Can Bankruptcy Help with Foreclosures?
What are My Rights, What can I do?
By Mark E. Henze
We save for years to afford a down payment. In many cases, the ownership of a home is the first step toward financial independence and, is often the major source of funding for retirement years. In many countries, real estate ownership is reserved for the upper classes and the majority of people pay for the right to occupy another's property (rent). Yet the greatest source of American pride is that we are different. Mortgages with lengthy terms, low down payments, tax benefits, and the ability to buy and sell to whomever we choose, make home ownership a dream capable of being achieved ...until the onset of a poor economy, unemployment, greedy and unscrupulous mortgage brokers, and other factors that are often outside of our control.
Your mortgage company has made you well aware that they are in control. You have likely been told that if the past payments are not made up "immediately", you will lose your home, together with all of the equity, improvements, familiarity, and memories that may be associated with it. They want their money now or they will take it all away. Yet, despite the attitude that the mortgage company conveys, they know that they are not really in control. They know your rights. . . DO YOU?
How does a foreclosure occur? When you become a month behind on your payments, most mortgage companies will require that you catch up in full, including all late fees, before they will accept any further payments. In other words, it your mortgage payment is $500 per month and you have missed a payment, the mortgage company will require a payment of $1,000.00 plus late fees on the next payment date. In many cases, if you sent them $800.00, the full amount would be sent back to you as "insufficient." You may find that by the time you are capable of catching up on the back payments, the property has already been placed in foreclosure and the mortgage company has already added $1,500 to $2,500 in costs (such as “drive by” appraisals, document prep fees and attorney fees). Sadly, the documents you signed at your loan closing gives them the right to do this!
After a few months of non-payment, the mortgage company commences a foreclosure by first sending the file to their "foreclosure department" and then to their attorneys. The attorneys will file two separate legal proceedings. The first, consists of a Notice of Election and Demand that is given to the Public Trustee in the County that your real estate is located. You will then be sent a Notice of the scheduled foreclosure sale date and a Notice of your Cure rights (discussed below). In the meantime, a second court proceeding, known as a Rule 120 Action, is filed in the District Court. This proceeding simply asks the Court to "authorize" the foreclosure sale. A hearing date will be set where you may contest the foreclosure if you desire. But be careful, the only matters that will be considered by the court are: 1) are you in default?; and 2) do you owe the mortgage company money? If this is true, the Court will authorize the sale. It is usually a simple rubber stamp proceeding.
The sale date is to be scheduled between 110 and 145 days after the filing of the Notice of Election and Demand. At the foreclosure sale, the mortgage company will bid an amount equal to what they believe the property will obtain in a "quick sale". This amount is normally less than the true value of the property and often less than the amount that you have agreed to pay to the mortgage company. Others may also bid, but only it they bring enough cash or certified funds to pay the entire amount bid by the mortgage company. Rarely does another person other than the mortgage company bid at the sale. After the sale, the mortgage company receives the Deed to your house. They also receive back their promissory note (with the deficiency amount noted on it) so that they may file a court suit to collect the “deficiency” (the amount you owe together with all foreclosure costs and attorney fees that is above the amount bid by the mortgage company at the sale). This deficiency may be collected through normal court collection procedures. Not only will you lose your home, but you may also be subject to a judgment and wage garnishment to pay off the remaining balance.
Your mortgage company will be glad to inform you of some of your rights. First, provided that you have previously sent a timely and required Notice of Intent to Cure to the Public Trustee’s office (at least 15 days before the scheduled sale date), you have the right to “Cure” the defaulted payments in cash prior to the scheduled sale date by paying the overdue payments (together with all foreclosure costs; late fees, and attorney fees). For example, if you owe five past due monthly payments of $1,000.00 each, the cure figure is likely to approach $7,500.00 . . .in cash. . . to be paid prior to the sale date. If you cannot do this, and most of you cannot, you are then out of luck and a Deed will be given to the purchaser at the Foreclosure Sale. Of course the mortgage companies know that by this time, no one will give you a loan due to your newfound bad credit as reported by the mortgage company.
When a NOTICE OF ELECTION AND DEMAND (foreclosure) is commenced, the homeowner has essentially, four options available to him/her. They are:
a) SURRENDER THE PROPERTY: In other words, give the properly back to the mortgage company. BUT BE CAREFUL AND SEEK APPROPRIATE LEGAL COUNSEL. If you abandon the property, you may have additional liabilities to your homeowner’s association and to your mortgage company. You still are obligated for all costs associated with the property until the mortgage company accepts AND records a deed conveying the house back to them. They will often sit on the deed without “accepting” it (even after you sign a deed over to them) until you have become liable for significant additional utilities, property taxes, maintenance costs, and homeowner’s association dues. The mortgage company is not required to accept the property back. In addition, in Colorado the mortgage company still has the right to sue for the difference between what they sell the property for and the remainder of what you owe them (deficiency).
If the above is not already enough, should the mortgage company be owed a deficiency amount and not collect from you, the IRS will send you a Form 1099-C asking you to pay income taxes on the amount of the debt that was forgiven! Be sure to consult with your tax advisor concerning this possibility.
b) SELL THE PROPERTY: Your sale price must be enough to pay off the mortgage company(ies) in full or you will be required to pay the difference at the time of closing. This is not unusual today with declining property values and stepped up adjustable interest rates. A “short sale” must be approved by the mortgage company and is often dependent upon your agreement to sign new documents obligating yourself for any losses. A sale to another who “assumes” the mortgage will not stop the foreclosure unless all back payments are made up immediately. Also, remember that you may have to pay capital gains taxes to the IRS on any sales proceeds you receive that exceed the original purchase price of the property and also pay taxes on the amount of any forgiven debt that is not paid at the short sale. Be sure to contact your tax accountant to check on any tax ramifications.
c) CURE: Pay all back amounts due in full (including fees and costs) AND IN CASH prior to the foreclosure sale and by providing the Public Trustee with a notice of your intent to do so at least 15 days in advance of the scheduled sale date.
d) FILE A BANKRUPTCY: (Chapter 7 or 13): Filing a Chapter 7 bankruptcy will normally mean that you will lose the property, but it will often delay the foreclosure and eventual eviction process, thereby giving you time to investigate other options and make and orderly move. In addition, you will have no obligation to pay any deficiency owed to the mortgage company after the sale and you will have no capital gains taxes owed to the IRS. A Chapter 7 bankruptcy also relieves you from any obligation to pay 1099-C income taxes to the IRS for debt forgiveness.
Filing a Chapter 13 bankruptcy will normally allow you to payoff the overdue back payments (arrears) over a period of years and stop the foreclosure sale. You will need to a) once again start making payment of the regularly scheduled mortgage amounts, and b) make an additional payment to the Chapter 13 Trustee once a month to pay off the arrears. The mortgage company cannot prevent you from doing this provided that both the regular payments and the Chapter 13 installment payments are made from that point on until the plan is completed. A Chapter 13 bankruptcy must be filed before the date of the Public Trustee Foreclosure Sale! After the sale date takes place, even a bankruptcy filing will not stop the foreclosure from taking place. One other advantage … the Chapter 13 will reinstate your homeownership and the ability to claim a mortgage interest deduction on your income taxes.
A Word About Occupancy: The owner of a residential property has the right to continue to occupy or to rent the property until the foreclosure sale is held and a Public Trustee’s Deed is issued to and recorded by the purchaser at the sale. If you have a Homeowner's Association requiring the payment of monthly dues, you are personally liable for the payment of those dues until both the foreclosure sale is completed and the Deed has been transferred into the name of the purchaser at the foreclosure sale. This is true even if you abandon the property or refrain from using the association amenities. In addition, any new monthly dues incurred after filing a bankruptcy are NOT eliminated by the bankruptcy filing. So… if you are obligated to pay these amounts, it might be wise to at least live in the property (free of any further mortgage payments) until the foreclosure is completed.
For a free initial consultation, call Henze & Associates, P.C. at