an owner of real estate in MA must have in its possession not only the original notarized mortgage, but now must also have the original notarized promissory note. These are two separate documents, and the paper trail required is now doubled, which clearly provides additional protection for consumers and burdens of standing for lenders seeking to effectuate its alleged rights to foreclose on a property. This additional requirement will now likely delay many foreclosures due to the fact that when loans are sold from one lender to another, many papers seem to get lost and even if the mortgage is present, the second document, the note, must also be present.

If a homeowner is going to defend against a foreclosure in Massachusetts, a good first step is to send a certified letter to the loan servicer demanding a certified copy of the original mortgage, and original note pursuant to the General Laws of Massachusetts, Chapter 244. While foreclosure law varies from state to state, the Massachusetts decision highlights an important universal rule; you can not take a home if you do not own the right to do so.  In simple terms, in order for a bank to foreclosure they must prove that the bank is entitled to receive the monthly mortgage payments, and simply the fact that a consumer was paying them is not enough, the Court will now require the proper paperwork to show ownership, or more succinctly, as it was recently put by Henry J. Sommer, supervising attorney at the Consumer Bankruptcy Assistance Project, “The basic fact, which I think is true anywhere, is that if you don’t own a mortgage and note, you don’t have a right to foreclose on somebody’s house,” he said. “That is really what this decision boils down to”.

One significant comment of caution when asserting the note defense is that this holding does not seem to be retroactive. By that, I mean to say that this will not help homeowners who have already been foreclosed upon or those in the process prior the June 22, 2012.  If however, a notice to foreclose has been received subsequent to the June 22 holding, the defense is not only valid but a must first line of defense against banks seeking to take a homeowner’s or investor’s real estate for lack of payment.

If you are facing a foreclosure action, your best bet is to immediately seek the counsel of an experienced debt relief attorney in your state.

Foreclosure, Short Sale, or Bankruptcy

In a struggling economy and a terrible housing market, many people have found themselves unable to continue making mortgage payments and unsure of where to turn next. With foreclosures on the rise, more people are considering short sales of their homes. Many people do not want to consider bankruptcy, but that may be the best option both immediately and forward looking.

A foreclosure sale is a forcible sale of the home by the bank or lender. The debtor will get notice of the sale and when he/she must vacate the premises. Foreclosed houses are often sold at greatly reduced prices by the bank to another individual. This helps the banks cut costs of maintaining the residence waiting for a buyer. The difference between the price of the note owed by the first debtor and the price the new owner purchased the house for is called a deficiency. There are a number of ways banks may handle deficiencies. The bank can go after the original debtor for the difference and will likely have a successful law suit if it goes that far. Large banks often do not go after insolvent individuals; however, they may sell the debt to another agency that will be more likely to pursue the amount owed. The bank may also settle for a portion of the deficiency. Or, the bank may charge off the debt entirely. When a debt is charged off, or forgiven, by any creditor that amount becomes taxable income to the debtor. Hypothetically, say the note is for $200,000 and the bank sells the home after foreclosure for $150,000 and writes off the rest. The debtor now has to claim an additional $50,000 in income the following tax year. In some cases this may change a debtor’s tax bracket, meaning they will pay more taxes on all income, including this amount. In many cases this results in owing the IRS a substantial sum of money.

The consequences of a short sale are virtually the same. A short sale is simply where a debtor convinces the bank to accept less than what is owed for the house. The deficiency amounts are handled the same way as a foreclosure. Many debtors turn to short sales as an alternative to foreclosures, thinking this is the better option for their credit. Many lenders still have waiting periods for to buy a home for homebuyers with a short sale or a foreclosure history.

For these reasons, and many more, it may be in the debtor’s best interest to file a bankruptcy instead of foreclosure or short sale. A home can be voluntarily surrendered in a bankruptcy. This option may offer the debtor the opportunity to work with the lender regarding the timing of the surrender. Most importantly, after filing for bankruptcy, the lender cannot go after the debtor for the deficiency amount. Further, the deficiency amount deemed discharged through a bankruptcy is not taxable income to the debtor so he/she will not have to worry about unwanted tax consequences in following years. Bankruptcy will also eliminate other debts at the same time and the debtor can get a completely fresh start.

If you have questions about this, or would like to set up a consultation, contact a St. Louis Bankruptcy Attorney Today.

Myths and Truths About Chapter 7 Bankruptcy, Part V

(Legal Series: Read the previous parts at www.lickerlawfirm.com)

Myth: A Chapter 7 bankruptcy will prevent a foreclosure or repossession.

Truth: A Chapter 7 bankruptcy will not prevent a foreclosure or repossession. A person should not file a Chapter 7 bankruptcy if they are trying to prevent a foreclosure or repossession and/or are behind on their payments. A Chapter 13 should be filed in that case. In a Chapter 7, a person should be current on their vehicle and/or home. There is an automatic stay that is implemented in the Chapter 7 as well as the Chapter 13; however, there is no repayment plan in a Chapter 7 bankruptcy like there is in a Chapter 13 bankruptcy.

Therefore, if a person files a Chapter 7 bankruptcy when they are delinquent on payments, the creditor will most likely immediately file a motion for relief from the automatic stay. If the debtor is unable to catch up on payments by the time of the hearing on the motion for relief, the court will likely grant the motion for relief, and the car or home can be repossessed or foreclosed.

Myth: In a Chapter 7, debtors will lose their house and/or vehicle.

Truth: In a Chapter 7, debtors will not necessarily lose their house or their vehicle just because it is included in the bankruptcy. All assets must be listed in the bankruptcy petition.