What You Should Know About Foreclosure and Bankruptcy
By: Jacob Alzamora, Esq.
Forclosure occurs when an individual defaults on a mortgage loan. It is similar to a car reposession; it is essentially a repossession of a house. This "repossession" is controlled by very specific state statutes which often require that certain procedures be followed in order for the foreclosure to be valid.
In many cases, a foreclosure will occur when a homeowner becomes three or more months behind on mortgage payments. To begin the process, the lender will retain the trustee or substitute trustee who handles the foreclosure on behalf of the lender. This trustee will provide the required notices, answer questions relating to the pending sale, and conduct the sale itself. The trustee is not an advocate for the borrower.
The borrower often finds out that his loan is in default and home is in foreclosure from the substitute trustee. This notice will come in the form of a letter, usually sent by certified mail. The trustee will also follow other procedures for the foreclosure. These procedures are oulined in the Virginia Code and variations on what is required will be found in the deed of trust, which is the security instrument recieved by the borrower at the initial closing. One common variation between foreclosures is the number of newspaper ads required. Deeds of trust will often vary on the number of times the notice of trustee's sale must be published in the local paper. This information is located in the deed of trust. Otherwise, the Virginia Code specifies a default number.
Even with notice of a pending foreclosure sale, all is not lost. The borrower can still negotiate with the lender and in some cases may be able to sell the house. While it is advisable to take these steps prior to foreclosure, the borrower still has the opportunity to try after the notice is given.
Lenders do not wish to own and manage property. They want to collect loan payments. When a home is sold at a trustee's sale, the lender will lose an average of approximately $58,000. These losses and the increasing number of foreclosures gives lenders the inventive to negotiate.
Filing for bankruptcy protection can stop the foreclosure process. When an individual files, an automatic stay is put into place at the time the case is filed. This automatic stay requires lenders and creditors to cease the collection process against borrowers. The stay is so powerful that it can even stop the progress of lawsuits that have been filed. Lenders and other creditors who violate the automatic stay can face serious monetary penalties.
In many cases, persons who wish to keep their homes will file under Chapter 13. This chapter requires individuals to come up with a "repayment plan" that will span anywhere from 36 to 60 months. Under the plan, the individual will propose an amount to pay each month to satisfy outstanding debts. The minimum amount takes into consideration the income and expenses of the individual. If the person is behind on their mortgage, the arrearage can be made up through the Chapter 13 plan. What this means is that the individual can have up to 5 years to repay the mortgage payments, penalties, and fees in arrears. For those who can afford the monthly payment, but just fell behind, this solution can be key.
While filing for bankruptcy can be an option to stop a foreclosure, it is not the only solution. Other options exist, including (1) the renegotiation of the interest rate or other terms of the mortgage with the lender, (2) disposing of property through a short sale, or in some cases (3) disposal of property through a deed in lieu of foreclosure. Individuals considering bankruptcy should explore each of these options with their attorney prior to filing.
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